What does financial freedom look like when you’re climbing solo? Peter McGraw talks with Nick Maggiulli, author of The Wealth Ladder, about the six levels of wealth, what changes at each stage, and how singles can build money—and a remarkable life—on their own.
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Listen to Episode #265 here
Aging Single #12: The Wealth Ladder
As part of my series on aging, retiring, and dying single, I have focused on money. Solos have unique challenges and opportunities that are not often fully addressed by the world of personal finance. With that in mind, I’m talking to someone who has a unique approach to thinking about wealth. He’s the Chief Operating Officer at Ritholtz Wealth Management. His blog ofdollarsanddata.com explores the intersection of data and personal finance. His first book, Just Keep Buying: Proven Ways to Save Money and Build Your Wealth, was an international bestseller. In this episode, we’ll focus on his latest book, a New York Times bestseller, a book that I found really quite intriguing, The Wealth Ladder: Proven Strategies for Every Step of Your Financial Life. Welcome, Nick Maggiulli.
Thanks for having me on, Peter. Appreciate it.
Most personal finance books, they give you a single playbook, whoever you are. Budget, save, invest, rinse, and repeat. You’re saying that this approach, and I agree with you, is fundamentally incomplete. What’s broken about this one-size-fits-all approach to money advice?
The Wealth Ladder: A Dynamic Strategy for Financial Growth
The broken part of it is that your strategy is going to need to change over time. If you get very good at budgeting, you’re going to save a bunch of money and you’re going to need to invest it. You’re going to have to get good at a different skill over time. The truth is your financial strategy needs to evolve and that’s the premise of The Wealth Ladder. It’s like, as we go through what I call these six different wealth levels, once you get through each level, your strategy needs to change a little bit.
You don’t have to go through all six of them. The goal of the book is not to get to the top of the ladder. The goal is just saying, if you do want to get to this level, your strategy may need to be a bit different. It just addresses all those things. I think the analogy I use in the introduction is a well-trained athlete and someone who’s morbidly obese, like a fitness instructor is going to give them very different advice.
Even though the bedrock’s the same, diet, exercise, all those things, but they’re not going to take that morbidly obese person and start them out in the same way that they would start out a well-trained athlete. It’s the same thing. Certain people are at different, everyone’s at different stages financially, and so it’s like figuring out where you are first and then the advice can be adapted from there.
I think that’s outstanding. One of the things that happens for some people, the lucky people, the people who are good at budget, save, invest, repeat, is they go from having a saving problem to a consumption problem. It becomes difficult often times to spend your money because you become a tightwad of sorts and that’s great until it’s not so great. One of the things you do with The Wealth Ladder is start to point out the categories of consumption that you don’t have to be a tightwad about. I think people are going, well, “What is The Wealth Ladder?” I think it’s this really unifying framework by which to think about one’s wealth, your overall wealth, correct?
Net Worth and the Six Levels of Wealth
Yeah, so The Wealth Ladder uses your net worth, which is your assets minus all of your liabilities. That’s everything you own minus everything you owe to others. You could take like your car, your home, your brokerage account, 401(k), add all those up on the asset side, then you subtract out any debt, mortgage debt, car debt, student loans, etc. You net those out and that’s your net worth. Depending on your net worth, you’re in one of the six wealth levels.
This is all for US household net worth. I know this is Solo and so that’s going to be more individuals. We don’t have as good of individual wealth data. Everything’s done at the household level and I use household level because when you’re out to go to compete to buy a home, you’re competing against a household. You’re not usually competing against individuals. Sometimes you are, but it depends. Level one is less than $10,000 in wealth. Level two is $10,000 to $100,000. Level three is $100,000 to $1 million. Level four is $1 million to $10 million. Level five is $10 million to $100 million. Level six is $100 million-plus. I broke the data out that way because if you actually look at where households land in the United States, they break out nicely across those levels.
I think we’ll probably be talking mostly one to four. I don’t think I have many readers who are $10 million-plus. If you’re in level six and you’re a reader, you should make a big donation to the solo movement. I just want to say that. Given these numbers are based on households, which in some ways have can have greater liabilities, can have greater cost because of lifestyle, because of children, etc. They also can have a hedge. They may have 2 incomes, they may have 2 401(k)s, they may have 2 Social Security, pots of money, etc. My guess is the numbers probably still roughly work?
Yeah, I think levels 1 to 4 is where most households are going to land as it is. That’s going to be 98% of households. Only the top 2% are level 5 and 6. I have them in there for other reasons to discuss them, not just the financial side. The top 18%, that’s going to be level four and above. That includes that top 2%. 18% is $1 million to $10 million and then the other, what is that, 60% I guess, yeah, or something like that, or maybe 70%, that would be levels 1 to 3.
We can break it out a lot of different ways. I haven’t looked at individuals in particular because all the data we have is household level data, unfortunately. I don’t think we can just say, okay, divide by two and that’s basically what an individual has, because if you actually look at a lot of the data, like I actually just wrote a post about looking at marriage, like married individuals versus non-married, there’s a huge difference in wealth there. That’s not just because of there’s two people working.
There are pieces that’s related to that, but also people that are married at a given point in time, that’s like a successful marriage at that moment. Anyone who’s been divorced, they were married and then they got divorced, so now they’re not in the survive. The wealth data’s all messed up by this survivorship bias stuff, but it’s still interesting to think about it in that way.
Towards the end of this episode, we’ll pivot and talk a little bit more about solos and you and I can workshop a few ideas, I think, on the fly. One thing that struck me is that you’re using overall wealth rather than income, and you argue that spending should be focused on wealth, not income. I think that’s probably a contrarian opinion to some. Why that pivot? Why that change in perspective?
Marginal Spending and the 0.01% Rule
Yeah, so when applying The Wealth Ladder to spending, the idea isn’t that all your spending needs to be based on your wealth. That’s not really possible. You need to have income of some sort to pay for your necessities. The question is the marginal spend. Now, what do I mean when I say the marginal spend? When you’re at a grocery store and you’re deciding, “Do I get the regular eggs or the cage-free eggs,” that’s like a marginal decision. There’s an amount there, it’s a few dollars.
