How much can you not afford to lose?

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Jack Jones
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How much can you not afford to lose?

Post by Jack Jones » Sun Jun 05, 2022 8:00 pm

When I got into the PP my answer was that until I’m retired, I can’t afford to lose anything. I needed to stash away money into the PP until I was financially independent, then I could consider VP investments.

In retrospect, this seems quite naieve.

Answer in any way that is appropriate. Open ended question.
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Re: How much can you not afford to lose?

Post by Hal » Sun Jun 05, 2022 8:45 pm

Jack Jones wrote:
Sun Jun 05, 2022 8:00 pm
In retrospect, this seems quite naieve
Count me as naive as well ;D

Waayyy back.... people used to save and not expect their investments to pay for their retirement instead of working. if "IF" you are a genius at speculating then having a lot in the VP when you are young may make sense. Family member tried that approach and lost his shirt in the dot com bust then cryptos. He is using the PP now.....

"A bird in the hand is worth two in the bush."
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Re: How much can you not afford to lose?

Post by Pointedstick » Sun Jun 05, 2022 8:52 pm

Personally I think it's the opposite: while you're working, and especially when you have a lot of time before retirement, you can afford to lose quite a bit. This is because your income comes from your career or your business, not your investments. Yes, you may have to live off your savings for a time if you undergo a particularly bad and long period of unemployment in a very bad job market, but these periods of time are generally rare for most people with normal economic and social skills. As long as you're flexible, you keep your skills sharp and in demand, and you aren't a jerk to other people, you shouldn't have trouble finding a job that pays the bills. Accordingly, I think it's wisest to invest very aggressively with normal boring stock index funds (not something stupid like crypto or cannabis stocks or whatever the craze du jour happens to be) during this phase of your life. Anything else is leaving money on the table in most economic conditions and will lengthen the amount of time you before you're financially independent and reduce the amount that you end up with once you are.

The above becomes less true the older you get. I see the PP as an excellent investment vehicle to sort of ease into over time as you progressively lose your ability to withstand financial volatility and your income earning potential drops.
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Re: How much can you not afford to lose?

Post by joypog » Mon Jun 06, 2022 12:16 am

On our end, we've settled on a year of income and money for a house downpayment which is in cash/STT's (about 15%). After that throw in 10% in LTT's and Gold, hold a some more in ITT's because my wife is super conservative. The remaining 50% goes into stocks. Like pointedstick, I'm pretty sure this is not the optiminal play, but it's an improvement over our current stock allocation while not going so high that it would cause discord at home if the market goes caddywumpus over the next year.

The money in a "formal PP" (if we disentagled the ball of yarn above and pulled out equal parts of the 4 HBPP assett classes) would result in about half our retirment needs if we follow the 4% withdrawl rate rule.

As a responsible adult (as much as one can be who spends this much time on internet forums), I don't see retiring before sending our boy to college, so I've got at least another 15 years to go in the workforce. That said, I love my job and I'm aiming 20 more years and I'm hoping to plow future savings into stocks so the stock percentage should hopefully go up over time. If stocks hold up well, that might give me some flexibility to quit early just in case if something changes....

If the headwinds at the office or economy goes sideways, I'll pivot and start pushing future savings into LTT's and Gold (the two niche investments) to crank up the HBPP "cant afford to lose" portion of my portfolio.
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Re: How much can you not afford to lose?

Post by Xan » Mon Jun 06, 2022 10:05 am

joypog wrote:
Mon Jun 06, 2022 12:16 am
If the headwinds at the office or economy goes sideways, I'll pivot and start pushing future savings into LTT's and Gold (the two niche investments) to crank up the HBPP "cant afford to lose" portion of my portfolio.
Doesn't that sound like a recipe for buying high and selling low?
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Re: How much can you not afford to lose?

