The Momentum Effect
The Momentum Effect
We have all heard of the one more year phenomena. Financially independent people, such as myself, hit the wall of fear. Although we have enough, we persist in our W2 day job for no reason. There are many explanations for our persistence. Yet none of them adequately account for why it is so hard to shake our indentured servitude once it becomes unnecessary. While I personally can count off various reasons I haven’t pulled the trigger, it is more likely than not the momentum effect that carries the greatest responsibility.
momentum definition. In physics, the property or tendency of a moving object to continue moving. For an object moving in a line, the momentum is the mass of the object multiplied by its velocity
The Usual Suspects
Before talking about the momentum effect, it is important to touch on the usual suspects that keep us from our retirement dreams.
Healthcare: This one is a no brainer. Time and again, this is the answer you get if you ask a financially independent person the biggest fear about leaving their job. Health insurance costs are unknowable, rapidly changing, and unlikely to go down. Many FIRE proponents base their opinion of enough on a yearly budget. How do you budget for a cost that is uncertain and difficult to calculate?
Meaning: In modern society we are defined by our jobs. If you ask someone to describe me, one of the first things they will mention is that I am a doctor. We derive subtle clues about who a person is and their station in life. So what happens when you retire in the prime of your career? Do you lose your identity?
Wall of Fear: What if the money runs out? No matter how closely you calculate the safe withdrawal rate, there is no way to account for black swan events. Sequence of returns risk haunts us all.
Bodies In Motion
The momentum effect is something completely different. Bodies in motion tend to stay in motion. We start our career at the bottom of a mountain. Pounding away at the pedals of our bike, we front-load the sacrifice in the beginning of our career. We reach the mountaintops, and hit our financial independence number. And then we start the ride back down.
Going down the mountain is much easier. We don’t even have to pedal. We have so much kinetic energy built up, that instead of feeling like work, we now are coasting. Who in their right mind would stop the bike, get off, and walk across the mountain on foot?
Not only are we coasting, but we are getting paid for the joyful acceleration. Where is the impetus to retire? Why slow down when it takes less energy to maintain speed?
On top of that, we get to keep our healthcare coverage, secure our identity, and further delay the wall of fear.
The path of least resistance is to stay employed.
Missing Out?
The momentum effect is a positive, affirming phenomena. It can allow you to enjoy the latter half of your career without ever needing to worry about the fears that go with early retirement. The glide path can be easy and fruitful.
The downside, of course, is missing out on the opportunity to use your time in better ways. Take away the fear, and early retirement is a wonderful time to reinvent oneself, develop new hobbies, and explore horizons that were previously left untouched.
The balance is up to you. If you’ve had enough and are ready to throw in the towel, by all means hit the brakes.
If you find yourself content with your work persona and look forward to chatting around the water cooler, by all means stay.
In my case, I have decided to down shift to a lower gear. I’m still letting the momentum effect carry me, but I am also allowing ample time for travel, kids, and fun.
Heck, I might even write a blog post or two!
You are correct that Healthcare expenses between age of retirement and age to qualify for Medicare is my biggest factor.
In my specialty I am hitting the golden period of practice where my experience is high, making reading studies more efficient and accurate and my energy hasn’t declined to the point where I assume it will be in my 60s (although it is far lower than it was in my 30s). So I’m probably at the stage where the two lines intersect (a sort of efficient frontier so to speak).
The money I make is incredible compared to the effort needed to make it and there will be some thing back of my mind saying am I leaving too soon.
I think I will likely work more than I really needed to and end up with more than I anticipated but peace of mind may make the tradeoff worth it
I think the momentum carries you forward. It’s actually hard to leave.
What do you think will get cut back first – clinical time or lazy side hustles? The clinical time provides more professional enjoyment but the side hustles are such easy money.
Does FI make it any easier to walk away from easy cash?
FI makes it easier…but still hard. i think I will abandon my hustle first and keep the side hustles longer.
For me, FI has allowed me to “coast” into retirement….I say “no” more often, lower the pace, the commitments, but still get a lot of the reward of “what I do” and “who I am”.
As my quality of life has improved (no call, no weekends) I have observed that my performance is better, and I am less fatigued and frustrated…..which leads to doing a better job, and enjoying it more.
Perfect example of the momentum effect. There’s no reason to quit!
Im in favor of easing into such changes. Cut back hours, remove hustles a bit at a time. Like a drug withdrawal though cold turkey would end badly for me.
You don’t want to get the shakes by withdrawing too fast. I like that.
I like the concept of momentum. People tend to keep on with what they are doing. Sometimes too long. We don’t tend to make changes until events occur, and these probably do shift the momentum enough to regroup. You are so right about health insurance. We probably could have retired about 5 years sooner but that was always the catch. Finally we did it anyway, only to be saved by the Obamacare subsidy. So far….!
Momentum leads to more money for less work. But are we eating our lives? Certainly health insurance is a conundrum.
Well said! Another “one more year” factor is the “big carrot” factor. In my case the last three years saw my compensation first increased by 50% and then doubled. It is really tough for a frugal guy who focused so much energy on his career to walk away when the money is shooting straight up. I wrestled with walking away from a job where it felt like they were throwing money at me. But I did walk away because I finally realized I had more money than I had time.
The golden handcuffs are real and hard to escape. Well done!