When you’re at a restaurant, you’re like, “Do I get this burger that’s $20 or the salmon which is $30?” If you’re making a debate, a financial debate, that’s the marginal decision, it’s $10. You could do that all the way up. When you go to buy a hotel room. You’re like, “Do I stay in the nicer one that’s an extra $50, $100, $200 a night or do I stay in this other one?”
It’s always on the margin and I think that’s where wealth can pay for. I say income pays for your necessities, wealth pays for your upgrades. Applying that to The Wealth Ladder, if we took The Wealth Ladder, which has this 10X jumps there’s less than $10,000 in level 1, $10,000 to $100,000 in level 2, etc., I came up with something called the 0.01% rule. You just take whatever your net worth is, multiply by 0.01%, that’s 0.0001, or divide by 10,000, it’s the same thing. Take your net worth divide by 10,000. That’s going to give you an amount. That amount of money is what I would consider trivial to you.
If your net worth is $10,000, I would say $1 is trivial to you. If your net worth is $100,000, I would say $10 is trivial to you. It’s not a big deal if you spend the $10. Now you can see when I was talking about that marginal spending decision earlier, that can now map to where your net worth is. If you have a net worth of $1 million, it’s trivial for you to spend an extra $100. If you’re at a restaurant, I would say it doesn’t really matter what you buy. It’s not going to impact you in any way. Besides a super expensive bottle of wine, putting that type of thing aside, anything you get on the menu’s not really going to impact you financially.
You can take this thing and apply it to The Wealth Ladder. Level two, I call that grocery freedom. Once your net worth hits $10,000, and by the time it goes up to $100,000, now you have full grocery freedom. Level three, that’s $100,000 to $1 million. I call that restaurant freedom. You start to get restaurant freedom at around $100,000 in net worth and by the time you have $1 million, you have absolute restaurant freedom.
Level four, that’s $1 million to $10 million. That’s travel freedom. You start to have some travel freedom by the beginning and by the end you basically have full travel freedom, barring private jets. I think that’s the one caveat I have. You can see how the logic works. You don’t even have to use these spending categories. Not everyone loves to travel as much, not everyone goes out to restaurants. You can find different things. The whole point is to use the rule. Take your net worth divide by 10,000 and that’s going to give you an amount.
If you’re debating, “Should I buy this or not,” and it’s less than that amount, I say just don’t even worry about it and just get the thing you want. That’s the thinking here. I think so many people nickel and dime themselves. People in level four who go to the grocery store and still coupon and trying to find a deal. I’m like, “What are you doing?” Such a waste of time, energy, effort, stress, like for what? To save yourself $5 a week when you go to the grocery store? It just doesn’t move the needle anymore. That’s where it comes from.
I need Uber cancellation freedom where I have to cancel a Uber ride because I’m getting screwed over and they’re going to charge me $5 and I’m going to customer service to get my $5 back. When I was in level one as a graduate student, that $5 was an entire meal. That was a pizza I could have and it matters. I really like this idea. Of course, I’m guessing and from what I recall from reading your book is this is all built on the foundation that you are taking care of business. That you have income, that you’re saving.
It feels like it’s really helping the tightwad versus the spendthrift. There are two types of people in the world. People who don’t save enough, people who save too much. What gets you to level two grocery freedom, you can let go and have some restaurant freedom, but that’s not in your nature probably. That’s the thing that I think is really liberating with this notion. Again, it doesn’t have to be restaurant freedom. It could be anything. It could be spa freedom or something like that, self-care freedom, that matters to you. You also have the 1% rule, so you have the 0.01% rule, now you also have the 1% rule and that’s about earning, yes?
Evaluating Opportunities with the 1% Rule
Yeah, so the 0.01% rule relates to spending on The Wealth Ladder. If we look at income or earning opportunities, we can also apply that to The Wealth Ladder. The idea there is, okay, take your net worth, multiply by 1%, 0.01, or divide by 100. That’s going to give you an amount. This amount is just saying like, “Should I consider this project, this income opportunity?” If it’s below that amount, I would say no, it depends how much time it takes really. Time is a factor here, but in general, let’s say you’re you have a net worth of $1 million and you’re like, “Should I bring on this client,” and it’s like, “I’m going to have to do all this work, bring this client on and they’re going to get me $1,000.” It’s like, your net worth is $1 million, 1% is $10,000. Is it worth your time to go through all this to earn $1,000, which is not even 1% of your net worth?
Of course, if someone said clap your hands for $1,000, you would do it. Obviously, time and effort is a factor here, but it’s just another heuristic or a method of just thinking through a income decision. Should I go and make this, should I go and try this project out? Should I go try this or that? It’s just another tool you can use when you’re trying to evaluate an income opportunity.
I think there’s a lot of times where I was looking at stuff, like things that made sense for me early in my career, you talk about being a graduate student, like when I was early in my career, I would have done things, I would have said yes to certain income opportunities that now I’m like, “It’s not worth my time.” I’m saying no to a lot more stuff now because it doesn’t compute with my wealth.
I’ve been very fortunate in that case where my wealth’s grown well to the point where now, I’m not going to sit here and do all this work for something that’s not going to even move the needle. I think thinking through that is the important part. That’s also a natural signal to be like, “I should raise my prices.” If I’m saying like, “I have this wealth and it signals and if no one wants to hire me at that price, that’s fine, but then unless something happens, then I can just let my wealth build itself. I don’t need to necessarily go out and keep working for it forever.”
As a tangent, there’s this FIRE movement, Financial Independence Retire Early. You know this better than I do because you play in the space, it’s like coast FIRE, you don’t have to keep investing. You have enough. You don’t have to create income. You can coast.
Yeah, basically you save enough for retirement where if you say, “If I just let this money grow between now and 65, I don’t need to save another dollar. I just need to cover my living expenses.” I’m going to make this very simple. Let’s say your annual living expenses are $100,000. You’re like, “I need to save for retirement,” so let’s say you’re getting $120,000, you’re spending $100,000, you’re saving that extra $20,000 every year. Now over time, if it just keeps growing, it’s going to hit your retirement balance, your target balance when you’re 65, you don’t need to save that $20,000 anymore. You can take a job that maybe is a little lower paying and you can just cover your $100,000 and you’re fine. That’s the idea behind this. Obviously, nothing’s ever so perfect, but it is a completely different way of looking at this.