Post by joypog » Mon Jun 06, 2022 10:57 am

Xan wrote:
Mon Jun 06, 2022 10:05 am
joypog wrote:
Mon Jun 06, 2022 12:16 am
If the headwinds at the office or economy goes sideways, I'll pivot and start pushing future savings into LTT's and Gold (the two niche investments) to crank up the HBPP "cant afford to lose" portion of my portfolio.
Doesn't that sound like a recipe for buying high and selling low?
Yes actually, what I wrote looks exactly like that.

What I really meant to say is that if it looks like I'm going to get forced into an early retirement - either due to economic layoffs or internall office politics - then I'll get more serious about the HBPP - both because I'll have fewer pension service credits and I'll be ending the accumlation phase of my life/career.

In the meantime, my gameplan is start conservative but let the stocks ride for a while.
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Re: How much can you not afford to lose?

Post by Jack Jones » Sat Jun 11, 2022 8:27 am

Hal wrote:
Sun Jun 05, 2022 8:45 pm
Jack Jones wrote:
Sun Jun 05, 2022 8:00 pm
When I got into the PP my answer was that until I’m retired, I can’t afford to lose anything. I needed to stash away money into the PP until I was financially independent, then I could consider VP investments.

In retrospect, this seems quite naieve.
Count me as naive as well ;D
Alright, I went back to the source material and don't feel so naive. Harry made it very clear that the VP is optional. To those who say that the PP is too conservative for someone in their accumulation phase, he would probably retort:
Rule #1: Your career provides your wealth.

You most likely will make far more money from your business or profession than from your investments. Only very rarely does someone make a large fortune from investments.

Your investments can make your future more secure and your retirement more prosperous. But they can't take you from rags to riches. So don't take risks with complicated schemes in the hope of multiplying your capital quickly. Your investment plan should be aimed, first and foremost, at preserving what you have—preserving it from investment loss, government intervention, or mismanagement.
Going over the source materials again, I noticed there's no notion of where you are in your lifecycle. Harry's PP/VP prescriptions are made in a timeless fashion. It's up to you to decide how to allocate things. Fortunately, he provided some guidance on the issue at hand for this thread.
How much should you allocate to the Variable Portfolio?
The answer may seem obvious to you. But if it isn't, pick an initial figure that seems reasonable, and then spend a few mintues imagining that you've lost it all.
What would the loss do to your life? Does the thought of losing your entire Variable Portfolio unnerve you? Would it change your future? Would it force you to change your lifestyle or your plans for retirement? If so, you've allocated too much to the Variable Portfolio. Repeat the exercise with a smaller amount...
This was a great exercise. I did it and arrived at a 60/40 PP/VP split (for context, I'm 38 and my wife is pregnant w/ our second, god help us). My wife was slightly more conservative, so we landed at 65/35. This was way more conservative than I would have landed had I not done the exercise.
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Re: How much can you not afford to lose?

Post by ochotona » Sat Jun 11, 2022 9:57 am

Perspective from a near-retiree:

"How much can I afford to lose?" is the wrong question for me. This question is framed around Net Worth, and changes to Net Worth.

Net worth doesn't matter for retirees. Repeat - net worth doesn't matter for retirees.

The ability to generate after-tax inflation adjusted cash flows is what matters for retirees. THAT is the key. Obviously, it's highly related to Net Worth, but it isn't Net Worth, it's derivative.

So you go to your retirement planner tool of choice, and you run sensitivities on how your asset allocation choices will affect your after-tax inflation adjusted cash flows based on not only your target retirement date, and I would suggest your "oh crap" retirement date... an early date if you get sick, or fired. Maybe age 62 instead of 65, for example. Most people retire at age 62, many out of need.

An answer or set of answers should be clearer.
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Re: How much can you not afford to lose?

Post by dualstow » Sat Jun 11, 2022 1:02 pm

Modest income, so I have always been loss averse.

I would like to point out that temporary downturns in total stock market do not count as a loss, at least when you’re young or in the accumulation phase. Putting your money into Pets dot com and watching it go bust — that’s a loss.

If I had focused on the above, I probably would have been even more stock heavy.

