Overcoming Frugality

Financial advising is in need of a good shift in thinking. Most advisors still operate like it’s the late 20^th century, baby sitting assets, and for retirement income, selling some of those assets each month to cover the clients’ monthly expenses.

One of the things we need to help our clients get better at is to spend money.

Most of our clients are chronic under spenders. Most of our clients are actually going to end up with more assets upon death than they had when they entered retirement. In other words, they didn’t even spend enough to offset the growth of their portfolios, let alone spend down the principal.

The Power of "Max Spend Analysis" in Retirement

One of the parts of our planning process is to do what is called a ‘max spend analysis.’ This is the amount of money you could spend each year and end up with zero at age 95, the assumed age of death.

This is NOT an advocation to actually spend that amount of money. It is helpful to know, however, from a conceptual perspective.

We use the analogy of the elementary school who was studying the construction of a fence around the school yard. What they found was when there was no fence, the kids would stay near the school. When there was a fence, the kids would stay near the fence. The knowledge of the boundary helped provide the comfort of knowing where they were safe allowing them to migrate away from the school itself.

Knowing how much you can spend per year, if you either had to or you want to, can provide that safety like the fence. Many clients have this problem. For decades we work hard to earn that paycheck, live within our means, and save for the future. It can be hard to make the transition from ‘accumulator’ to ‘decumulator.’ One of the hardest things a retiree has trouble with is, after being programmed for saving, to start spending.

The "Die with Zero" Approach to Retirement Spending

Bill Perkins wrote a book called “Die with Zero” which discussed building your optimum retirement strategy. The book talks about how, if you spend hours and hours of your life acquiring money and then pass without spending all or most of it (this includes legacy and charitable spending), then you’ve needlessly wasted too many precious hours of your life working.

Perkins focuses on maximizing positive life experiences and making sure you invest in those experiences early. Your life is the sum of your experiences, and when you look back at your life, it will be at the memories and richness of those experiences.

Just recently, I read some pundits discussing this on a podcast. They discussed the idea of testing out spending more and becoming more comfortable with it by purchasing your next car with cash, and seeing how that feels taking the money out of your portfolio. You can even start smaller in order to get used to it gradually.

Another key point by Perkins is to give money to kids and charities early, before you pass. There’s not much point in waiting until you’re gone. This way you can give when it has the most impact on their lives as well.

My parents gave me a gift when I was just married and when we were putting together money for a down payment. We had saved enough for a small starter home, but I remember my father saying if we gave you some of your inheritance now, you could buy a better home than the ones you are looking at and not stress and worry about making payments.

It was actually not a large amount of money, but it made all the difference to us at the time. The key was it was at the right point in time in our lives. Generationally, when most parents pass, their kids will likely be in their 50s or 60s, and in their peak earning years. The time when they likely need it least.

Instead, smaller gifts earlier in life is something that really resonates with me for this very reason.

Integrating Your Bucket List into Your Financial Plan

One of the things I want clients to think about is creating a list of experiences that are on their bucket list and building those into their financial plans. By embedding them into their plans, they are far more likely to be achieved and feel comfortable with the spending aspect of those experiences.

To make our reviews more meaningful and valuable, have some of these experiences written down.

As always, we value the trust you place in our firm.

Sincerely,

Mark J Asaro, CFA