What I like about your approach is it’s freedom focused. I think a lot of solos, they want their autonomy, they don’t like being told by the world what to do, how to behave. You have these different consumption-based elements of freedom, but the 1% rule is about creating time and energy and attention freedom, that you don’t have to work a job you don’t want. You don’t have to work with people that will make you unhappy because you’re only doing it for a modest paycheck. Modest is relative to your overall wealth.
There’s a lot of optimism, there’s a lot of goodness in this. Let’s look at the rough part of The Wealth Ladder, which is level one. You said less than $10,000. I’ve been there. What I always say is, it’s okay to be young and poor, it’s not okay to be old and poor. One thing about level one, and I’ve been there, is that’s where bad luck is amplified.
Level One: Escaping the Financial Tailspin
Yeah, exactly. I was going to say something briefly, I’ll get back to the luck point. You said being old and poor is not a good thing. You actually look at the data, so around 20% of U.S. households are in level one, that’s on average across all ages. When you break it by age, I’ve done this in the book, this is in chapter 10. Households that are 20 to 29, in their 20s basically, that’s 39% of those households are in level one. By the time you get to let’s say your 50s, it’s 15%, 60s is 13%, and 70s is 10%. It’s still like a small 1/10 to maybe 1/6 of individuals in any age bracket are going to be in that in level one. It still happens.
Once again, this is just looking at wealth, it obviously doesn’t include things like if you’re in level one, you have less than $10,000 in wealth, but you have Social Security, you still have income coming in even though you don’t necessarily have any assets. That’s something else to keep in mind. Getting back to your luck point, I think the main thing in level one why I say bad luck is amplified is because a common occurrence and an annoyance for someone in let’s say level 3 or level 4 can really send someone into a financial tailspin in level one.
Now I’ll give you a simple example. Driving to work one day, your tire blows out. Anyone in level 3, level 4, whatever, they’re going to call AAA, they’re going to call their insurance company, whatever, they’re going to get it dealt with. It’s an annoyance, they move on. Someone in level one, okay, that blows out, they don’t have money for the repair, then they can’t get to work anymore. How are they going to get to work? They could lose their job, now they’re behind on bills. When you have very little barrier, you have no financial redundancy, it’s very easy to get behind. If you actually look at the data on financial delinquency events, 50% of all financial delinquency events.
Falling behind on mortgage payments, bankruptcies, all these events, are experienced by only 10% of households. It’s a very small minority that just keep getting caught in these cycles and they can’t get out. I’m not saying that individual choices don’t matter. Of course, some of those people just can’t help themselves and just keep making bad choices. Some of those people maybe didn’t make any bad choices and they just got unlucky once and then they got into one of these financial tailspins, as I call them.
My whole thing is like level one’s an emergency, like you’ve got to build up just a little bit of wealth just to get out of that. If you actually look at the data on the where the biggest jumps in happiness and well-being come from, it’s literally just getting out of level one. I’ve looked at all the data on this and like literally going from having nothing to even having $5,000, people feel transformed. Even though someone with $1 million, you give them $5,000, they’ll say thank you, but they’re not going to change their lifestyle at all. They’re not going to even notice it. They will obviously be thankful, but not they’re not going to feel like that person who just went from 0 to $5,000. They’re not going to feel like unlock this freedom and stuff like that. That’s something else to keep in mind when you’re thinking about level one.
I think that as much as it can be followed, the traditional financial advice really does work. How can you eliminate any unnecessary expenditures? How can you find low-income housing? How can you create any buffer that keeps you from having to lose your job because you don’t get there on time, etc.? My heart goes out to people like this. I lived in that world, but I knew it was temporary. I was optimistic that I was going to finish my degree and get a job that was going to pay.
I remember having a conversation, I was doing a postdoc with a guy and I was concerned about money because I’d been concerned about money my whole life. He just says to me, he’s like, “Are you really worried you’re not going to have a job? You’re not worried you’re not going to be able to earn money given where you are now in life?” It was hard to it was hard to undo, it was hard to change that perspective. Level two, so again, that’s $10,000 to $100,000 grocery freedom, you say learn today, earn forever, yes?
Yes.
Level Two: The Return on Investment in Education
Education is the sweet spot. In America in particular, one of the best ways to get out of poverty, true?
Yeah, and it has been historically, and I think it will be going forward. We have to think about what I mean when I say education because it doesn’t just mean go get a degree. We’re starting to see even changes in the marketplace from AI, but I think there’s a lot of educational things you can do that don’t necessarily need to be getting taking on a ton of debt and getting a degree. That’s something else to keep in mind.
The big one is trade. Learn a trade. I think that’s it’s one of the unfortunate things about American culture. That’s not as true in other cultures, in Europe and elsewhere, which is learn to be a carpenter, learn to do HVAC, learn to be a plumber. There’s a whole bunch of educational opportunities where you can learn the basics and apprentice and make very good money and be more AI-proof than someone getting a Poetry degree or even a Psychology degree, which is what I ended up having. The idea being the education opens up income opportunities. Those income opportunities often come with healthcare. Now that keeps you out of a major chance of a financial shock. They come with 401(k) matching opportunities, so you can start to build a nest egg and so on and so forth, correct?
Yeah, exactly. When I’m thinking about this stuff, it’s like you can imagine you have a career trajectory that’s just like a slope. It’s like a line going up over time. Education is something that can just change the slope of that line. That education is that just a little shift in the slope and you end up somewhere very different 20, 30 years later as a result of that or even 10 years later. You can just see your whole lifestyle change because of getting education, getting the right job, things like that. Obviously, that’s changing with AI, but like there’s a lot to learn with these systems. To think that people that don’t know something can just take these systems and just take over and they we don’t need to learn to code anymore, we don’t need to learn any of this. I don’t really think that’s necessarily true.