At this point, I am more loss averse than before, but I still can’t have a (vp + pp) that is 25% in stocks.

Edit: Good luck to you Jack!
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Re: How much can you not afford to lose?

Post by EdwardjK » Sat Jun 11, 2022 1:06 pm

ochotona wrote:
Sat Jun 11, 2022 9:57 am

"The ability to generate after-tax inflation adjusted cash flows is what matters for retirees. THAT is the key."
ochotona,

I disagree. I entered retirement with net worth that I am fully prepared to use to live and enjoy life. Although I have assets that generate healthy dividends, I use those dividends and sell other assets as needed to fund my desired lifestyle. I had no expectations that I would, or could, live on dividends alone.

My wife and I agreed that we were going to spend what we needed to spend, to do what we wanted to do, when we wanted to do it at whatever the cost was at the time. We have no children, but lots of nieces and nephews. If there is any money left over after we pass, they are welcome to it.

I created a detailed financial model that projects my portfolio value using the last 30 years of investment returns roughly matching my portfolio. The 250 scenarios estimate that I have a 99% chance of dying quite wealthy. Although that is good for my beneficiaries, I rather die the day I spend my last dollar.

Too many of my friends live a frugal life in retirement so they can "leave money for the kids". In most cases, their kids have better paying jobs than they ever did and have the ability to fund their own retirement. In the meantime, they sit around and grow old never enjoying the fruits of their past labor.

That's not for me.
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Re: How much can you not afford to lose?

Post by ochotona » Sat Jun 11, 2022 1:37 pm

Hi edwardjk you totally misunderstood my statement. I was not implying that one should live off interest and dividends. I didn't say that at all. Being able to generate cash flows includes selling assets, as well as interest and dividends.
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Re: How much can you not afford to lose?

Post by xmj » Mon Jun 13, 2022 1:29 pm

Good thread, many interesting responses.

I'll add one.

Retirement calculations all derive from, essentially, three things:

1. Current portfolio size
2. Size of expected future inflows ("additional savings")
3. Life expectancy at retirement.

Market shenanigans impact 1 and 2 negatively (assets shrink, jobs get lost). If you've been diligent in saving and in your work they shouldn't impact your health too much, at least not directly.

If you care about early retirement but aren't there yet, the time to retirement is a function of your pre-existing stack, savings rate, after-tax real returns and the desired withdrawal rate (probably <4%).

Image

Now if you care to derisk this, the fastest and most directly influenceable way is to increase your savings rate 's' (market returns being exogenous).

The next big thing you can do is create an asset allocation that minimizes temporary drawdowns (hey, that's what the PP is for!).

Obviously increasing your income over time is great - but not losing any income (or worse, it going to zero) is more important in the short term :-).


... If you're already (early) retired, and the current drawdown worries you, consider taking up additional income to not have to withdraw anything that's already shrinking.
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Re: How much can you not afford to lose?

Post by mathjak107 » Mon Jun 13, 2022 1:32 pm

Kitces did a very good article on what is called the red zone of retirement.

That is the danger zone the decade leading in to retirement and the first decade or so in retirement since portfolios are the largest and down in dollars can be huge .

So he suggests a milder glide path for the red zone

https://www.kitces.com/blog/managing-po ... -red-zone/
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Re: How much can you not afford to lose?

Post by Vil » Mon Jun 13, 2022 2:25 pm

mathjak107 wrote:
Mon Jun 13, 2022 1:32 pm
So he suggests a milder glide path for the red zone
As pre-retirement I was genuinely interested on this, however if I can recall from this article (which you shared in the past if I am not mistaken) the glide path was in essence - move some of the stock allocation to bonds when you are in the red zone. However, given the plunge of bonds, not sure this advice has any more sense. I am living in Europe and still had some faith in bonds till quite recently, however given the fresh 1000% clear statement of the ECB, bond rates will have to go all the way from negative to possibly moderate positive rate territory. And that will hurt a lot, for sure.
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Re: How much can you not afford to lose?

