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Too Thrifty?

Dennis Friedman  |  December 26, 2020

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 UpDon’t Delay and Try Not to Slip. Follow Dennis on Twitter @DMFrie.

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Will
Will
4 months ago

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!! 😉

BenefitJack
BenefitJack
4 months ago

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!

R Quinn
R Quinn
4 months ago
Reply to  BenefitJack

My SS and pension are a bit more than my base salary when I retired in 2010. Each month we “spend” all of it, but HOW we spend it is the key. We fund 529 plans for grand kids, we maintain and replenish an emergency fund, we travel normally twice a year, we rent a house for a month in Florida, we save for and pay cash for a car, we donate to charities. In short, if you want to maintain a standard of living, you need 100% income replacement when you begin retirement even if spending later declines.

R Quinn
R Quinn
4 months ago

I find this topic most interesting. I have lived what I’ll call frugal, but not drastic life as well, but on a different scale with four children.

We lived in the same 1929 house for forty-five years. My efforts at frugality after retirement tend to move up or down in big, short-term bumps. Like saving ten years to buy my dream care for $65,000.

But on a more serious note, I still find it difficult to spend, at least to the extent it dips into my accumulated assets. I’ve loosened up a bit in the last year spending some interest and dividends. I don’t live off my investments because I have a pension.

My priorities are first, assuring my wife will always have what she needs given her survivor pension will be 50% and second, to leave as much as possible to my children and grandchildren. As typical, none of them have pensions and saving is not easy as it was for me.

Saving too much and worrying about the next generation seem quite controversial in the financial planning world.

Gozo Rabat
Gozo Rabat
4 months ago
Reply to  R Quinn

R. Quinn, I enjoyed your three comments here.

I’ve lived my life believing that most people don’t truly understand what money is, and what wealth is. If they did, I believe the articles we find to read would not focus so much on some impossible-to-attain perfect balance.

Regards,
(($; -)}™
Gozo

SanLouisKid
SanLouisKid
4 months ago

My father used to talk about “the happy medium.” As I’ve gotten older I realize more and more what he meant, and how it actually works quite well. Save for retirement, but live your life. Get a decent car, but don’t go overboard. A really big lesson was on buying a house. He and mom lived in the same house for 49 years. When my wife and I purchased our house, we thought about living there for 50 years and planned accordingly. (We’re at 23 years and counting.) Right now we could probably spend more money than we do but it wouldn’t make us any happier. It’s a good place to be.

UofODuck
UofODuck
4 months ago

Alas! Living more in the moment is unfortunately something that most of us grow to appreciate after the fact. My wife and I were diligent savers for years. Debt was eliminated quickly and every extra dollar, bonus, windfall went into savings for that day in the future when we would need the money. And we succeeded. When retirement arrived, we were well prepared and don’t have any real spending concerns. However, what we’ve grown to appreciate is that what we don’t have is unlimited time. As each year passes, we regret that we didn’t travel more when we were younger and fitter. The pandemic has really driven this point home as the number of years left for us to travel grows ever shorter. A balance between saving and spending is definitely needed, but had I to do it over again (if only!), I’d try to worry a bit less about an unknowable future.

R Quinn
R Quinn
4 months ago
Reply to  UofODuck

Worrying less about an unknown future seems only easy in hindsight. I’m thinking a good chunk of today’s working generation needs to do a bit more worrying … or better still actual planning and action. Before our four children were out of the house we couldn’t have done much traveling even if we wanted to, not to mention paying for a total of sixteen years of college (within ten years). It sure wasn’t a matter of not spending enough. We didn’t start traveling until I retired eleven years ago at 67 and since we have been to 44 countries, several more than once. With less future based frugality, I’m not sure much of that would have been possible. It’s all about balance as you say … and a bit of good fortune too.

Gozo Rabat
Gozo Rabat
4 months ago
Reply to  R Quinn

R. Quinn: Amen to what you say. Life and the Universe don’t give us very much of Just The Right Balance.

Which is better in your old age: too-little or too-much?

(($; -)}™

Robert Schneider
Robert Schneider
4 months ago

The balance or “happy medium” is often easier to talk about with the advantage of hindsight. It is not always easy to identify in the moment.

ncbill
ncbill
4 months ago

~800 sqft would be a little small for me.

Though I grew up in a 1920s ~6000 sqft home & it was a white elephant…mom nearly went broke trying to keep it up after the divorce.

Much happier in my cheap to buy, cheap to maintain 3BR/3BA ~3000 sqft townhouse where my family of four has lived for 25 years.

