The Real Story Behind Early Retirement
Many of the baby boom generation have done quite well, and they're retiring now. As a result, you'll see boomers write articles and blogs about how they achieved their financial success.
They generally say that they regularly invested in mutual funds over the years. Sometimes they attribute their success to certain vehicles such as REITs or dividend stocks. And while steadily buying over the years, they did not freak out during market panics. They conclude that buy and hold made them rich.
Such intelligence. Such wisdom! Such bravery.
The problem is... their assessments miss all of the major reasons they actually achieved financial success. The younger generation can easily miss the real story if they read those articles and think they're a recipe to success. In reality, most of these factors are beyond our control.
The Real Reasons
Here are the actual reasons these people achieved financial independence:
1. They were lucky enough to align with the greatest bull market in world history
This is the big one, and it's dumb luck. They invested during 1980-2000, the years of the greatest secular stock and bond bull markets in world history. The bond bull market still continues today. Yes, if you are lucky enough to align with the early years of a powerful multi-decade secular bull market, you're going to make money.
I guarantee you that the younger generation is not starting off at the beginning of a great bull market, with the S&P 500 near all-time highs today. Bull markets start with low valuations.
2. They had income stability and steady employment
Jobs were much more secure before 2000. People actually worked with the same company for decades and enjoyed pension plans. Another important thing I noticed from Canadian boomer blogs is that many of these people experiencing excellent financial outcomes worked in government or pseudo-government (academia and Crown Corporations). This underscores the importance of steady employment, something that is elusive or even impossible for the current, younger generation.
Job security and steady income is very important, because periods of unemployment cause you to dip into savings and this destroys wealth growth.
3. They didn't suffer a financial calamity
Again, this is just luck. The people writing these blogs about their great investment success simply did not encounter a destructive financial calamity, such as an expensive divorce, major lawsuit, illness, or investment fraud. It turns out that if you steadily save up money without flushing hundreds of thousands of dollars down the toilet, eventually the money adds up.
4. They made plans and had goals
This is one point I'll agree with the blog writers on. Planning and aiming for a goal really does help you. Saving up money and investing long-term requires some discipline, focus, and effort with spreadsheets and projections. The people who had the best success were also good at controlling their spending.
5. They succeeded in spite of their investment choices, not because of them
In some of these articles, the author will focus on something they believe worked for them, such as small cap stocks, REITs, or dividend/income funds. It's more likely that the investor succeeded in spite of their specific choices, not because of them. They would have done equally well in standard vehicles. For stocks, that means major index funds. For fixed income, GICs or a regular bond fund.
What can the young generation do?
It's unlikely that young people will experience the same financial success as the baby boomers. Nearly all of these factors are beyond our control, and they're not working in our favour currently.
Among the real reasons explained above, focus on what you can actually control:
- Don't assume a perpetual bull market
- Limit your exposure to stock/bonds and recognize that 1980-2000 was an exception, not the norm.
- Try to improve job stability or at least plan ahead for unemployment
- Be mindful of personal liability (including tax compliance)
- Be very critical of money managers and be wary of fraud
- Have goals and track your finances. Save aggressively and spend little.
- Keep your investments simple. Doing complicated things won't make you rich. Instead, use index funds, simple benchmark ETFs, GICs/CDs and savings accounts.