In the personal finance world, we spend a massive amount of time discussing net worth in relationship to our careers, financial independence, and retirement. Today I want to flip the script. Instead of obsessing over net worth, let us consider the concept of margin.
The Space Between Safety and Peril
Margin is simply the buffer between having enough and not having enough. It represents the gap between safety and peril. Throughout our careers, we steadily build this margin with the expectation of one day retiring and not actively making any more income.
During those younger working years, your margin is the gap between what you make and what you spend. We invest that safety valve to build our net worth. As you approach retirement, your margin essentially becomes your net worth. It transforms into the safe amount of money you have saved up to support your lifestyle without running out.
The Anxiety of the Drawdown
A safe withdrawal rate is just a way of hitting a specific safety margin of net worth so you can stop making new money. But a serious psychological problem emerges once we reach this finish line. We prefer to maintain that same or greater margin, and we become incredibly anxious when it goes down.
Retirees currently find themselves caught between two very different streams of thought regarding this dilemma:
This creates a heavy emotional burden. We simply do not know what the real goal for our margin should be. The Die With Zero approach provokes anxiety for many, while the traditional approach leads to hyper-accumulation because we make overly conservative assumptions.
The Reverse Margin Equation
Here is the truth. It is mathematically logical for your margin to decline as you age.
Understand the timeline: If you step away from work at age 55, your safety margin might need to last for 30 or 40 years.
Acknowledge the math: As the years pass and you support less lifespan, the heavy lifting required by your savings decreases.
Allow the creep: Once your safety margin gives you the emotional strength to leave your job, allow that amount to slowly creep downward over time without expanding it.
When we stop viewing net worth as an emotional burden and start viewing margin as a mathematical equation, we relieve our financial anxiety. Forget money. Think margin.
Did you catch this week’s episode of Earn & Invest (Click to listen)?
Buy The Healthcare Heist (My latest book)
