Life Optimization

In the book, The Art of Non-Conformity, Chris Guillebeau talks about writing out your idealized, perfect day and taking the steps necessary to achieve it. For me, the perfect day looks a little something like this:

I wake up naturally in the morning without the aid of an alarm clock.  I prepare myself a cup of coffee, sit outside and enjoy the moment. In silence, I visualize how the rest of my day will look like.  I will have a few things that I want to accomplish, but will not pack my schedule with too many competing priorities. I will have a hobby that peaks my interest at the moment and will spend a few hours working on it. If I discover a new hobby that I want to try, I will. I might also spend some time volunteering or on a freelancing project to earn a little side cash. Part of the day will be spent reading and doing some sort of physical activity whether it is hiking a new trail, taking a leisurely stroll, or doing a short, high-intensity workout. In the evening, I sit around with a few friends or acquaintances conversing through the night.  When I picture this perfect day, a few recurring themes come to light.

1) My time is finally my own. I set the times that I want to do things and no longer work on someone else’s schedule.

2) My priorities are finally my own. I am free to discover new hobbies and have new experiences as I see fit. I am no longer constrained to engage them only on the weekends or during non-working hours.

3) My idealized vision needs to be realized sooner rather than later. 65 is too late.

In order to reach this goal, one needs to have achieved a certain level of financial independence.  Achieving this and, consequently, being able to live my perfect day is my vocation.

The military has a pension system that can’t be beat. For those of us who hang in there for 20 years, you receive an immediate annuity upon retirement. But exactly how much would you need to have saved in order to pay yourself an equivalent retirement amount? In order to find that out, we need to determine the present value of a graduated annuity, which is what a military pension is. It grows with inflation so that your buying power isn’t eroded as time passes. To calculate the present value, a few factors have to be defined and a few assumptions have to be made.

Let’s assume that I decide to retire after 20 years and I make it to the rank of Lieutenant Colonel. According to the military retirement calculator, an O-5 retiring at 20 years in 2011 would receive $45,358 (PMT₁) before taxes. Further, let’s assume that if I retire at 44, I will live until age 90. This gives me 46 years (N) in retirement. I expect the inflation rate (g) to be approximately 3%. Finally, I would expect an equivalent lump sum to return approximately 7% per year (i) in the stock market if it was invested. Using all this information, I plug it into the following equation:

PV_GA=Pmt₁/(i-g) [1-((1+g)/(1+i))^N]

= 45,358/(.07-.03)[1-(1.03/1.07)⁴⁶]

=$937,409

As you can see, the present value is just shy of $1 million before taxes. Although only a small percentage of the military stay in for 20 years, I think this is a consideration that shouldn’t be taken lightly for obvious reasons.