A couple times a week middle-aged and older people come to my office or email me asking for advice about what to do with their work, finances, retirement. They ask what their life plans should be. I love it. Whether you're transitioning to a new job or going into retirement, taking stock is a special moment in people’s lives. Doctors, psychologists, sociologists and writers (anyone better than Phillip Roth?) are more eloquent than economists on the human condition. See Michele Silver’s new book about how people feel about retirement. But, still, my conversations are as poetic as they are practical.
Life course stories share the same basic issues, though every person’s fascinating peculiarity is a challenge. Yesterday, a person in their early 50s wanted me to sit with their papers and plans. Am I invested in the right things? Do I have enough money? Basic. I asked the question I learned from an emergency room doctor who asks patients who come to the ER with a chronic complaint: why are you coming to me now? The answer I got was “I want to get my retirement plan in shape because I want to quit my job to work full-time on my side business.”
And, wow, was their “side business” interesting. I won't reveal the person’s identity, but the business was skilled and esoteric. Not unlike finding rare letters and artifacts, like “find me the original commission of Alexander Hamilton to Major General.” Cool things like that. This person‘s clients are mainly wealthy individuals. Some people in this business, but not my visitor, work for museums or libraries.
I shifted gears as I got a bit alarmed.
First, I was on firm ground. We cleaned up the easy stuff. Most people have junk in their portfolios, like expensive mutual fund products. I advise moving to an index fund manager like Vanguard. Recently, Fidelity is offering a free index fund in order to attract new business. That one can raise investment returns by lowering costs is not hard to understand and most people make the switch. Good first step.
Next, we look at the number. Luckily my visitor was on track with almost $500,000.
But the tricky question was whether my visitor should quit their part-time job they have held for 20 years to work full-time on their side business. The part-time job pays full health care and contributes 10% of pay (their wage is $40,000 per year). My visitor looked exhausted, stress lines, hollow cheeks, and was in desperate need of time off because their side jobs took nights, weekends, and all vacation days.
I suddenly got really nervous and didn’t have an easy answer. And I really like having the answers.
Stop before you read any further. What would you advise?
I could definitely see my visitor’s relief imagining getting caught-up on their side business. Business was booming and each task completed meant a juicy check was on its way.
I worry the boom in activity in my visitor’s side business was because of the asset boom and tax cut -- wealthy people had extra money to buy luxury goods like Hamilton’s commission letter. In a downturn, that side business would dry up and so would the chances my visitor could get a part-time job that paid benefits. I became all caution, all nerves and conducted a mini-lesson on business cycles.
Recessions often give self-employed workers a triple whammy : your own business shrinks at the same time your job prospects shrink and the value of your retirement plans falls by 20 to 25% less. A retirement off-ramp is more difficult just when you need the off ramp.
This individual story reminds me that retirement planning depends crucially on where we are in the business cycle – being at the peak or trough – completely changes your perception of the world.
Most economists expect a downturn in the next one or two years and when that happens my visitor’s financial picture and forecasts will change. I advise not quitting the job and drinking more coffee to do the side business. But I am uneasy because the worker needed a break. What would you advise?