Learning to Die with Zero. The Last Check Must Bounce.

My friend Christopher Ng recommended to his reader to read this book by Bill Perkins called Die with Zero.

I do not know whether it is a good book or not but I think it might be thought provoking enough for me to read it.

Die with Zero sought to answer a core question we all seek:

What’s the best way to allocate our life energy before we die?

When Bill released this book, I also heard many interviews that he did to promote his book.

This book… might be the book to help re-calibrate my thinking. After doing so much research on how much a person need to accumulate so that they won’t run out of money in retirement, we need a book to teach us not to spend all our time accumulating.

Is this a good book? Personally, I find it hard to connect with.

In this article, I list out some of the notable takeaways from Bill Perkins.

Consumption Smoothing

The first concept that Bill explained was consumption smoothing. Bill took a page out of a time when he started working not too long ago. Back then, he was very thrifty and extremely proud about it.

However his boss, who is a partner at the company he worked for was astonished he was saving so much.

“Are you a f***ing idiot? To save that money?”

It was a slap across Bill’s face.

His boss Joe Farrel said: “You came here to make millions, ” he said. “Your earning power is going to happen! Do you think you’ll only make 18 thousand a year for the rest of your life?”

In his boss’s mind, Bill would eventually made much more than that.

He could certainly spend today and not save this sum of money.

It was a life-changing moment for Bill as it cracked his head open to new ideas about how to balance his earnings and spending.

If we look at our income chart over the years, it should be upward sloping. Due to our experience over time, we should earn more.

If we know that, we should be able to spend a greater percentage of our income today because eventually, we will make more and our savings rate will go down, but the savings in the future will make up for the higher consumption today.

We will basically transfer money from years of abundance into the leaner years.

What is difficult to connect for a lot of people is how much higher would your salary be in the future?

To use myself as an example, some of my peers are currently director of security while others are still a team lead in a small company.

If we smoothed out our income, the director of security and the team lead would be totally different.

I get the idea but I think whether it is sensible for us to do that or not is subjective.

Investing in Experiences

Your life is the sum of your experiences.

This just means that everything you do in life—all the daily, weekly, monthly, annual, and once-in-a-lifetime experiences you have—adds up to who you are.

When you look back on your life, the richness of those experiences will determine your judgment of how full a life you’ve led.

So it stands to reason that you should put some serious thought and effort into planning the kinds of experiences that you want for yourself.

This is not rocket science.

Bill is not saying we should not delay-gratify. He just wants to point out that our culture tends to overemphasize the virtues of the ant—of hard work and delayed gratification—at the cost of other virtues.

You can visualize your experience in the diagram above. Think of it as a game and you are gathering experience points. As you look back at year 7, what you rememeber are numerous experiences.

The Memory Dividend

Bill lets us know that dividends is not just monetary but also what we remember.

When you teach your daughter to swim or to ride a bike, it’s not because you think she’ll get a better-paying job with those new skills.

Experiences are like that: When you spend time or money on experiences, they are not only enjoyable at the moment—they pay an ongoing dividend, the memory dividend.

Experiences yield dividends because we humans have memory. We don’t start every day with a blank brain, like characters in so many sci-fi movies. We wake up every morning preloaded with a bunch of memories that we can access at any time—mainly to get around and navigate the world.

Once you start thinking about the memory dividend, something becomes really clear:

It pays to invest early. The earlier you start investing, the more time you have to reap your memory dividends.

Aim to Die with Zero

Dying with zero dollars mean you got to not just survive life but enjoy it.

You need to stop driving mindlessly and actively steer your life the way you want it to go.

Bill give the story of his friend at an old workplace that went into autopilot mode.

His friend John wasn’t making a calculated choice between work and family, or between working for money and the millions of other things he could have been doing with his wealth, time, and talent.

No, he was continuing to work because he had formed the habit of working, much like a smoker who had picked up cigarettes as a teenage boy because he wanted to look cool to the girls.

But now that the boy got the girl, why is he still smoking?

Only because he’s formed an addictive habit, and habits are hard to break.

For some people, it can be the same with working for money—it is just easier to keep doing what you’ve been doing, especially when what you’ve been doing continues to reward you with society’s universal form of recognition for a job well done, aka money. Once you’re in the habit of working for money to live, the thrill of making money exceeds the thrill of actually living.

