When Good Money Habits Turn Against You...Submitted by S. F. Ehrlich Associates, Inc. on January 3rd, 2018
December 31, 2017
As published in the Wall Street Journal1, the author, Dr. Meir Statman, states: “The mindset that works so well as people are building their nest eggs can damage their quality of life in retirement.” In other words, you spend a lifetime learning to save money, and then you reach a point (i.e. retirement) where those savings have to be spent to fund the rest of your life.
Statman also makes the following points:
- Conscientiousness is a double-edged sword: If you were frugal for decades in order to accumulate sufficient assets that would allow you to retire, that’s probably a mindset that you may not be able to overcome once you do retire. Frugality, for better or for worse, may haunt you in retirement.
- It’s all in how you frame it: If your intent is to live on income generated by your portfolio and not to touch your principal, there’s a high probability one of two things will happen. You’ll potentially either take on excessive risk by seeking high-yield-focused investments or consistently spend less because your portfolio is not earning a sufficient return.
- The pain of regret: Spending principal from your portfolio may trigger regret. What’s the fun of spending money if the emotional toll is unbearably high?
- You’ll die sooner than you think: While you may be the one out of ten 65-year olds who lives past 95, the greater odds say that won’t occur. If you’re planning a lifespan that’s too long, you’ll tend to spend too little during those years when you might enjoy it the most.
- Don’t leave the best for last: “We have a tendency to put off spending for enjoyment, thinking both that it is financially prudent and that delaying will increase our gratification. That is wrong.” Physical limitations and illness might impact planned spending to the point that gratification isn’t delayed, but denied.
- Spending isn’t just about the price: Just because you have the means doesn’t mean you should spend money because you can. It’s about spending on those things that give you pleasure. If you occasionally fly but hate flying coach, flying first class might give you immense pleasure. It might only be a once or twice a year splurge, but you might enjoy it far more than buying a more costly car just because you can afford to do so.
- It’s better to give with a warm hand, than with a cold one: My parents used to give us very generous monetary gifts. I remember telling my dad that we didn’t need the money, and I can still vividly recall his reply: “Your mother and I get pleasure out of seeing you buy things now. Why wait until we’re gone?” I try to follow the same philosophy.
- Don’t try to beat the market: While repeating this point may be a bit self-serving, Dr. Statman advises retirees not to manage their own money. Retirees can’t afford to fall back on their human capital and earn their savings all over again if they suffer irreparable losses, and that’s an unbelievably painful lesson to learn.