I think you need to learn a little bit about this stuff. You need to know how these systems interact. There’s just there’s still value in having this. I know some programming, AI’s far more useful to me than someone who doesn’t know any. Don’t get me wrong, I’m not saying you need to know every single thing. I think it is bringing the bar lower in terms of the entry cost to get in here, but you it’s better to still know something. I think skills are useful because they can map to other fields, other domains and they can come across in other ways.
Now, that’s in a knowledge worker type of economy. You’re absolutely right about trades and things like that. I think we don’t have enough of those people doing those things and that’s why we’re I think we’re going to see a a push more towards the physical in the future, but I don’t know how long that’s going to take to play out.
I agree. One of the beautiful things about AI is it can teach you at a very low cost, $20 a month. You basically have a tutor who never gets tired of you and is incredibly patient and highly knowledgeable. Plus YouTube, plus Udacity, plus community college, plus all these things. I don’t have many young readers, but I think one of the places that this note about education I think really ends up mattering is what is the cost of the education versus its return on investment with sky-high tuition rates and back-breaking student debt.
As you said, the student debt goes on that other side. It works against your net worth. How do you go about developing skills, not just a degree, but skills that will help you be more employable, get promoted, earn more money, and so on? I think that notion of education for those $10,000 to $100,000 folks is really spot on. By the way, I think that’s regardless of your age. Obviously notably we think about 18 to 22, but this could be happening in a career shift in your mid-40s, for example.
I would say yeah, basically anyone who’s not already in retirement age, I think it’s tough. If you have the vitality to do it, you could do it at age 65 and say I’m going to learn this new thing, but you’re going to end up working probably into your 80s to do that if you feel up for it or if you really enjoy that. That’s great, but I agree with you, for most people it’s going to be something that can happen say 20s, 30s, 40s, maybe even into the 50s if possible.
Indeed. Level three, $100,000 to $1 million, that’s our restaurant freedom world. You say Just Keep Buying. That’s the title of your first book too?
Yes, it is. It’s the framework for level three.
Just keep buying what?
Level Three: Transitioning from Saving to Compounding
The idea behind Just Keep Buying is the continual purchase of a diverse set of income-producing assets. Just keep buying investments basically. Level three is where this this change starts to happen where your investments start to really build your wealth. I can just do this with a very simple example. You know, when I was let’s say 23 years old, I started my first job, started saving. I might have had $1,000 to my name within a few months there of saving putting my 401(k), whatever. If I got a 10% return, which is like a good year in the market, I would have got $100.
Every night I went out with my friends, I lived in San Francisco at the time I’d go out, we’d get drinks, we’d get dinner, I’d get an Uber home or something or a taxi home, whatever it was. I think this was right when Uber was still launching. I’d spend my whole year’s investment return in one night. That was not crazy. Spending $100 wasn’t absolutely crazy. Of course, it’s a fun night, we went out, we did a lot of stuff. That was the norm at the time. It’s like, I can spend my whole year’s investment return in one night.
Now let’s compare that with I have $100,000 invested. Now a 10% return is $10,000. Obviously, I’m not going to spend that in one night. You can see how that one little shift there and it’s like, now your investment, your portfolio is actually starting to build real wealth. $10,000 a year in savings, that’s like a considerable amount of money. As that goes up, it’s only going to get higher. By the time you’re at $500,000, a 10% return is $50,000.
I’m not saying you’re going to get a 10% return every year, but even if you’re getting half of that at a 5% return, you’re talking $25,000 a year just on asset appreciation and expectation. I think that’s where the shift starts to happen is into level 3 and by the time you get to level 4, it’s definitely true. That’s where I’m like, you really need to focus on this thing. I’m not saying you should ignore it in level 1 or 2, but you can ignore it in level 1 and 2 and be okay. By the time you get to level three, you can’t ignore it because the amount of money you have if you aren’t investing it properly, it’s not going to compound and it’s not going to keep building your wealth.
You mentioned compound, and I’m glad you brought that up because I think compounding is one of the most fascinating elements of personal finance and it’s maybe the most misunderstood by the average person. If I were to force you to give a little lesson on compound, extending the way you you’re talking about, make the case for why this particular just keep buying world really pays off.
I’ll just tell you a story. Let’s go back to when I was 23. I really wanted to get a good bonus that year. I worked in something called litigation consulting and the bonuses were something like 10% of your salary or something at the time. At the time, I was very highly paid for someone coming out. I went to a good school, I got into a high-paying job at the time, and I was trying to really maximize my bonus. I want to get a good bonus. I worked so hard all year whatever. My bonus ended up being $7,000.
At the time, you don’t have much money, I came from a lower-middle-class family, that was a lot of money to me. This was like 2013. I spent a whole year just grinding, grinding, grinding so I could get a good I obviously was getting paid a salary too, but like I really wanted a good bonus, I got this bonus, I’m like great. That $7,000 bonus every day, every single day my net worth changes by at least that much, if not more, and today.
I spent a whole year working my butt off for this amount of money and now on a daily basis, my net worth moves up from just random market fluctuations. It probably moves a few multiples of that. I’m not saying that to brag about my wealth, I’m saying that to tell you about the importance of compounding because what happens that you’re going to work so hard to save this little bit of money keep compounding, over time, that wealth starts growing so much that what used to be a lot of money to you, that used to really change your life. If you do it right and you do it properly for a very long time, and I haven’t even done it for that long, I’ve only been doing it for let’s say 14 years, in a 14-year time span, my annual bonus when I was 23 years old is just flying around all day.
I’m not invested in super crazy levered things. I have short-term Treasuries, I have US stocks, global stocks, like I have a little bit of gold, I have a little bit of Bitcoin, I have a little bit of a bunch of stuff. I’m just saying just from the daily fluctuations, you’re going to see your wealth move in ways that you could not imagine. If there’s ever a way of thinking about compounding is one day you’re going to make or lose more money than all the money you went and worked so hard to save like many decades before. That is crazy to think about, but that is the benefit of compounding is because you can make more in a day than you save in a year basically. That is crazy.
