A seemingly uneventful flight from Orlando, Florida, to Houston, Texas on October 25, 1999, captured the nation for a few uncertain hours when the unthinkable happened.
U.S. Open golf champion Payne Stewart boarded a Lear Jet along with the flight crew. Stewart was a three-time major champion who was known for his fashion of ivy caps and knickerbockers, combined with his NFL sponsor where he wore the colors and logos of their teams. Payne won the title one year after giving up a four stroke lead in the 1998 U.S. Open. Payne won the title against a gracious Phil Mickelson. For Payne, it was redemption from his 1998 result. For Phil, it was a missed opportunity to gain that elusive first major, but he couldn’t have been happier for Payne and his family. The U.S. Open is held on Father’s Day weekend each year, so the event is as much about the winner’s family as it is the winner himself.
As the twin jet climbed up to cruising altitude, something didn’t happen. The cabin didn’t pressurize. The crew lost consciousness and didn’t respond to Air Traffic Control. The Air Force scrambled jets as the plane continued off course to the northwest.
When I was in the Naval Aviation Training, they told us that a slow pressurization change was actually more deadly that a rapid change. A rapid change was easier to notice and mitigate, but a slow change just resulted in slowly having less oxygen until you become lethargic, then unconscious, and die. The entire crew died of hypoxia before the plane crashed in South Dakota.
That slow change resulted in Payne Stewart’s death.
Slow leaks happen everywhere with our day-to-day life behavior, including investing.
Annie Duke’s recent brilliance, How to Decide, revealed some statistics about those that belong to a gym that I have always been curious about. 82% of gym members go to the gym once a week or less. 77% of that 82%, don’t go at all. 80% of gym members that join in January, quit within five months.
At the gym and in investing, our cultural affirmation makes complacency acceptable – it’s not.
Social media and instant gratification are the slow, hypoxic behavioral link to not becoming fit or not achieving wealth. When we attempt to keep up with the Joneses, we show that when we aren’t willing to sacrifice for what we want, what we want becomes the sacrifice.
The slow leak in our plan starts with our savings rate. Let’s say you make $138,000 a year and you contribute 14% to your 401k. Then you get promoted and a raise, and make $150,000. With the restrictions on the 401(k) maximum, you now can only contribute 13%. On top of that, you now have additional cash flow later in the year thanks to the Social Security cap.
So if you don’t save this additional windfall (not to mention some of your actual raise) – you are introducing $2238 of lifestyle creep at the same time that you are saving at a lower rate. Repeat this for 10 years at a 5% return rate, that isn’t just $28,150 in savings opportunity cost, it is also $22,380 in lifestyle creep…$50,530.
This number is likely somewhat understated if you continue to get raises. That 401k percentage will continue to go down.
It’s one thing to spend your raise. It’s quite another to combine that with decreasing your savings rate. It is unintended compounding that likely has contributed to the middle class squeeze. Adding to your savings reduces uncertainty and is not subject to counterfactuals. Many say you should try to save half of your raise. That is a good place to start the discussion.
People with money are like labrador retrievers with food - you may not be hungry, but you still want to consume now because it is emotionally pleasing.
Accomplishment predicts self-esteem and intrinsic reward more than shallow participation trophies. The investing process is slow, continuous, invisible, and intangible. This slow pressurization as we look to get the desired cruising altitude of life doesn’t get noticed. Conversely, we recognize when the oxygen masks of investment pain come down immediately.
My job as an advisor is to attempt to connect with my clients in a way that will influence better behavior. I want to make these good behaviors more noticeable and pleasing. I want them to notice the pressurization and oxygen levels.
Here are four concepts I am currently experimenting with in an attempt to provide a metric that is sensitive enough to measure progress .
Life Time Savings: Lifetime Income – this will provide you a good view of how compounding is working. Technically, it is impossible to save more than you make, but if you are saving and investing well, then you can get this number over 1.
Freedom Ratio: Annual Savings/Annual Taxes - are you depending more on the government than yourself in the future?
Wealth:Spend Ratio – Ideally, you want this number to stay over 30 for your retirement. Before retirement, we should monitor how this number is trending. If you intend to retire before 65, this number should be higher (if you retire at 60, this number should be 35).
Savings Rate: Tracking this over time relative to income is a good way to see how our behavior is keeping up with our income changes.
These metrics can be socially rationalized with 401k matches and home equity. Those adjustments to make you feel better may let you better monitor the oxygen in the cabin, but may also result in you settling for a lower, less efficient cruising altitude to get to your destination. Higher altitudes will allow you to capture the tailwind of compounding and let you get to your destination faster and with less fuel.
James Clear in Atomic Habits discusses how our good habits cost us now and we get the dividends later, while our bad habits are satisfying now, but cost us later. He discusses how we chase pleasure and that our emotions drive our behavior. Probably most importantly, he says that we can only be rational and logical after we have been emotional. Self-control is difficult because it is not satisfying.
The metrics I shared earlier are my way to make those habits using James’ four characteristics to good habits: Obvious, Attractive, Easy, and Satisfying.
Bad or complacent saving habits are slow depressurization that lead to financial hypoxia. Good habits ensure you have enough oxygen for the entire journey.