(Bloomberg Business) — Michael Kitces could drive a hot new car, work out in a high-end gym, and relax in a sprawling house. He can afford it. He just doesn’t want it.
What does the 37-year-old financial planner, a partner and director of research at Pinnacle Advisory Group, want? To save enough so that he doesn’t need to earn any income from his work.
And when he reaches that point, he’ll probably just keep working—and driving his Kia Spectra, which just turned 10.
It’s part of a philosophy—and plan—he started following in his twenties. Back then, Kitces (Kit-sis) focused on building up his human capital by staying continuously enrolled in one career-related course after another. He wound up with two master’s degrees and seven professional designations after his name.
“When you recognize that even as a 37-year-old I could be working in some way for the next 50 years, investing in myself and being able to improve my earnings power matters way more than anything else,” he said.
The married father of two young girls has built himself into a financial-planning brand. Along with advising clients, he writes books, has a blog he says has about 100,000 unique visitors a month, gives speeches at about 70 conferences a year, has partnered with or co-founded half a dozen financial services businesses, and has developed a newsletter service. All those activities feed into kitces.com, his website. His wife stays at home with their daughters “in part to help support my ability to grow my business for our family’s benefit,” Kitces said.
Starting with a savings goal is going at it backwards, Kitces said. “I start from a spending lifestyle first, not a savings target,” he said. “I don’t say I want to save 10 percent or 20 percent a year.”
He’s aiming to save the equivalent of his current lifestyle—his annual spending—times 30. Here’s why: Much of the research into how much retirees can safely take from savings each year lands on about 5 percent for 20 years, 4 percent over 30 years, and about 3.5 percent for 45 years. Kitces is planning for another 50 years of work, retirement or a mixture of the two, corresponding to an annual withdrawal rate of about 3.3 percent, to be conservative. He reckons saving lifestyle times 30 will put enough savings away to meet that goal.
“On the one hand, it’s a big number,” he said. “But when you’re shooting for lifestyle times 30, you constantly think about expenses that might affect your lifestyle.” The more he can control spending, the faster he can hit the crossover point into financial independence.
In his financial-planning practice, Kitces has seen how decades of “lifestyle creep,” as he calls it, can haunt people. Most of his clients who are just over 50 and struggling to get to retirement are in such a bind because they let spending rise with their income. They had great careers but never really got ahead in their saving. Now they’re at a point where they have to go backwards in lifestyle if they want to save enough to retire comfortably. He’s also seen, among clients, “many people who retire and stop working completely and become miserable,” he said. “They lose all purpose and focus.”
Avoiding lifestyle creep is crucial to Kitces’s plan. As his income grows, all the savings that accrues from not buying fancier stuff, or just more stuff, gives him the financial flexibility to take any opportunity that comes along. ”When you talk to a lot of people who climbed the ladder in advancing their career, very few tell the story of going in a straight line,” he said. “There’s almost always some bouncing around.”