Yeah, my example of this is Warren Buffett. Everybody talks about what a genius Warren Buffett is and my cheeky response is that Warren Buffett’s greatest gift is that he lived to 100. When he was 65, he actually wasn’t that wealthy. You get this cumulative effect of these sometimes small percentages over time and then getting perhaps even like a hockey stick effect later in life. Often, when you want to make sure you have money because it’s really terrible to be old and poor, as I was saying before.
Before we get to level four, which might be the most interesting psychological level, I want to talk to you about saving via a house versus saving through other investments, most notably a diverse equities portfolio, a low-cost passively traded mutual fund is the other gold standard, I think. I’ll just put forth something I’ve said many times on the show. I think that home ownership, while culturally is highly appealing in the United States, it’s seen as the American dream to own your own little plot of land, I think that there’s some very notable downsides to it, and especially for a solo.
One is this notion sometimes you overbuy. You’re spending a lot of money on a mortgage, on space you don’t need, a dining room, guest rooms, etc. It can limit mobility. If you buy a home, you really ought to stay in it. The numbers vary, some people say 5 years, some people say 10 years, just because of the costs of transaction.
The flip side of this, of course, is mortgages are forced savings. For some people who have trouble investing their money, they’re very good about paying their mortgage where they may not be very good about investing in their 401(k). Do you have particular thoughts whether it be about solos or non-solos about the relative costs and benefits of investing in a house? It’s not necessarily binary, but versus equities.
The Trade-offs of Home Ownership vs. Equities
I can tell you historically like US home prices have gone up by about 1% per year above inflation. S&P 500’s done 7% per year. I know there’s lever technically when you take out a home you have debt and you’re levering, so it’s not exactly apples to apples, but even when you include those things, like stocks have far outperformed. Does that mean they’re going to in the future? I don’t know. I do think there’s something to productive businesses where you get a bunch of people together trying to grow it and trying to create a business is very different than just owning a piece of land.
Obviously, the land can still go up in value even in inflation-adjusted terms. I think everything you said makes perfect sense like in terms of thinking about the forced savings vehicle. I think for some people that’s amazing, it’s really the only way they save money, and it’s actually the bulk of the wealth for those in level 2 and especially in level 3 is going to be in their home equity. You’re going to see like those types of things definitely matter.
My preference personally ,r I don’t own a home yet. I am looking and so my wife and I are looking and everything, but how long is that going to take before we get that? We just signed an eighteen-month lease, so we’re going to be here a little bit longer before we start looking again, but it’s one of those things I know I’m going to do it at some point. It’s more of a consumption good though than an investment. That’s how I really think you need to look at it because how many things do you buy as an investment and you have to keep paying for them? There’s no property tax on your stocks.
I understand it’s different because you own the thing, you’re paying for services, but that’s what I’m saying. It is a consumption good at the end of the day, unless all the, unless everyone follows Florida and we just get rid of all property taxes across the US, which is not going to happen, like you’re going to have to keep paying on this thing forever. It’s not like my mortgage is zero, I’m free now. It’s like, no, you still got to pay property tax and you still have to fix it when it breaks down. I don’t have to worry about that with any of the stocks I own. Of course, that’s already built into like management fees and all these other things that are in there. At least when you think of it that way, that’s why I prefer things like businesses over just real estate in this case.
I’m not trying to be prescriptive. If anything, I’m just trying to get people to question their assumptions, to do a little bit of math, and so on and I think obviously interest rates have gone up recently, that makes the appeal of buying much less so. It is certainly the case, actually I have a colleague at CU who studies essentially the idea that there are these different zones in the United States. Some are stagnant, some are declining, some are increasing.
The Philosophy of Perpetual Buying
It happens to be where you buy a home too, it’s not just this it goes up and up and so on. Taking away that point from level three is just keep buying. You just keep taking money, putting it in these assets that are meant to increase, they may not always increase. I always say don’t pay too much attention, check your statements quarterly, it’s a lot less painful than checking them daily.
Level four, now we’re getting into a really nice world if people are fortunate enough to be there, this is $1 million to $10 million, this is as you said travel freedom. This is an interesting thing because I think this is where you start to have consumption problems. You can very easily take care of your basics. It’s where the tightwads really struggle because they’ve got a pot of gold of a sort and they’re having difficulty spending it. What your advice, what’s your perspective on that level four group?
Level Four: Overcoming the “Tightwad” Consumption Problem
I think what happens for a lot of people is they use their wealth in level four as just a way to create income and then they just spend that income. Let me give you a simple example. Let’s say you had $1 million just in a checking account, you could go and buy put it in a CD or short-term Treasury bill, let’s say, and let’s say that’s paying you 4% a year. Now you’re getting $40,000 a year in income. They are going to just say, “I’m just going to spend that $40,000. I’m never going to touch the principle, I’m just going to let that stay there and I’m just going to spend the $4,000, and obviously that’s what they’ll do. They’ll do something like that.
That’s a little bit of an extreme example, but you can imagine having stocks, bonds, and Treasury bills, etc., and then just living off the income. A lot of retirees do that. They either live off the income or for the real, I don’t want to say tightwads, we’ll just say people who don’t spend a lot, they are going to not even spend all that income. They have end up taking that money and then reinvesting it.
A lot of things people don’t know, there’s this term called rmds or required minimum distributions that you have to take at age 70 if you have like pre-tax money. The government’s like, “You got to take it out because we need our money.” A lot of these people take this money out and they don’t even spend it, they end up reinvesting it. It’s this thing. It’s forcing you to take the money out to pay the tax and then to use the money in theory, but if you’re like, “I’m not going to use it on anything. I’m 70 years old, I don’t really need much,” they end up reinvesting it. There’s a lot of people who end up doing stuff like that.
I do think every person’s going to be different and I think people just like to live off of income. I get it, it’s a very safe way of going through retirement. If you understand the 4% rule, you can spend much, much more and you will still very likely be fine. We’ve run a lot of analyses on this thing. Spending down 4% of your portfolio a year is not usually a problem.
