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Consuming Your Net Worth

When should you start consuming your net worth?
Should you ever consume your net worth?
How much of your net worth can you consume safely?


Net Worth Trajectory

If you are keeping an investment log or a financial net worth chart then you’ll know if your net worth is rising, falling, or holding steady.

Just like a stock chart your net worth will fluctuate and we are looking more for trends over a broad time-horizon rather than momentary ups and downs. 

Maintaining a positive net worth trajectory can solve a lot of financial uncertainties and retirement woes. All you have to do is to make sure that your net worth keeps heading in the right direction until your assets reach a critical mass. 

Market Crash

But what about a market crash? This surely will demolish your net worth trajectory and will do a solid job of consuming your net worth.

So it would seem.

In fact, most market downtrends, crashes, or corrections are temporary market events. Expect the market to recover if for no other reason than investors rushing into such low-priced funds. This has been the history of the securities market and few stock market events have deviated from this paradigm. 


Investing in a Down-Market

It’s painful continuing to invest in a market which appears to be crashing but it’s a necessity. The example I am using in this post is the stock market – the securities market. However, you may be invested in your own particular investment which undoubtedly will have its own ups and down.

If you continue to invest while the market is down then you will come out ahead in the long-run. You will have maintained the upward trajectory of your net worth by putting more money in than your portfolio gave up in losses. 

Go Against the Grain

If you are investing for the long-run then I think it’s best to go against the grain and trust the securities market model. Invest even when the market seems to be doing poorly. 

This is akin to continuing to pay the mortgage on your rental income properties even if they value of these properties bottoms out or the rental market dries up. You know such events are temporary, so why bail on your investments?

The advantage of investing in a poor performing economy is that you are still purchasing dividend producing assets. On top of dividends, these investments will also go up again in value – at least that’s the point of investing in securities. 

I buy an index fund ETF for 2 reasons:

  1. dividend income
  2. appreciation of the fund

$130 of VTI will produce a 2% annual income of dividends and it will hopefully be worth $138 in another year. 

Earning Efficiency

What is more efficient, earning an income as a physician or earning passive income from your portfolio? 

Earning an income as a physician doing the kind of work you’d love – the kind of work you’d perhaps do for free, is far more efficient than passive income from a portfolio. Here, I am referring to some consulting or perhaps the occasional telemedicine shift.

However, once your portfolio reaches critical mass then the returns from that portfolio will likely far outpace your income earning abilities. 


Consuming Your Net Worth

Consuming your net worth refers to spending from your wealth to the point of depleting it. Theoretically there is nothing wrong with this. In fact, it’s the main way that we spend in retirement – in traditional retirement.

I am proposing to the healthcare professional to avoid consuming your net worth too early because it’s one of the most powerful tools you will have in your financial independence arsenal.

Critical Mass

Your investment portfolio will reach a level eventually when it won’t matter how much you withdraw from it within reason. This is the critical mass stage of your portfolio. 

Your spending level, whether $30k/year, $60k, or $120k a year, won’t affect your underlying net worth by much because your assets have reached a critical mass which is powerful enough to maintain your level of spending. 

If you have $1M invested in the securities market and you are spending $30k a year then it’s quite feasible to spend $50k or even $60k from time to time without consuming your net worth.

Critical mass is affected by the size of your portfolio, the underlying returns on investment, and how well-diversified the portfolio is. 

Depleting Your Net Worth

Once you hit the age when you can no longer work due to old age or perhaps a medical condition, you are okay to deplete or consume your net worth. 

This means that you can spend well beyond what your portfolio can passively earn because your goals isn’t to maintain your net worth forever. 

If you are 90 years old and have an investment portfolio of $2.5M then sticking to the 4% rule is shallow thinking. 


Portfolio Critical Mass

When will your portfolio reach critical mass? There is no good equation to help answer this question and I haven’t heard it discussed by any of my previous financial advisers. 

A good financial adviser will however have a ‘feel’ for this and tell you at what point you can probably do whatever you want, spend wildly and you will not be consuming your net worth. 

For the layperson it will be obvious because your net worth keeps growing even when you’re spending from it at-will in a poor-performing economy. It takes just 1-2 years for you to realize this. The upward trajectory is maintained despite you cashing out a portion of your investments. 


Long Retirement Horizon

There is a concern among the early retirees that because their time spent in retirement is protracted, they have a higher risk of running out of money. The concern is that a passive income model from a securities portfolio may not sustain a 4-5 decade-long retirement. 

This is one of the reasons that a 4%-rule becomes 3.5%, 3%, 2%, and eventually 1%. It’s time to graduate beyond financial rules and use the common sense which you’ve honed over many years of investing. 

In fact, when we look at securities historically, the longer the time-line, the better the chance of succeeding. 


If your lifestyle is most comfortable to a tune of $60k/year but you can still enjoy it at $40k a year then you have something most other consumers don’t – plasticity. 

This plasticity will play out really nicely when your stock portfolio is declining in a given year, ensuring that you’ll never run out of passive income. 

More Ups Than Downs

The other advantage you will have with a longer time spent in retirement is that historically the markets spend more time returning profits than losses. 

If I take a 10-year snapshot of the market you’ll see that most years the market is doing well. Which means that most years the underlying asset is gaining value, returning dividends, and increasing the price of the stock. 

Ironically, this phenomenon also makes long-term investing a less profitable endeavor. In that same 10-year window you are buying the same assets at a discounted price only a fraction of the time. The rest of the time you are buying that asset at a slightly inflated price. 

This serves as another argument to invest in order to maintain the upward trajectory of your net worth. 

More Time – More Opportunity

When you are retired you have more time. More time for the savvy physician means more opportunities. My local housing market might suffer a crash because of a wave of bankruptcies or layoffs. I can use this opportunity to buy real estate. 

As a retired healthcare professional you also may be offered an opportunity to generate income doing something you enjoy. Particularly opportune if you have been consuming your net worth due to unforeseen circumstances. 


Replenish Your Net Worth

A financial adviser cannot predict every single financial scenario which is why they come up with the most conservative financial plans for their clients. The kind of plan that is fairly bulletproof. 

Your spending behavior (your plasticity) isn’t the only variable which can make for a solid retirement plan. If you are able to replenish your net worth during poor performing markets then you will have added one more level of support to your retirement’s foundation. 

The upward trajectory of your net worth is what I want to get back to. It’s quite possible for the market to chew off 5-10% a year from your invested assets when the economy is tanking. But it’s also possible for you to replenish your net worth with money from earned income. 

If you are adding $100k a year to your net worth while your stock portfolio is declining by $50k, you still enjoyed a $50k rise in your portfolio. You still enjoyed an upward trajectory of your net worth and you avoided consuming your net worth. 


The X-Factor

Personal finances and investing is certainly not a science. Much like the practice of medicine, there is more art than science.

The x-factor that you can bring to the equation will make a world of a difference. 

This post would get out of control if I talked about:

  • reverse mortgages
  • seller financing a property
  • investing in a fixed annuity
  • living overseas for a year during a weak economy
  • timing the sale of your primary residence or business 
A Personal Finance Plan

Can you build these things into a personal finance plan? Impossible. Can you have such skills and tools at your disposal? Absolutely.

I am convinced that if I got wiped out financially tomorrow, with a net worth down to $0, I could build my portfolio back up even better than before in a shorter period of time. 

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