Life-Cycle Hypothesis

Back in the 1950s, an economist named Franco Modigliani, who went on to win the Nobel Prize, posited something that came to be known as the Life-Cycle Hypothesis (LCH)

LCH is an idea about how people manage their spending and saving to try to get the most from their money across their life span.

Franco basically said that making the most of your money in the course of your life requires that, as another economist put it, “wealth will decline to zero by the date of death.”

In other words, if you know when you will die, you must die with zero—because if you don’t, you are not getting maximum enjoyment (utility) from your money. And what about the very real possibility that you don’t know when you’ll die? Modigliani has a simple answer to that: To be safe but still avoid needlessly leaving money behind, just think of the maximum age to which anyone can live.

So a rational person, in Modigliani’s view, will spread their wealth across all the years up to the oldest age to which they might live.

Why Life-Cycle Hypothesis is too Idealistic

LCH is challenging in the real world. We either save too much or save too little.

This is because optimizing your whole life takes a lot of thought and planning; it’s easier to live for short-term rewards (myopia) and to stay on autopilot (inertia) than to do what will be good for you in the long term.

Bill gave the example of the fun-loving grasshopper who didn’t save for the rainy day while the ant saved for it. Each of us may be a grasshopper or an ant (or a little of both)

We can have myopia like the fun-loving, free-spending grasshopper.

But some of us might have inertia like the ant later in our life. Can a dutiful saver suddenly crack open the nest egg they’ve so diligently built up?

Behavioural economists understand that just because something is rational to do—in this case, switching from saving to “dissaving”—that doesn’t mean people will do it easily.

Inertia is a very powerful force.

As economists Hersh Shefrin and Richard Thaler once put it, “It is hard to teach an old household new rules.”

Americans Saved Too Much

Here are some data Bill provided that show just how much retirees are saving.

The Federal Reserve Board tracks how much Americans have built up at various stages of their lives.

For example, we know from its most recent Survey of Consumer Finances that the median net worth for U.S. households headed by someone aged 45 to 54 is $124,200.

American heads of household between the ages of 65 and 74 have a median net worth of $224,100, up from the $187,300 saved up by householders between 55 and 64.

People in their seventies are still saving for the future!

In fact, even in their mid-seventies, people in this upper half of the population don’t start dipping into their savings.

The median net worth for American householders aged 75 or older is the highest of all age groups: $264,800.

So even with rising life expectancies, millions of Americans are on track to have their hard-earned money outlive them.

Yes, older people often save in anticipation of healthcare costs—but, as you’ll see shortly, people’s overall expenses decline with age, even counting the cost of healthcare.

Here is the summary:

• On the whole, people are very slow to spend down (“decumulate”) their assets.
• Across ages, whether looking at retirees in their sixties or those in their nineties, the median ratio of household spending to household income hovers around 1:1. This means that people’s spending continues to closely track their income—so as people’s incomes decline, their spending does, too. This is another way of seeing that retirees aren’t really drawing down all the money they’ve saved up.
• At the high end, retirees who had $500,000 or more right before retirement had spent down a median of only 11.8 per cent of that money 20 years later or by the time they died. That’s more than 88 per cent left over—which means that a person retiring at 65 with half a million dollars still has more than $440,000 left at age 85!
• At the lower end, retirees with less than $200,000 saved up for retirement spent a higher percentage (as you might expect, since they had less to spend overall)—but even this group’s median members had spent down only one-quarter of their assets 18 years after retirement.
• One-third of all retirees actually increased their assets after retirement! Instead of slowly or quickly decumulating, they continued to accumulate wealth.
• Retirees on a pension—meaning that they had a guaranteed source of ongoing income after retirement—spent down much less of their assets (only 4 per cent) during the first 18 years after retirement than did non-pensioners (who had spent down 34 per cent).

Stop Relying on Insurance but Self Insurance

Some people never actually planned to spend all that money on life experiences but instead were saving for the unforeseen expenses of old age, especially medical expenses.

Bill thinks that we should rely on insurance for this area.

One point Bill make is quite interesting.

No amount of savings available to most people will cover the costliest healthcare you might possibly need. For example, cancer treatments can easily cost half a million dollars a year.

For example, if your out-of-pocket medical expenses amount to $50,000 per night (as they did for Bill’s father’s hospital stay at the end of his life), does it really matter whether you’ve saved $10,000 or $50,000 or even $250,000?

No, it doesn’t, because the extra $50,000 will buy you one extra night, a night that might well have taken you a year’s worth of work to earn!

Similarly, $250,000 saved over however many years will get wiped out in five days.