These are luxury problems to have when you reach that level of net worth. I’m 55. I think about retirement. This is going to be part of an episode related to retiring solo. It’s a surprisingly complex problem to try to figure out what your spending should be like, even if you’re fortunate enough to be in level four. You have to anticipate what is your cost of living is going to be like. How will that change as you go to your 60s to your 70s to hopefully your 80s and 90s. How long will you live? What if you make it to 100? What if you only make it to 69, just what my mom made it to, and you’re laying on your deathbed with your pot of gold and saying, “I could have enjoyed my life more?”
Also, questions around how much do I actually want left over and who am I going to give it to? For a lot of solos, they may not have children. They certainly don’t have a spouse. You could take a more aggressive approach. I’m modeling my future on a die with zero approach. Ideally, the day I die my bank account goes to zero.
Now of course that’s not really going to be the case, and of course I have people that I do want to give money to, but I’m probably more likely to help them out along the way than wait for my demise, so this gets really complex. You could die with too much, you could die with too little. How do you think about this? Is it just the 4% rule’s a good enough approach? It has a downside, it has an upside.
The Math and Psychology of the 4% Rule
4% rule’s actually incredibly conservative as a rule. Michael Kitces did this analysis, he says you have a 60/40 portfolio, 60% stocks, 40% bonds. You do the 4% rule, adjust for inflation every year. Let’s say you start with $1 million. First year you pull out $40,000. I’m just going to use high numbers to make the math easy. Let’s say inflation’s 10%. Next year you pull out $44,000. Inflation’s 10% again, the next year you pull out $48,400 or whatever it is. You keep doing that. Inflation is not going to hopefully be 10% every year. I’m just doing that because it’s easier than 2% in my head.
Anyways, my point is you do that. You do it for 30 years. You take the actual historical inflation rate. 60/40, start with $1 million. You are more likely to end up with four times your wealth than you are to end up with less than your starting balance. If you start with $1 million, it’s basically-it’s a coin flip. You’re equally likely to end up with $4 million or less than $1 million after 30 years. Most likely case is you end up 2X or 3X. After pulling money at 4% rule for 30 years, the most likely case is you end up 2 or 3 times more.
So people are-when I say 4% rule is conservative. It’s extra conservative. There are very few cases where you’re below your balance and you’d have to literally go through the Great Depression to even end up at like close to zero. That’s like the only time where-and you would have once again this also assumes we’re robots. If we go through a Great Depression, you’re seeing the stock market go down 50% in a year and then the next year it goes down you’re not going to go and say okay, “I have to take my $40,000 out now.” You’re going to adjust your behavior.
If you include the human element in there, you’re never going to run out of money. It’s impossible. Who’s going to do that. Now of course people living longer, that’s one thing, but like if you’re living longer that’s more time for the market to recover as well and you’re very likely to see your wealth keep growing. People do run out of money in retirement, it’s incredibly rare. I think you have to go quite a bit above the 4% rule before you really start to risk it, though.
One of those other uncertainties is what does the market do. We only have the past, we can’t predict the future, so that’s another level of uncertainty. How much will I need, how will I live, how much do I want to leave behind, and then what will the market do? Obviously there are people who have pensions, so that’s becoming less and less the case. There are annuities. I don’t think they tend to be very good vehicles. They are useful because they remove uncertainty.
I have a buddy, he doesn’t want to use the word tightwad, I will, in part because I have some tightwadness at least I’m trying to undo it, but he’s tightwad, and he says he wants to buy an annuity because it’ll force him to spend his money. As you mentioned with the required minimum distributions, to reinvest your required minimum distribution is irrational. It doesn’t make any sense because you’ve already paid tax on it. Unless you really need to for some reason. It’s hard to imagine, maybe you want to leave your money behind.
If you reinvest your annuity money, that’s just absurd. Again, these aren’t good values. They remove psychological uncertainty, but they’re not the best use of your money. It is really a highlight of like if you even if you are fortunate enough to get to this level, it’s still complex, it’s still not easy to do, and so I think people err on let’s just stay at the 3-star hotel rather than the 4-star hotel. It’s that easy to say. You know what, let’s sit in economy versus premium economy or let’s sit in premium economy instead of splurging for business class on this particular onerous trip. I’m just highlighting puzzles without actually highlighting very good solutions.
Market Uncertainty and the Power of Optimism
The data on retirement spending show on average it declines by about 1% a year. What a lot of people do, like in the first few years of retirement, they might travel a lot or they’ll front-load a lot of their spending and then they’ll cut it pretty significantly, especially once there’s a health event, all the non-medical spending drops off a cliff. They usually stop going out, stop doing stuff. Obviously, the medical spending can shoot up, but obviously there’s Medicare and there’s other things there, so it’s not saying it can’t cost money, there are if you have hospice or things like that could cost more.
However, you start looking at the data and in general, like spending goes down over time. Obviously even with inflation changes that a little bit but in general, like that’s what the data shows. The other thing too you said something about like we don’t know what the market’s going to do in the future, that’s true, but all of our history has all of those periods where the market did not do well. It has the 70s in there, it has the 1930s, it has the Great Depression. It has all that in there.
It has 2010. As we’re as we’re moving forward, like the people who retired in let’s say 1995, they went through the 2000s and that was a very rough period for US stocks. They went through that and we’re going to have more data on how they’re faring now and did they run out of money after 30 years type thing because that would be actually 2025. You can imagine we can run those analyses now and test that.
Also I think all things equal you’re better off having an optimistic view of the world. It’s motivating, I actually had an author on who wrote a book called The Big 100 and one of the things that is very common among people who make it to 100-plus is they’re optimists. You can imagine like it’s really hard to live to 100 if you’re not optimistic. You don’t engage in the behaviors that get you to 100. Again, all things equal, I think optimism tends to be motivating, tends to be a more pleasant place to live life.
As we know, we’re not in a very optimistic period in life and social media prays on pessimism and concern and scare and in fear. I would add one thing that I think and maybe you’re just being modest, but I think relying on people like you is an important thing for laypeople to do. I’ve had my own financial advisor, Money Amy, on the show. She’s fee-based, so I write her a check for every hour that we talk. She has a fiduciary responsibility, it’s in her best interest for me to do well, I don’t she doesn’t benefit or have any cost for me to buy or sell something. She’s just much more up-to-date on things than I am.