Post by mathjak107 » Mon Jun 13, 2022 2:30 pm

Overall short term and intermediate term bonds have fallen less then equities ..
A conservative portfolio like I use is down half of equities fall
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Re: How much can you not afford to lose?

Post by Vil » Mon Jun 13, 2022 2:57 pm

Desert wrote:
Mon Jun 13, 2022 2:34 pm
And yes, while bond prices do decline at times, they're still less risky than stocks, especially if the average duration is not too long.
Thanks, that's clear. What seems I cannot really accept and digest is that at the moment who's losing less is actually the winner. Still have the childish belief that it cannot be for too long that all 4 assets are underwater, the one that is susceptible to explode is the Gold. We have all of it - inflation, instability, war, supply chain disruptions/commodity shortage, etc. etc.... If not now - when ? Belanger in his fresh book suggest that gold is better diversifier than bonds (~less correlation) for mid/long term .. and regardless the deflation/inflation wave.. let's see.
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Re: How much can you not afford to lose?

Post by ahhrunforthehills » Mon Jun 13, 2022 3:46 pm

Jack Jones wrote:
Sun Jun 05, 2022 8:00 pm
I needed to stash away money into the PP until I was financially independent, then I could consider VP investments.
I'm gonna break this down into 2 different sections:

VP

Why are you in the PP? Are you a danger to yourself gambling-wise? If so, just stay in the PP. Are you afraid of losing money? Just stay in the PP.

The HBPP is like a rehab facility for gamblers. It is a place where they can FEEL nice and safe from the world of temptation. HB knew that gamblers would eventually fall off the wagon with just a PP. That is why he said you can scratch your itch to gamble (the VP) ONLY AFTER you saved up all of your "necessary money" in the PP.

HB Translation: Make sure you pay your family's mortgage, groceries, and electric bill BEFORE going to the racetrack and losing your paycheck.

This is good advice FOR A GAMBLER to keep him out of harm's way. But this doesn't make the VP a good idea overall or something to aim for. It's a horrible idea.

In fact, if your VP investment idea is such a good idea, you shouldn't even have a PP... your VP should be your primary horse in the race.

Look at someone who is invested in a PP/VP portfolio mix and then take 5 steps back and squint your eyes. Now look at an asset allocation from a PP Investor. Now look at the asset allocation from the typical person on Bogleheads. What makes the PP/VP person so unlike the bogleheads person (or any other investor)?

Again, it is about a FEELING of control/safety with those in a PP/VP. Feelings and logic need to be separated for a serious conversation about making a financial plan.


"Financially Independent"

The definition of "financially independent" is what is setting your goal post. This definition is different for everyone. Do you have a formula in mind?

Personally, I calculate it as follows:

(Annual Spending x Cape) x 1.2 = Entry-Level Financially Independent

But I don't think where you fall on the scale necessarily translates to risk tolerance. I am wwwaaaayyyyyy past my Financially Independent number but I still work and still viciously guard every penny the same way I did as if it was my first. I don't think a bird is necessarily going to change its feathers just because it hit some milestone. Savers will always save. Spenders will always spend. Gamblers will always gamble.

If you feel like you can't lose anything, the name of the game is cutting expenses as much as possible (since those can be controlled a lot easier than investments) and have the largest impact on your being financially independent (and your mental health).
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Re: How much can you not afford to lose?

Post by ahhrunforthehills » Mon Jun 13, 2022 4:26 pm

Vil wrote:
Mon Jun 13, 2022 2:57 pm
Desert wrote:
Mon Jun 13, 2022 2:34 pm
And yes, while bond prices do decline at times, they're still less risky than stocks, especially if the average duration is not too long.
Thanks, that's clear. What seems I cannot really accept and digest is that at the moment who's losing less is actually the winner. Still have the childish belief that it cannot be for too long that all 4 assets are underwater, the one that is susceptible to explode is the Gold. We have all of it - inflation, instability, war, supply chain disruptions/commodity shortage, etc. etc.... If not now - when ? Belanger in his fresh book suggest that gold is better diversifier than bonds (~less correlation) for mid/long term .. and regardless the deflation/inflation wave.. let's see.
Gold doesn't react quickly. Tis the way gold is.