How to Actually Spend Your Money (Without actually hitting zero before you die)

This part has a lot of words but how would we make sure that we plan well to spend down close to zero when we die?

The first thing is to use an online actuarial calculator to estimate how long you will live.

The big issue with that is….what if you lived longer than expected.

The possibility that you will live longer than you expect is called longevity risk.

Nobody wants to die early—the possibility of that is called mortality risk —but nobody wants to die after their money runs out either. (With no money, your quality of life will take a dramatic dip, to put it mildly.) So there’s uncertainty on both sides of our expected life span, and we want to figure out how to deal with the negative financial consequences of that uncertainty.

The solution Bill cited was annuities:

Economists generally think that annuities are such a rational way to deal with longevity risk that many experts have long wondered why more people don’t buy annuities—a question economists call “the annuity puzzle.”

Give Money to Your Children or to Charity When it has the Most Impact

Bill recommends you to give your children whatever you have allocated for them before you die. Why wait until you’re gone?

Here are some of his points.

The Problem with Inheritance

The main problem is that you are leaving too much of the allocation to chance. We do not know when we will passed away but your child still need to do some sort of planning.

Federal Reserve Board tracks the most common age group for people to get an inheritance. While there is a spectrum when people usually receive the inheritance, the best bet is nearer to 60 years old.

Bill cite the example of how earlier gifting might be more live-altering for their children:

In general, inheritance happens when someone tries to give a random amount to a random set of people (because we also dunno how many will still be alive by then) at a random time.

How can randomness be considered caring?

Give the Money Near Peak Utility

Bill did a Twitter poll asking people what do they think is the ideal age to receive an inheritance windfall.

Of the more than 3,500 people who voted on this question, very few (only 6 per cent) said the ideal age to inherit money is 46 or older. Another 29 per cent voted for ages 36 to 45, while only 12 per cent said 18 to 25.

The clear winner, with more than half the votes, was the age range 26 to 35.

Some reasons:

• The time value of money and the power of compound interest, suggesting that the earlier you get the money, the better.
• A bunch of people pointed out the immaturity problem of getting the money too young.
• You always get more value out of money before your health begins to inevitably decline.

26 to 35 is best because they are old enough to be trusted with money, yet young enough to fully enjoy its benefits.

This may apply to charity as well.

The sooner you give money to medical research, for example, the sooner that money can help combat disease—as we can see from the research into returns on investments in medical research.

Balance Your Life

How would you spend if you know you will pass away X days from now?

If you knew you were going to die tomorrow, you’d spend today one way, and if it was two days from now, you would spend today slightly differently. This is because you’ll still have tomorrow.

The same is true for three days from now, four days from now, or 20,000 days from now: The further back in time you go, the more the balance shifts between living for today and planning for the future.

So if you work your way back one day or year at a time, from your deathbed to the wheelchair to retirement, and then further back to your thirties, twenties, and so on, you should see at least subtle changes in how you should be spending your life.

This is easy to see when you’re talking about a few days—those changes aren’t subtle. But when we’re talking about thousands of days—of years and decades—people tend to forget this logic altogether and act as if 20,000 days is the same as forever.

Health Should Drive Our Consumption and Saving Pattern.

Researchers found that people under age 60 are most constrained by time and money, whereas people 75 and older are most constrained by health problems.

In other words, when time and money are no longer a problem, health is.

Researchers also track different indicators of eye health (visual function), such as contrast sensitivity, retinal thickness, and visual acuity. Lung function has its own trajectory of decline with age.

So do cardiac health, cognitive function, and sense of smell, among many others. So there are many different health curves, not just one, and they all look somewhat different: Some decline in a steady, almost linear trajectory, while others are more curved, showing an accelerating rate of decline.

Also, group differences aside, some individuals are healthier than others, to begin with, and some are better at maintaining their health over time, so ranges are more telling than single curves are.

But no matter what specific health data you look at or how many curves you combine, 80-year-olds are a lot less healthy than 25-year-olds.

The diagram describes the problem we faced.

1. Everyone’s health declines with age.
2. Wealth, on the other hand, tends to grow over the years as people save up more and more.
3. Worsening health gradually constrains your enjoyment of that wealth as more and more physical activities become impossible to enjoy, no matter how much money you can afford to spend on them.