I was reading William J Bernstein and he describes when we start the work life, we are expending our “human capital”. This is what you call momentum. Human capital is not infinite and neither is momentum except in a friction less system. You can see it all over the comments regarding “slowing down”. That is the burning out of human capital. When your human capital is burnt, like mine is, you’re done. I think what keeps people working is they intuitively understand when their human capital is not expended. I retired 8 years before I retired. What that means is I was FI and circumstance caused my job to go away, but intuitively I knew I wasn’t done so I started another practice and continued on 8 more years, until finally my human capital was burned out, and I knew it was burned out. If you quit but your capital isn’t expended (like my first retirement) there is psychic dissonance.
The point of human capital is to of course survive, but also to create a vehicle aka a portfolio to support you into the future till you and your spouse physically expire. The human brain is a statistical difference engine and it understands hard work and enough risk early builds portfolio wealth later. It also is exquisite at understanding risk. You can have all the 4% WR boilerplate you want but the brain understands in the 1930’s stocks fell by 90%. If you retire largely in stocks (80-90%) that is your risk. It understands there are “risk free” assets like bonds and LTIPS and if you have a big enough portfolio you can just live off the “risk free”, but they are not risk free. Inflation especially in the case of bonds will eat your lunch and the low returns on LTIPS may cause you to outlive your money. People do their analysis on portfolios that are too risky and too small and with too long a time horizon, into a unknowable future, and use calculators that look backward not forward, to judge the veracity of their plans. They do their analysis and they understand they have not consumed their human capital to the point of being done. They walk away leaving money on the table, significant money and waste their human capital on fishing or Tiki hut travel. It’s all a big experiment. If you have a big enough pile and/or a small enough lifestyle you probably will survive.
So I think that’s the real state of human affairs in FIRE land, and I think the blogosphere creates a ready made denial system and adherence to the denial system is where the fear comes from. FWIW Bernstein thinks a 2% withdrawal with a near age 60 retirement, taking SS at 70 is bulletproof for a couple with a risk adjusted low volatility portfolio. I think he is right as long as you Roth convert and control your tax bill.
I think you and Bernstein are a touch to conservative. I think 3% is bulletproof. 2% if you think we are going to have world war type devastation and loss of economy and infrastructure!
You only need inflation, not war, not devastation, not infrastructure. Go look at Argentina’s history.
I wonder, Michael Kitces took the SWR data and ran it historically through a number of different countries nd economies. His conclusion is that you didn’t need to go down to 2% unless you hit devastation point.
I think it might be how Bernstein and Kitches look at retirement portfolios. I think Kitches looks at a portfolio as a whole forever. Bernstein looks at it as a whole during accumulation with a decelerating transition to retirement and then divides it into 2 parts, a living portfolio and a risk portfolio upon retirement. The living portfolio has very different risk characteristic and possible demise characteristic than the RP. All of your side gig cash flow would constitute part of the living portfolio. The same with pensions and SS. RP is wealth in excess of LP invested as risk capital. Neither one really deals with taxes which is a glaring flaw in the analysis. Taxes are almost as good as inflation at blowing things up.
I have respect for Kitches but also Bernstein and I think the take away is bulletproof is somewhere between 2% and 3%. I notice Wade Pfau used to be 4% then 3% and now I saw something about 2%, but I think Pfau is part of the annuity and reverse mortgage industry and “talks his book” so I’m not sure where to put him on the list.
I think it’s difficult for physicians to just hang up their coat and walk away. They’ve invested so much time and effort into their education and training (sunk cost) and a large part of their identity is the M.D. after their name. And after many years of practice, muscle memory takes over and you don’t have to pedal as hard anymore. Great insights Doc G
Muscle memory is right. We are coasting at some point!
Many of the FIRE community think that FI means stopping your job. That’s why you wrote this article. You make the assumption that if you dont quit when you reach FI, then there must be something wrong. How do we explain it? He didn’t RE.
Step back and realize FI doesn’t mean that at all. It only means your financial future is now secure. Nothing more. You can work or not work. Play or not play. Work less. Work differently. FI does not mean you need to quit.
If you are fulfilled by your work, and enjoy it, then nothing should change simply because you reached FI. Maybe you could stop saving now, since you have enough, and use all the money you earn for cool vacations. Maybe since you don’t need any more money, you can give your paycheck away to a cause you support.
I’ve reached FI. I still worked part time for 3 years, then changed professions to something new. I did stop all contributions to retirement plans. Now I have better uses for my money than saving it for the future.
Dr. Cory S. Fawcett
Prescription for Financial Success
Your most recent book has amply demonstrated your point. It definitely has made me think long and hard about retirement vs finding joy in work!
Hello Doc G,
FI only means you have enough money to give yourself a breather. So much more to life than that. My husband could care less about FI. To me he has the ultimate wealth. Being able to do exactly what you want regardless of the money.
I am beginning to think some of us chose the wrong specialty to want to tap out so definitively.
That’s a good question. If we want to tap out so early, did we choose unwisely all those years ago.
It is not now what it once was. What it was, was a cottage industry of self employment and positive social good. What “it is now” is Blackstone and corporate greed.
Well, then can I roam beside you?
I have come to lose the smog,
And I feel myself a cog in somethin’ turning
And maybe it’s the time of year
Yes and maybe it’s the time of man
And I don’t know who I am
But life is for learning
Joni Mitchell Woodstock.
FIRE blogs are cottage industry. Not sure if they provide social good, but then life is also for living.
Hopefully FIRE blogs are at least fun to read!
I think the momentum effect in this case steals time, and that’s not a good thing 🙂
I kinda agree and kinda not. I suspect part of the reason you still work is because it is easy. Because you don’t have to think. momentum its carrying you.