Keep in mind that Belanger started righting that book a couple years ago. That couple years already caused a 10% performance deviation between allocations.

A couple years ago the overwhelming narrative here was that rates were just as likely to go negative then go up (i.e. convexity, etc.). The only person I know of that stuck around this forum after they dumped treasures was mathjak. Shame people spent more time blocking him than listening to him. It was the safer bet.

Dumping treasuries then and dumping treasuries now is a different calculation. The risk/reward profile shifts because Gold is the same as a 0% Treasury without counter-party risk. Market forces push harder on interest rates the lower they get.
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Re: How much can you not afford to lose?

Post by dualstow » Mon Jun 13, 2022 4:57 pm

ahrunforthehills, you don’t post often, but for me your posts are gold.

I haven’t taken a lot of action during this stock downturn. Just watching the market reduce my stock allocation for me since I apparently didn’t take enough profits in December-January.
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Re: How much can you not afford to lose?

Post by Pointedstick » Mon Jun 13, 2022 9:29 pm

ahhrunforthehills wrote:
Mon Jun 13, 2022 3:46 pm
I don't think a bird is necessarily going to change its feathers just because it hit some milestone. Savers will always save. Spenders will always spend. Gamblers will always gamble.
There's a lot of wisdom here. Definitely don't expect that after you hit that number, you'll act differently. You'll still be the same person with the same personality, wants, and goals.

I actually achieved financial independence six years ago, at a fairly spartan, scroogey standard of living for my family. During the 7 months I wasn't working, I hated it and felt useless. I also wanted to be able to provide more for my family, so I went back to work and now I'm still working and saving. I anticipate eventually achieving FI again at a much higher target number, but yeah, I fully expect that I'll want to keep earning and saving anyway as long as I feel like I have skills to contribute to society. What you do before FI is gonna be what you do after it.
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Re: How much can you not afford to lose?

Post by ahhrunforthehills » Mon Jun 13, 2022 9:29 pm

dualstow wrote:
Mon Jun 13, 2022 4:57 pm
ahrunforthehills, you don’t post often, but for me your posts are gold.

I haven’t taken a lot of action during this stock downturn. Just watching the market reduce my stock allocation for me since I apparently didn’t take enough profits in December-January.
Thanks dualstow, I really appreciate the kind words :)

I think everybody is falling from the sky… it is only that some were able to get a little closer to the sun before their wings melted.

As you know, these corrections are normal. Based on trends from other recessions, this likely has a ways to go (I tried to roughly trend them all out based on their correction % and duration).

Things appear to be getting serious. Obviously real estate is slowing down. Companies want their work-from-home employees back, and the zoomers and millennials are holding out for better work. Meanwhile, they are racking up their credit cards.

Not to be weird, but I read the other week in the news that even girls at the brothels have no work. The pretty girls on OnlyFans are reporting a 50% hit (and the mediocre girls saw a 100% hit). Pretty interesting from a disposable income standpoint that crosses multiple socioeconomic classes.

I dabble in startups and it isn’t much better. VCs are backing out of future rounds for companies that are even exceeding their own projected expectations… forcing them to seek out bridge loans under worse terms or else run out of runway. Even non-profit seed investors are tightening up.
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Re: How much can you not afford to lose?

Post by ahhrunforthehills » Mon Jun 13, 2022 9:52 pm

Desert wrote:
Mon Jun 13, 2022 5:20 pm
ahhrunforthehills wrote:
Mon Jun 13, 2022 3:46 pm
The definition of "financially independent" is what is setting your goal post. This definition is different for everyone. Do you have a formula in mind?