This thought immediately suggested practical implications:

1. If your capacity to enjoy life experiences is higher at some ages than others, then it makes sense to spend more of your money at certain ages than others! For example, because $100,000 has more value in your fifties than it does in your eighties, and your goal is to maximize your enjoyment of your money and your life, it’s in your best interest to shift at least some of that money from your eighties into your fifties.
2. For the same reason, it’s in your best interest to shift some of it to your twenties, thirties, and forties, as well. Making these kinds of conscious financial shifts essentially creates a lifetime spending plan that takes into account the changing utility of money.
3. Whenever you shift in order to spend money, you are necessarily also shifting when you save. So, for example, instead of saving 20 per cent of your income throughout your working years, some people would be better off saving almost nothing in their early twenties (as we’ve discussed), then gradually ramping up their saving rate during their late twenties and thirties as their income begins to rise. Then they should save even more than 20 per cent in their forties—and then slow down their savings so that eventually (as I explain in the next chapter) they actually start outspending their earnings.

To get the most positive life experiences at any age, you must balance your life, and this requires you to exchange an abundant resource in order to get more of a scarce one.

Health is more valuable than money.

No amount of money can ever make up for very poor health—whereas people in good health but with little money can still have many wonderful experiences.

Your Personal Interest Rate

Bill introduce us to this thing called your personal interest rate.

I called the personal interest rate like your life utility opportunity cost.

When you’re 20 years old, you can afford to wait a year or two to have an experience, because you can typically have the same experience later.

Therefore, your personal interest is low.

Someone doesn’t have to pay you much for you to be willing to delay the experience.

If you need to trip to Mexico this summer, but your boss said to you, “I could really use you here this summer. I know you wanted to take this Mexico trip, but would you consider taking it next summer instead? I would pay you x% of the price of the trip to do that.”

Okay, interesting offer.

So how high would x have to be for you to agree?

10%?

25%?

Now suppose you’re 80.

At this point, delaying an experience becomes much more costly, so your x would have to be much higher than when you were 20. Even if someone paid you 50% of the price of the trip to delay it, you should not necessarily take the offer. Your personal interest rate at age 80 may be higher than 50%. It might even be higher than 100%.

Your personal interest rate rises with age, but unfortunately, we don’t always act as if it does.

If this concept of a personal interest rate works for you, though, then keeping it in mind when you are considering buying an experience can help you decide whether it’s worth it to spend the money now or to save it for another time.

Time Bucket Your Life

In retirement, we segment our wealth into buckets. Bill teaches us that we should do that with the experiences of our lives as well.

No Clear End Points

Bill raises an important point: There is a certain best period to enjoy a particular experience. Once you missed that period, it is different anymore. And you cannot get that feeling back.

The teenager in you dies, the college student in you dies, the single unattached you die, the version of you that’s a parent of an infant dies, and so on.

We needed to maximise our lives at a certain point because we cannot go back anymore.

Regret-Free Living

Regret usually surface only when we are facing our mortality.

A team of psychologists asked one group of young students to imagine that they would be moving far away in 30 days, and told them to plan their next 30 days accordingly: It would be the students’ last chance for a very long time to enjoy all the special people and places they’d come to like about their college. In short, the students were urged to savour their remaining time on campus. Then, every week that month, the researchers asked the students to write down their activities.

By contrast, another group of freshmen weren’t told to imagine anything or to do any kind of savoring of their days—they merely had to track their daily activities. Guess what happened? As you can imagine, the students in the first group were happier by the end of the 30 days than the second group. Whether they did more or just managed to squeeze more enjoyment out of whatever they did on a daily basis, the mere act of deliberately thinking about their time as limited definitely helped.

What’s the takeaway here?

Being aware that your time is limited can clearly motivate you to make the most of the time you do have.

Learn from Your “Time Buckets”

Draw a timeline of your life from now to the grave, then divide it into intervals of five or ten years.

Each of those intervals—say, from age 30 to 40, or from 70 to 75—is a time bucket, which is just a random grouping of years.

Then think about what key experiences, activities or events you definitely want to have during your lifetime.

We all have dreams in life, but I have found that it’s extremely helpful to actually write them all down in a list. It doesn’t have to be a complete list; in fact, you can’t know right now everything you’ll ever want to do, because, as you know, new experiences and new people you meet tend to reveal unexpected additional interests that you’ll want to pursue. Life is all about discovery. And you will revisit this list later in life, too.

Then, once you have your list of items, start to drop each of your hoped-for pursuits into the specific buckets, based on when you’d ideally have each experience.

