Michael Laurence

This is a guest post from Michael Laurence. Previously at Get Rich Slowly, Michael has shared his thoughts on investment risk and what happens when more money makes you miserable.

You hear the phrase "the game of life" all the time.

https://www.youtube.com/watch?v=L-o8Spa4isQ

There are books on Amazon instructing us on how to win at the "game of life". Hell, Milton Bradley's "The Game of Life" from 1860 — still sold today — was the first popular board game in the United States.

https://www.youtube.com/watch?v=fXdBZWyiSLA

In the Real World, the game of life's rules and criteria for success are vague and never explicitly stated. But we all know what they are. To win, you need:

• money (or, more accurately, conspicuous consumption)
• physical attractiveness
• kids who go to great schools and are athletically successful
• and so on

"The game of life" has become more than a metaphor. Many people — obsessed with their status, career, or where their kids go to school — have internalized this idea and literally view their life not as something to enjoy, but as a competition to be won.

This is a tragedy. Life is not a game.

Money, the conventional wisdom says, doesn't buy happiness. Modern psychology seems to back this up, with studies suggesting that beyond an income of $75,000, money doesn't make you any happier.

This conclusion is simultaneously obvious and counter-intuitive.

As an abstract principle, most us acknowledge that money doesn't buy happiness. But, at the same time, we all want more of something material -- a nicer house, nicer vacations, the ability to live in a certain neighborhood or eat at fancier restaurants -- that we think would make us happier. (If you're J.D., you think maybe season tickets to your favorite team might make you happier.)

Everybody’s financial situation -- age, income, saving rate -- is different.

But every retiree, early or late, aspiring or actual, has the same, simple investing imperative: We must preserve and grow our purchasing power in real terms in order to finance decades of future consumption.

This sounds simple (which it is) and obvious (which it isn’t).

The Declining Value of Your Dollars

Let's assume you're forty years old. Every week, you buy a six-pack of your favorite microbrew for $10. You have $520 in savings that will buy you your weekly six-pack for all of 2019. Life is good.

Here, for instance, is GRS founder J.D. Roth with a $10.19 six-pack of his favorite beer, which he's drinking while he edits this article:

Now, let's assume that the cost of this six-pack increases by 3% annually -- which is a reasonable estimate of inflation. Every year, your $520 in savings buys you 3% less beer.

In thirty years, when you’re seventy and still enjoying your suds, that six-pack that costs you $10 now will cost you $24.27, which is a $1,262 annual expense if you continue to buy a six-pack a week.

In other words, your $520 in savings has to increases by nearly 145% to $1,262 over the next thir[s]ty years to merely maintain -- let alone increase -- your current beer consumption.

It gets worse.

Even if everything goes according to plan and your beer money grows from $520 in 2019 to $1,262 in 2049, you’ll need to sell $1,262 worth of your investments to get the cash for your beer. That will trigger a $750 taxable gain, and at a 25% federal and state tax, you'll have to pay approximately $188 in taxes. Your beer money is now approximately $1,074. This only buys you 44 six-packs of beer in 2049, whereas you were consuming 52 six-packs in 2019.

In other words, due to inflation and the taxation of nominal gains, you’ll be poorer, with a lower standard of living, thirty years from now.

This bears repeating: A 3% pre-tax return on your investments will not preserve, let alone grow, your current standard of living.