Personally, I calculate it as follows:

(Annual Spending x Cape) x 1.2 = Entry-Level Financially Independent
Your calculation makes sense to me, but I'm curious where the factor of 1.2 originated.
I don’t have my breakdown in front of me, but it is factoring the probability of higher taxes going forward which will cause additional drag not only on personal finances. Those GAO reports don't beat around the bush about the harsh fiscal realities the US faces going forward and the lack of options available. There is also global trade that will inevitably happen more and more outside of the US Dollar, there are large real estate headwinds, population headwinds, etc. These can all impact spending and non-CAPE assets.

TLDR: 1.2x because the future is bleak based on the government’s own reports that need accounted for.
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Re: How much can you not afford to lose?

Post by ahhrunforthehills » Mon Jun 13, 2022 10:16 pm

Pointedstick wrote:
Mon Jun 13, 2022 9:29 pm
ahhrunforthehills wrote:
Mon Jun 13, 2022 3:46 pm
I don't think a bird is necessarily going to change its feathers just because it hit some milestone. Savers will always save. Spenders will always spend. Gamblers will always gamble.
There's a lot of wisdom here. Definitely don't expect that after you hit that number, you'll act differently. You'll still be the same person with the same personality, wants, and goals.

I actually achieved financial independence six years ago, at a fairly spartan, scroogey standard of living for my family. During the 7 months I wasn't working, I hated it and felt useless. I also wanted to be able to provide more for my family, so I went back to work and now I'm still working and saving. I anticipate eventually achieving FI again at a much higher target number, but yeah, I fully expect that I'll want to keep earning and saving anyway as long as I feel like I have skills to contribute to society. What you do before FI is gonna be what you do after it.
It will never end! It is a HUGE issue for anybody retired who is a saver. Your identity as a man is often tied to what you produce. I remember reading a post about when the USSR fell apart people still want back to work b/c they didn’t know what to do with themselves.

One time I sold a majority of my company for a windfall… but because I no longer had my daily flow of cash I felt EXTREMELY poor. Worst I felt since I was a teenager. Crazy.

Money doesn’t cause happiness. Happiness is caused by being productive and achieving goals.
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Re: How much can you not afford to lose?

Post by mathjak107 » Tue Jun 14, 2022 2:32 am

Money may not buy happiness but it certainly can buy choices in life
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Re: How much can you not afford to lose?

Post by ahhrunforthehills » Tue Jun 14, 2022 7:33 am

mathjak107 wrote:
Tue Jun 14, 2022 2:32 am
Money may not buy happiness but it certainly can buy choices in life
But in what way?

IMHO one of the largest benefits of THE PERCEPTION of having excess money is it lowers fear of uncertainty. Uncertainty causes fear. Fear triggers varying levels of fight or flight in the amygdala based on the perceived threat, predisposition, etc. The frontal lobe (reasoning, planning, decision making, etc.) has significant issues while this occurs because it is being flooded with chemicals.

You can literally make more intelligent decisions when you have the perception of control by having a comparatively massive safety net.

When markets tank it feels like you are watching a zombie movie. Everyone is running around freaking out making irrational choices while you are yelling at the TV “don’t run in there… why the hell would you do that?!?”.

The answers are so obvious when you aren’t being chased (or at least don’t think you are).

This is exactly why having an “investment system” is important for most people. If they tune out the other noise it reduces fear of uncertainty, in turn keeping their frontal lobe in control.

But none of this is actually about money. It is about the PERCEPTION of being in control. Everything is in the mind.

I see younger people struggling to start their own business all the time. They have no time outside of their full time job to strategize, learn skills, etc. They FEEL out of control. But they are their own enemy.

At any time they can quit their job, go on govt assistance, and spend their whole day grinding away at it. Hell, they can even go to a white collar prison and live rent free, free meals, free healthcare, access to all of the books they want, they can even rub elbows with very savvy business people. Maydoff and Martha Stewart on speed-dial. Again, perception is everything.

Basically, people have the power to feel rich at any time.
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