Money Amy and I have been together for two decades. She got me going with my 401(k) when I first started my job. She helps me with both the legal, economic stuff, but then also even the emotional and psychological stuff. I remember her basically telling me that I can afford a four-star hotel. I don’t need to worry about that. That was shocking. I had to talk to her to buy a car. I was like, “Can I really afford this this car?” I had to talk to my therapist and my financial planner to be able to buy a nicer car than I had been driving before. I think that there’s just a wealth of knowledge and also the support you need from professionals. Of course, my caveat is for the solo crowd, they need to find someone who’s tuned in to the specific issues that single people have.
I completely agree with that. It’s good to have those people you can bounce ideas off, people that you just resonate with in one way or another. Doesn’t have to be me, could be any there’s a lot of financial people out there. I think and you look at the data and I’m trying to present the data, I’m like, “Let’s look at what would have happened statistically and I know you’re worried about this or that.”
You can always change course, like you can start with the 4% rule and if you’re like, “The market’s not doing as well as I thought,” you can cut back a little bit. You can go to 3.5% or something. The truth is, in all the models, everyone’s inflexible in the models, but in real world, people are flexible, they can do different things. I’ve written about this. You can actually pull out even more than the 4% rule if you’re flexible. I’m saying if you’re flexible with your spending, you can actually go to like 4.5% to 5% really. It’s really eye-opening the change that’s been made because of some of the historical analysis we’ve been able to do.
I think there’s even little things that you can do where you retire, you take a chunk of money and you put it in something really safe. That means if the if the market goes down 30%, you can live off that safe money until it gets back going, which as we know as you said historically, it does get back going usually within a few years at most.
Let’s talk happiness, let’s talk well-being, let’s talk about different versions of wealth. In my book, in Solo, I talk about these ways that people flourish. I steal this idea from Scott Barry Kaufman about thinking about well-being as a sailboat. The hull of the boat is your health, your wealth, and your social connection. It’s really hard to flourish without that foundation.
The sail is the flourishing and there are different paths to flourishing. For example, there’s like purpose, so you’re living a very meaningful life or an achievement-focused life. We’re taping this while the Olympics is going on. There are these people who have a very purpose-driven life, they’re trying to achieve gold medals or silver medals or just trying to make the Olympics. They’re living their best life doing that.
There’s other people who are trying to cure cancer and volunteering in a soup kitchen. Their purpose-driven lives are very meaningful. There’s positive emotion, living a life of good healthy meals. Having delicious food, enjoying your spa time. There’s engagement, so creative endeavor, so that feeling of flow you have when you’re writing your book and time melts away.
In The Wealth Ladder, you talk about Charlie Munger. I was not aware of this. Charlie Munger was like 99 or something when he died. He said that he wished he had multiple trillions instead of multiple billions, which I think says a lot about what Charlie Munger’s approach to flourishing was, which was achievement, which was the amount of money in the bank was a way to keep score of how smart you are, how creative you are, how hard-working you are, etc.
You contrast this with Felix Dennis, who’s worth $750 million I think is the number, and he said he wished he stopped at $60 million to $80 million to just write poetry and plant trees. Right? So to go instead of going from achievement, now he’s pursuing engagement, flow, writing poetry, and meaning, planting trees. I think there’s almost nothing you can do better for the world than plant trees. That’s actually what I’m going to do with any money I have left, not any but a lot of money I have left, is to plant trees on 6 of the 7 continents. That’s my dream. You spend time in this book and you already alluded to it earlier about these different categories translating into different types of non-financial wealth for people.
Defining Flourishing: The Three Types of Wealth
I think when you think about this, like you use the sailboat analogy. Which there’s just different types of wealth and I think like without health, like all the other ones, doesn’t matter how much money you have if you feel terrible at like. If I said how much money would you have to take to have a cold every day for the rest of your life, there’s just like most people would say there’s no amount. I would pay you to not have to deal with that. Health’s great.
I want to interrupt for a second. I was traveling and I hurt my back deadlifting. I was bedridden. Stuck in bed. I had to crawl on my hands and knees to use the bathroom. If a wizard showed up and said, “Peter, you can write a $50,000 check and your back pain will go away and you can resume your normal life,” I would have written that check. You know what I mean? It’s just like to your point, it was so debilitating, it was so awful, and it didn’t matter what amount of money I had in the bank account at that moment. I had a very provocative moment. No wizard showed up, so I just had to heal on my own.
Just deal with it. There’s other types of wealth and I think money is, I say in the book, the great enhancer and the analogy I use is like salt. Food can be good if you add some salt to it, it makes it better, but salt by itself is useless. You would never just eat a plate of salt, but salt adds a lot to an already existing good thing. It’s like that’s what money does to our life. You have great friends, you have good health, you have a good mental health, good time everything you can control your time a little bit.
All that’s great, money just adds to all that. If you don’t have any of those things, the money’s not going to do anything by itself. Thinking about happiness and things like this, the Munger quote’s actually funny because I remember watching, I had seen this clip on Twitter or something and I was like, “I can’t believe it,” because Munger’s considered one of the wisest businessmen ever and here he is near the end of his life obviously and he has like this level of almost regret. It’s striking.
By all accounts, you’re considered the greatest of all time. Him and Buffett are considered the businessman and even a lot of people will say Munger’s wiser than Buffett even though he wasn’t as rich, so there’s debates had about intellectual prowess and everything and Charlie Munger checks every box, and yet at the end of the day he’s still sitting there saying, “I wish I’d been a little bit smarter. I would have maybe trillions and not billions.” No one’s going to remember you for that. They’re going to remember you for all the other things.
No one cares you’re rich enough. You passed a threshold, you don’t need to have the be the absolute richest person in the cemetery for people to respect you. I think in his head maybe he didn’t think that or I don’t know why he felt that way, but it’s just it’s very interesting to see that. It’s funny because we talk about happiness, I wrote about this in The Wealth Ladder and the data on happiness is actually very clear. I’ll just summarize, I’m not going to go through the whole story and everything that’s in the book.
