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I NEVER REALLY LIKED the vehicles that I owned. They were an unimpressive lot, including a Volkswagen Beetle, Mercury Capri, Toyota SR5 pickup, Toyota Camry and Ford Fusion. I would like to say they got me where I needed to go, but that wasn’t always the case. All the cars, except for the Camry, were unreliable, which would sometimes make my life stressful and difficult. Of course, keeping those cars for many years didn’t help.
When I think about it, I didn’t really like the homes I lived in, either. They included small apartments, without many of the standard conveniences you’d expect when renting or buying a home.
Some of my apartments were downright terrible. In 1979, I rented a studio apartment located on an alley above a garage. The apartment had poor insulation. It would get so cold in the winter, it felt like the North Pole, and it would get so hot in the summer, it felt like Death Valley. It was so small a friend who visited asked if the place had a bathroom.
It wasn’t the safest place to live. A drug dealer lived in the apartment next to me, my car was broken into more than once and one day someone stole my clothes from the laundry room. I stayed there for six years, putting up with all the discomfort and trouble that surrounded me.
The small 789-square-foot condominium I purchased in 1985 was an upgrade, but it wasn’t a place you’d want to stay for 35 years, which is what I did. A young lady, about the same age I was when I first moved into that studio apartment above the garage, bought my condo earlier this year. Her real estate agent informed me that this was just a starter home for her and she’d probably be moving within five years. When I moved to my current home, I realized all the comforts I missed out on during those years living in that small condo.
I made good money working for a large aerospace company, so I didn’t have to live that way. But I chose to—because I wanted to save money. When I look at my investment portfolio today, I have more money than I need for a comfortable and secure retirement. In fact, I probably saved too much.
You might ask, “Can someone save too much money? Is there such a phenomenon in personal finance?” I think so.
When it comes to saving for retirement, you have to strike a balance between forgoing smaller rewards today for larger rewards later. But you don’t want to delay gratification to such a degree that you make life harder than it should be. And that’s what I did to accumulate the large pile of cash that I’ll probably never need. Some of this money would have been better spent in my earlier years.
After I retired, I hired a low-cost financial advisor to manage my investments. Hiring that financial advisor got me thinking about my relationship with money.
One day, we were going over my budget for the year. I could tell he was prodding me to spend more. He asked me if I wanted to buy a new car.
“I don’t believe so,” I said.
He jokingly responded, “How about a boat?”
“No, I don’t fish.” I interrupted him. “I should tell you I’m getting married.”
“Congratulations, you surely could afford to buy her a nice ring,” my advisor said. “Why don’t we add that to your budget for this year?”
Since then, I have been adding quite a few more items to my yearly budget.
The upshot: I’m trying to live more in the moment, to enjoy life more. You shouldn’t live life always thinking about your future self—because it doesn’t do you any good saving money if you aren’t willing to spend it.
Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor’s degree in history and an MBA. A self-described “humble investor,” he likes reading historical novels and about personal finance. His previous articles include Live It Up, Don’t Delay and Try Not to Slip. Follow Dennis on Twitter @DMFrie.
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well, you just don’t know whether you will need the money until late in life. And if you are comfortable being frugal, or even ENJOY it, do it!! 😉
Too Thrifty? Yes if you are sacrificing safety. Otherwise, I think Will has it right.
However, there is a large difference between saving for retirement and saving along the way to retirement. Life is Not A Dress Rehearsal For Retirement: Start doing some of those things you are dreaming about today!
Professor Dan Ariely and Mrs. Aline Holzwarth, principal of the Center for Advanced Hindsight, both of Duke University, posted an article in the September 4, 2018 issue of the Wall Street Journal titled, “How Much You’ll Really Spend in Retirement, Probably a Lot More Than You Think.” Here are two excerpts from that article:
First, in surveys, they asked hundreds of people, “How much of their salary they thought they would need in retirement.” The answer most people gave was about 70%.
Second, in surveying those same people, they asked them to identify how much they would like to spend. “The results were startling: the percentage we came up with was 130%.”
The authors then suggest the next step to “translate this annual amount to the total amount you will need over the course of your full retirement (is to) simply multiply the annual amount by the number of years you expect to be in retirement. For most of us, that’s about 20 years.”
I say that most people don’t increase their spending in retirement. How can I say that? Easy: most won’t have enough money.
Let’s start by reducing that 130% figure to dollars. The 2018 median household income in America was $62,175. Multiply that by 95% (130% less 35% of retirement income to be sourced from Social Security), equals $59,066. Now, as the authors direct, multiply that by 20 = $1,181,320. Assuming a 2% real rate of return, by my calculation a median income American household who plans to spend at a 130% replacement rate must save approximately 30% of household income each year for 37 consecutive years – from age 30 to the Social Security Normal Retirement Age of 67!
So, this envisioned level of “like to spend” assumes more than one million dollars of savings. I’m reminded of “Comedy is Not Pretty,” a Steve Martin gig from decades ago. Steve exclaims, “You can be a millionaire and never pay taxes! You can have one million dollars and never pay taxes! You say, Steve, how can I be a millionaire and never pay taxes? I say, First, get a million dollars. Now… ”
For most workers, retirement is not a savings challenge, it is a spending challenge. The issue here is the word “like,” as in I’d “like to spend” more. The only way workers can save 30% of household income is to deny or defer spending on some essentials and almost all desires. And to that: no I say! Start doing those things you are dreaming about today, now! Don’t defer.
70% is a Common-Sense Goal
Where does 70% come from, anyway? As financial expert Michael Kitces observes, “In the end, people can only save what they haven’t already spent. Ideally, households will spend less than they make. With the added benefit that if you spend less in the first place, you will also need less to retire It’s not really the “savings rate” that defines a successful savings path to retirement. It’s actually the spending rate – and having a spending rate that is less than 100% of household income. Or stated more simply: you can’t actually choose or control your savings rate because there may not be any money left to save in the first place. But you can choose and control your spending rate.”
Finally, even 70% may overstate the need. Consider some age 85+ retirees who retired more than 15 years ago. The Society of Actuaries found that, “retirement is not a static financial event, but one that evolves over time. (Retirees) tend to be frugal and don’t have a large amount of expense to cover. This may be largely generation-driven, that is, as a result of being raised by Depression-era parents, or it may be a result of the lower activity level that comes with older age. Most are living primarily on Social Security and most have incomes of less than $2K per month, they usually do not spend more than their income. Most report spending less now than they did in the past, especially on travel and entertainment.”
True Stories on How it Really Works
Meet Hugh & Sheila. This couple was in their early 60s when they evaluated their finances in 1983 as part of a pre-retirement seminar. Hugh says, “Well, the numbers say we can maintain our pre-retirement standard of living. We can make it, but it won’t be a retirement full of wining and dining.” Sheila responds, “We weren’t living a life of luxury while you were working, what makes you think we should in retirement?”
Meet Mike & Mary. Mike was a fire fighter. Mary was a homemaker who sold real estate on weekends. Together they had five kids. Their only retirement “dream” was a trip to Hawaii with Mike’s buddies and their wives – Mike served in Europe, but each of his buddies had served in the Pacific during WWII and had talked up Hawaii. All five kids went to college. Mike and Mary burned the mortgage. All was on target, except that Mike died at age 53.
The lesson: Start doing some of those things you are dreaming about today, now!