Gary's Shrink
Gary's Shrink
4 months ago

Interesting topic. I’ve come to a somewhat opposite frame of mind. Despite the ability to spend more, I look to spend less. I have “enough” posessions, a comfortable but modest house in a pleasant neighborhood. I eat well and take care of my body to the best of my ability. More stuff will not make me happier to any significant degree. We live in a time of wildly unprecedented consumption, and while I know my individual actions have no meaningful impact on the overall I feel some sense of obligation to lessen my “footprint” where I can. I will always feel extremely fortunate to have what I have relative to so many others. For me being “thrifty” is no longer about saving money for the sake of saving money.

davebarnes
davebarnes
4 months ago

Not too thrifty.
Too frugal.
Too cheap.

John McHugh
John McHugh
4 months ago

This goes with the bit about reaching the stage of “Don’t need to look at the prices on the menu anymore.”
(And the next higher level that I won’t make, “Don’t need to look at the Grand Tour air and hotel prices.”)

A few years ago I adopted a new daily habits mantra to match:
“I am no longer Conservation Man; I am now Consumer Man.”

(All that said, if I could still get a slightly used Taurus wagon today I’d grab it. 😀 )

Langston Holland
Langston Holland
4 months ago

I always enjoy Dennis’ articles – it’s fascinating and instructive to learn from folks that are further down the road. My 2¢:

1. Saving and investing for the threshold we call retirement really does require constant study, hard work, discipline, sacrifice and maybe a bit of luck (although I’m not sure about luck because I think the long-term smiles on those who do the other stuff). All of this was a joy, particularly in hindsight. 🙂

2. I’ve just crossed the retirement threshold. I don’t give a rip if I don’t spend enough before I die because those I love will receive the residual. I am spending more than I ever have (maybe 150%) and I’m having a blast doing it. Almost all of the excess spending involves family, friends and charity. Spending? Happy if I do, happy if I don’t and then to see my investment in eternity. 🙂

Worried about sub-optimization of #1 or #2 and you’re still alive? Sunk cost! Forget it and make today and the future the best you can an enjoy the journey! Watch this again and Merry Christmas!

Nicholas Clements
Nicholas Clements
4 months ago

In the early days of Humble Dollar I wrote about my frugality. Since the age of 16 I have saved, saved, saved until my early retirement at the age of 55. I don’t have much need for material things. I live modestly. I remain in the same home that I bought when I was 25 years old. It’s only 900 square feet but it’s enough for me and my husband. Now that I am retired and that I have a nest egg that is more than sufficient for my daily needs I find myself getting more gratification from giving the money to those who need it more than I do. I take vacations with friends picking up the cost of the vacation. We take friends out for dinner. I get more joy out of experiences with my family and friends than I do from any material things. I never really felt that I was depriving myself during those years of frugality and I don’t have any regrets. Now that I am retired I don’t worry about money but yes, I am still frugal but not to the same degree! It’s a little difficult to shake the habit, a good habit in my opinion.

medhat
medhat
4 months ago

Such a complicated topic, our relationship with money. I guess I’m grateful for having parents that were not materialistic themselves, and had more than adequate income, and as a result taught by example to focus on the value that wealth could provide: certain educational opportunities (if you put in the effort), a head start on some of the material things that paid significant downstream benefits (a home in a great school district), and a level of financial security where we could focus on long instead of short term asset appreciation. The current result being that I continue to live well below my means, including not having a car of my own, yet don’t in any way feel deprived of whatever material excesses (I like wine) that occupy my spare time. The educational “bonus” is both my spouse and I continue to work essentially full time in well-compensated professions, but only because we want to, not because we have to cover expenses. The “excess” generated from that effort will likely be of benefit, not even to our children, but theirs, where one could only hope that we’ve set a good enough example that they’ll do something similar for future generations.

Jim Gentile
Jim Gentile
4 months ago

Please put me in your will, that’s where the majority of the money’s going. I retired at age 55 fifteen years ago and my wife was 53. The nieces and nephews are still gonna get too much.lol

Steve Spinella
Steve Spinella
4 months ago

We’re all “too [something.]” Congratulations for identifying who you are and exploring how small changes might be beneficial! My guess is that most people who read “Humble Dollar” rather than “Bigger Bucks” could probably consider spending more sooner ;-).

Doug K
Doug K
4 months ago

my wife and I took a year off work in our 30s, lived out of a Ford Econoline and travelled the US. The most common conversation in that year with other folks in the campgrounds, was older couples in RVs saying we were doing it right. They’d waited until retirement and now did not have the health or fitness to really enjoy their travels.
Been working 50 hour weeks for 40 years now, at least another 7 to go, and my main regret is not taking more such years. But once you have kids the options narrow.. have to spend enough on the house to get a good school district, have to buy a safe car, have to save for college, have to buy life insurance..

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