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When Can You Stop Saving?

I like to point out, from time to time, the importance of saving and investing.

What if we invert this question? 1. When is not a good time to save? 2. When is it enough? Inversion is a favorite mental hacks of the great investor Charlie Munger.

The first one is easy. When you face an emergency, or have a great opportunity to spend your money on someone/something you love, you should do stop saving temporarily.

The second one is trickier. This relevant for your retirement — this is the time you can stop saving permanently.

Let's say your annual expenditure is X. This, of course, is different from your annual income. If you have accumulated 25X in equity funds, 1X in cash, 1X in debt/liquid funds, and 1X in gold, you can stop saving. You're set.

The goal is to withdraw 4% from the equity fund each year (adjust for inflation as you go along). Generally speaking, this amount (1X) would be compensated by appreciation of the equity markets. You can't do this when the stocks drop more than 25% though. Think the drops of 2008-9 or 2020. This is when you should dip into cash/LF/gold. Replenish the latter when the economy improves. This strategy doesn't work that well for real estate because of the illiquidity associated.

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