A Closer Look at "Family Inc." By Douglas McCormick

I really like this book.  On the other hand, I thought I was going to love it (based on my prior post 

Retirement and "Family Inc").  That difference between like and love is probably meaningless to anyone but me but I was curious about the difference. That means that the point of this post is for me to take a peek at where I think my expectations and the real-book-in-my-hand might have diverged rather than try to do an in-depth serious review of the whole thing cover to cover.

Here is what I love about this book. 

Family Inc. is not just about retirement but that is the lens thru which I look at things like this these days.  From that perspective the thing I like the most is that McCormick steps way back to view a retiree's (or family's) situational management from a much broader, much more holistic point of view than just looking at a financial portfolio.  He also contextualizes that holistic view as if a person were running the family's situation like a business (hence the title) with the reader positioned as a CFO.  The reason I love this is that I credit this kind of thinking with what turned around and (so far) saved my own early retirement.   

In my case, I went from a state of obliviousness to one of a growing sense of unease to one of a sudden awareness of being on a possibly catastrophic path.  It was at that point, long before this book was published, that I took ownership of everything I was doing retirement-wise and visualized that effort as a business with me as CEO (not CFO). I managed the situation from that point forward with a balance sheet, an income statement, self education on the financial equations of retirement, rigorous analysis of the data, a ruthlessness in executing change and an ongoing continuous improvement mindset.  The details are irrelevant. The mindset is what was essential and is what is well conveyed by McCormick's book.  For example, here is what my situation looked like using one metric (that I no longer dwell on as much as I used to), cumulative net operating surplus/deficit:

Before CEO of Family Inc:

This is a little bit of a tease because you know where this is going. The point here was that the net cumulative deficit was going straight down. Even that wouldn't have been so bad if the underlying spend rate for my age was sustainable…which it wasn't.  This was a slo-mo crash in process.

After CEO of Family Inc:

Ignore whether there are implications for changing spending (or read Darrow Kirkpatrick on his theory on spending "enough").  The main point here is that it is incredibly easy to see in one chart where the stages are: 1) obliviousness, 2) growing awareness, and 3) Family Inc.  If you can't see it I'll just point you to January 2012 which is when I seized control and gave responsibility to Mr CEO.  This is the biggest and most important (to me) message in McCormick's book. It is a worthy read for that alone.

Here is what I "like" about this book. 

There is nothing I actively dislike in his material.  It is merely some minor quibbles that bring me to something slightly less than love.  For example:

• He takes the proposition of low long term volatility of stocks as a given. In the end he is probably right but there is no mention of any debate on this proposition, which there is. Or at least there is commentary and different points of view by folks like Zvi Bodie; Blanchett, Finke, and Pfau; a paper from the Society of Actuaries, etc etc.

• His balance sheet is an essential component of and tool for a successful retirement.  The only problem for me is that he only goes halfway into an actuarial-style balance sheet where he could have stayed traditional or gone 100% Actuarial (see Ken Steiner at howmuchcaniaffordtospendinretirement.com).  While he adds the value of human capital and the actuarial value of social security, he could have also finished that out with actuarial liabilities for future spending, long term care, legacy, reserve for education support, and the like.  In it's current form his balance sheet is only half done.

• I didn't really expect him to but he does not sufficiently draw out the significant differences between an early retiree and a traditional retiree.  The time frames are longer of course and the math is less forgiving. 

• I might have missed it but I didn't see much discussion of sequence of returns risk.

• I didn't see it (maybe it's there but I'm not going to re-read) but there wasn't much pointing towards the modern retirement theory that leans strongly these days towards a floor and upside approach vs standard portfolio theory.  That's not really a ding since it is easy to have divergent views on this.

• And lastly, and this is perhaps too subtle for it's own good, I think he wades only halfway -- in other words either too far or not far enough -- into complexity.  Everything he says is correct and well thought out with respect to retirement but personally I think that there are at least two types of retirees: simple and complex. Simple retirees don’t want any math or tools or complexity. They just want someone to make it work.  According to Richard Thaler at the University of Chicago "For many people, being asked to solve their own retirement savings problems is like being asked to build their own cars."  On the other side, where a former colleague with a PhD in mathematics once told me "there is a simplicity on the far side of complexity," I don’t think he goes far enough.  There may be far more simple retirees than complex in the world but going halfway will likely satisfy neither.   For the complex there are tons of resources and researchers out there.  There is very little in the book that either satisfies full complexity or points the way.