For example, if you want to go skiing 50 times in your life, during which decades or five-year buckets would you like to have those ski days? Here, too, don’t think about money just yet—rather, think about the point in your life when you’d really like to have each experience.

In general, using the time-buckets approach will make you begin to realize that some experiences are better done at certain ages.

Your time buckets are the opposite of the so-called bucket list, which is typically a single accounting of all the things you hope to do before you “kick the bucket,” so to speak.

The more traditional bucket list is usually put together by an older individual who, when confronted with their mortality, begins to scratch out a list of activities and pursuits they not only haven’t done yet but now feel compelled to do quickly before time runs out.

By contrast, by dividing goals into time buckets, you are taking a much more proactive approach to your life. In effect, you’re looking ahead over several coming decades of your life and trying to plan out all the various activities, events, and experiences you’d like to have. Time buckets are proactive and let you plan your life; a bucket list, on the other hand, is a much more reactive effort in a sudden race against time

Now, you might notice as you fill up your time buckets that some experiences are more flexible than others.

Know Your Peak

Finally, here is something that bill share that resembles financial planning.

Bill says that to be responsible, before you think about spending down your money, you need to make sure you have enough to live on for the rest of your life.

This means that you will need to figure out how much you need for your retirement. Bill gave some rule of thumb, but oddly, I find it rather very raw, so I will not share it here.

The most interesting thing in this section is that Bill doesn’t want you to see a portfolio value such as $1 million or $1.5 million.

He wants us to track and visualize a certain date.

Many of us have been trained to think that our plan for drawing down our savings should be framed in terms of number. That is, that once we reach a certain amount in savings, we can then retire and start living off those savings.

To understand why you should think in terms of a date, not a number, you need to recall that enjoying experiences requires a combination of money, free time, and health.

You need all three.

Money alone is never enough. And for most people, accumulating more money takes time. So by working more years to build up more savings than you actually need, you are getting more of something (money), but you are losing even more of something at least as valuable (free time and health).

Here’s the bottom line: More money doesn’t equal more experience points.

Most people forget those costs of acquiring more money, so they focus mainly on the gains. So, for example, $2.5 million does buy you a better quality of life than $2 million, all other things being equal, but all other things are usually not equal!

That’s because for every additional day you spend working, you sacrifice an equivalent amount of free time, and during that time your health gradually declines, too.

If you wait five years to stop saving, your overall health declines by five years, closing the window on certain experiences altogether. In sum, from my perspective, the years you spend earning that extra $500,000 do not make up for (let alone surpass) the number of experience points you lost by working for more money instead of enjoying those five years of free time.

Your Peak Net Worth

Traditionally, people continue to increase their net worth until they stop working, and are afraid to dip much into their principal even after retirement.

But to make the most of your hard-earned money, you must crack open your nest egg earlier (starting to spend down your savings sometime between 45 and 60 for most people) so that you end, theoretically, with zero.

In general, most people hit their peak between the ages of 45 and 60.

Waiting until they are past this age range causes suboptimal fulfilment results because they end up dying with more than zero, running out of time in which to have many fulfilling experiences.

Clearly, earnings growth also has a big effect on a person’s peak. Someone with rapid earnings growth hits their peak early.

At the other end of the earnings spectrum are people who need to keep adding to their savings into their late sixties, perhaps even later, if they are to have any discretionary experiences after retirement.

What does all this mean for you?

It means that unless you are an exception, you ought to start spending your wealth down much earlier than what is traditionally recommended.

If you wait until you’re 65 or even 62 to dip into your nest egg, you will almost certainly end up working longer than necessary for the money you will never get to spend.

As a result, unless you spend significantly more in your middle years than most people do, you will fail to die with zero.

Summary

Die with zero is pretty short of math but that is OK.

I get what Bill is trying to preach to us. We are put on this earth to do something other than accumulate money.

We should remember that.

Too often, we forget about that and spend all our lives revolving around money.

My push back to why we do that is… for some of us, our lives have to revolve more around money because we are not working in that kind of lucrative profession.

Our accumulation will be tougher than a profession such as an energy trader.

For a lot of people, the big question is figuring out how much you need to live a sensible retirement. A lot of people don’t even have that!

If you do not even have that, you really run the risk of dying with less than zero.

For the more affluent, most of Bill’s qualitative points are something you should think about.

Helping your children while they are alive particularly resonated with me.

Personally, I find filling up my time buckets to be challenging. If it is challenging, it is likely an area that I should work on.

If you think this book is interesting, do check out Die with Zero.

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