On Lifestyle Diversification in Retirement
The task was simple. Each team was given an envelope and one specific goal:
Start a business and earn as much money as possible within two hours using only the money inside the envelope.
The problem? Each envelope only contained $5.
It was a Wednesday afternoon and each team had until Sunday night to finish the challenge. They could plan as much as they wanted, but as soon as they split open their envelope containing the $5, their two hour window would begin. If that wasn’t hard enough, each team would have to create a single slide summary of what they did and present it to their fellow students the following Monday.
What would you do if you were given this task? How would you maximize your earnings in two hours with only $5 to start?
This was the assignment given to students at Stanford’s Graduate School of Business. So how did they approach this problem? Professor Tina Seelig, the creator of the $5 challenge, recalls her experience:
When I ask this question to most groups, someone usually shouts out, “Go to Las Vegas,” or “Buy a lottery ticket.” This gets a big laugh. These folks would take a significant risk in return for a small chance at earning a big reward. The next most common suggestion is to set up a car wash or lemonade stand, using the five dollars to purchase the starting materials. This is a fine option for those interested in earning a few extra dollars of spending money in two hours. But most of my students eventually found a way to move far beyond the standard responses. They took seriously the challenge to question traditional assumptions — exposing a wealth of possibilities — in order to create as much value as possible.
In fact, the average team earned $200 in profit (a 4000% ROI). How did they do this? They realized that the $5 was a complete distraction. The money was irrelevant to the task. With this in mind, the question became what can you do with nothing to earn the most money? Professor Seeling elaborates:
All of the teams were remarkably inventive. One group identified a problem common in a lot of college towns — the frustratingly long lines at popular restaurants on Saturday night. The team decided to help those people who didn’t want to wait in line. They paired off and booked reservations at several restaurants. As the times for their reservations approached, they sold each reservation for up to $20 to customers who were happy to avoid a long wait.
Other teams also used their free time/labor to earn money successfully. However, the winning team did the most genius thing of all. Remember that “presentation” that each team had to give to their classmates on the following Monday? The winners sold their presentation slot to a company looking to hire Stanford Business School Graduates, earning them $650. After all, how often do you get the undivided attention of some of the best and brightest business school students in the country? It was a win-win for both sides.
The $5 challenge demonstrates that sometimes, focusing on the money can lead us astray. This idea is directly applicable to one of the biggest topics in all of investing — retirement. When you hear the word retirement the first word that pops into your head might be “money” or “savings” or “401(k)”, but while money is important for your retirement, it matters far less for your overall well being than you might imagine at the outset. Let me explain.
In the process of doing research on retirement, I found no shortage of resources discussing personal finances. Michael Kitces has written an overwhelming number of detailed articles on the topic and Bill Sharpe, the Nobel Prize winning economist, has stated that retirement is the “nastiest, hardest problem in finance.” As you can see, my entire view of retirement was shaped by financial matters. This all changed when I came across a book that shattered my reality on the topic.
The book was How to Retire Happy, Wild, and Free and it contains no sections on money. Yes, it is a retirement book that excludes any talk of optimal withdrawal rates, taxes, or required minimum distributions. Why does it exclude these? Because the author’s research found that things like “physical well-being, mental well-being, and solid social support play bigger roles than financial status for most retirees.” In other words, it’s not about the money. Ernie Zelinski, the book’s author, states:
Regardless of how talented you are and how successful you are in the workplace, there is some danger that you will not be as happy and satisfied as you hope to be in retirement…What may be missing is a sense of purpose and some meaning to your life. Put another way, you will want to keep growing as an individual instead of remaining stagnant.
The premise of the book is that it is not a financial crisis you need to worry about in retirement, but an existential one. The fact is, once you stop working for 40+ hours a week, what are you going to do with all of your time? It is easy to say “vacation”, but even if you did that for an entire year, then what? Don’t believe me? Consider what Kevin O’Leary, aka “Mr. Wonderful” from Shark Tank, stated about his attempts at early retirement after selling one of his companies:
I could never be retired right now; I tried it, very boring. I’ve been on every beach on the planet.
Or, consider what John Osborne, a retired educational psychology professor who teaches a course on how to retire happy, said in the book (emphasis mine):
The more your life revolves around work, the more of a shock retirement will be. It’s like having a portfolio that’s not diversified, and it’s not until your job is gone that you confront reality. It can be like falling into space.
So, let’s confront one reality. I know that, statistically, the readers of this blog (i.e. you) are more likely to be reading this post while at work (thanks Alexa):
So, years from now in your retirement, you may end up craving the very thing that you are distracting yourself from right now. Ironic, right?
So what’s the solution to this future dilemma? As Osborne suggests: diversify your life interests. It is easier said than done, but finding other purposeful things to do with your time will likely lead to more life satisfaction than the marginal amount of money you will earn from working more hours in your primary career. This is probably not true for everyone, but you should consider it.
It’s Really Not About the Money
I understand the skepticism you may have listening to a 27 year old financial blogger tell you that retirement isn’t only about the money. However, the fact remains that once you have some base level of financial security, your day to day happiness in retirement will be more heavily impacted by your relationships, your hobbies, and your sense of purpose than your financial assets. I completely relate to this as my day to day happiness is effected far more by my dating life and blogging life than what is happening with the S&P 500.
However, let’s say you don’t listen to me and decide to focus on the money. Once you are rich you are still likely to worry about your wealth, as this recent New York Times article seems to suggest. So even when you do get the financial status you crave, you will probably get anxious about losing it. In other words, you are screwed on both ends. Either you feel too poor, or you feel wealthy and you worry about being poor again. You never win. It’s far better to not focus on the money and enjoy life for what it brings.
My advice is to find what you do, but don’t be afraid to try something new once in a while. Diversify your life interests and you may be surprised with the returns. Thank you for reading!
This is post 47. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data