The Ironic Relationship Between Money and Happiness
Basically if you’re poor, more money will make you happier. That’s generally shown in the data. If you’re happy, more money will make you happier. Which is a funny part because if you’re already happy feeling great, if you have more money, you’re probably going to be even happier. If you’re not poor and you’re not happy, more money won’t do a thing.
It’s ironic because the people that aren’t let’s say happy or satisfied in life in some way and they think it’s because I don’t have enough money, you look at the data, that’s not the case. If you’re poor and that’s the reason you’re unhappy, then yes, that is the case. For most people that are like, “I don’t feel I’ve achieved anything whatever,” those people that have some money have some success and they’re still chasing more, money is not the issue there.
It’s overwhelming thing we see in the data and just very interesting because it’s also ironic because the people that are chasing the money because they’re not happy are the ones who aren’t going to get the happiness. The people that are already happy having a great time, if more money happens to hit them, they’re going to be even happier.
Yeah, it is really ironic. You talk about work by Kahneman et al. I actually did my postdoc with Danny Kahneman and so was around him. These are the early aughts as he was focusing a lot on well-being and all of this jells with how my own independent beliefs about well-being are. You think about that sail, where is it that the money matters? The money matters because it takes care of your basic needs, your safety needs, you’re not worried about losing your home, you can afford your bills, etc. How do you use money as a tool to achieve your goals?
Let’s say you’re a writer spending money to go on a writer’s retreat or to rent a cabin in the mountains and have a time to read and write uninterrupted is an incredible return on investment. It’s actually not that expensive. Level 2, level 3 people can afford that of endeavor. Planting trees. You could give $1 million to have trees planted or you could go and buy a tree and plant it yourself and have the same meaning in your life. Actually in many ways it’s probably healthier to do the tree planting yourself because it gets you out in nature and moving your body.
I think that again, we’ve been very focused on the USA. This idea of using money as a way to keep score. How you’re doing, are you winning? I think also people don’t have often good intuitions around what will actually make them happy when it comes to spending their money. Spending money on a meal with friends is a wonderful return on investment versus buying luxury items that just you get used to that end up on the shelf that fall out of fashion, and have no chance of ever compounding a stock does.
I’ll stop editorializing now. I just want to go back to this fact because I think that it’s so important. How do you get people out of poverty? If your financial situation is tenuous, and solos have more tenuous financial situations than non-solos because they don’t have the hedge, they don’t have a second income, they don’t have someone who could pick up extra work if you become disabled, for example. As you move away from poverty, I think your prescription based on this finding, Nick, it is what I’m taking away, is how do you find a way to be happy first and then increase your income second, yes?
Yeah, I guess it depends how much to what degree we’re talking. If someone has very little wealth, them getting some wealth is going to lead to happiness. You need to get out of, once again, getting out of level one I think is important. You’re right, once you start getting into level 2 and definitely by level 3, then that doesn’t matter as much.
Every person’s going to be different. It’s always going to be relative, everyone has relative to their history. If they had a lot of money and they lost it due to a divorce, due to an accident, due to a medical condition, a disability as you said, there’s a lot of history there and that is going to impact what they feel they would need to feel happy or at least satisfied financially again. I think that’s another piece we need to think about here.
Indeed. I’m going to leave level 5 and 6 for the people who read the book. I think those are interesting. It’s funny, level 5 and 6 people have problems too. As the great poet Biggie says, “Mo’ money, mo’ problems.” I know you’re a rap man because you also talk about Jay-Z in the book. Nick, reflecting on this conversation, is there one takeaway that you do feel comfortable prescribing to someone in our level 2 to level 4 world, the average Solo reader?
Final Takeaway: Investing in Social Wealth
If you’re solo, obviously you may not have that family member there that-that a lot of people do have. I would say what are you doing on the social wealth front, because everyone needs social wealth. Of course there are some people who are super introverted that feel like they don’t need it. I think even they need it sometimes and so figuring out how do I still have social wealth whether that’s through a community, whether that’s something I go to periodically? Whatever that is, that if I had to think about like the solo audience, me just theorizing right now, I’m guessing of all the areas where they’re investing in their life, different types of wealth, I think the one that they probably need to focus a little bit more on is the social wealth.
Yeah, I think that’s well said. Again it’s one of those elements of that bottom of the boat. You know when you think about people are homeless, oftentimes people are homeless not just because of income, it’s because they are socially isolated. I remember realizing at some point in my life where I was like, “I’ll never be homeless,” because there’ll always be a couch or a guest room or something that I can rely on from someone who I love and loves me.
Those social connections which thankfully most solos actually have more of than the average married couple, but that is not always the case. It is easy to get isolated if you’re not careful. Nick, thank you for your time. Thank you for writing this really interesting, compelling book that I think changed the way I think, and I hope that people go out and get it and that they learned a little something here.
Appreciate having me on, Peter. Thank you for saying that. Once again if any of your audience has any questions for me, feel free to DM me on Instagram, LinkedIn, Twitter, wherever. I respond to every DM.
Cheers.
Important Links
- Ritholtz Wealth Management
- Of Dollars and Data
- Just Keep Buying: Proven Ways to Save Money and Build Your Wealth
- The Wealth Ladder: Proven Strategies for Every Step of Your Financial Life
- The Big 100
- Financial Freedom With Money Amy
- Solo
- Nick Maggiulli on Instagram
- Nick Maggiulli on LinkedIn
- Nick Maggiulli on X
About Nick Maggiulli
Nick Maggiulli is the Chief Operating Officer at Ritholtz Wealth Management and the NY Times bestselling author of The Wealth Ladder: Proven Strategies for Every Step of Your Financial Life.
His first book, Just Keep Buying: Proven Ways to Save Money and Build Your Wealth, was an international bestseller. Through his blog, OfDollarsAndData.com, he explores the intersection of data and personal finance, reaching millions of readers worldwide.
His insights have been featured in The Wall Street Journal, Forbes, CNBC, and other major media outlets. Mr. Maggiulli holds a degree in Economics from Stanford University and currently lives in the New York City metropolitan area.