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WHEN I WAS IN COLLEGE, late in the evening and usually after a few drinks, someone would often play Edith Piaf’s Non, Je Ne Regrette Rien, her stirring and defiant 1960 song about regretting nothing.
It’s a sentiment worth recalling as we look back on our financial life. Here are four things we shouldn’t regret:
Saving too much. Is that really something to regret? It’s undoubtedly better than the alternative: saving too little. While lifestyle improvements often fail to deliver much happiness, a sharp decline in our standard of living—perhaps triggered by inadequate retirement savings or a job loss coupled with a skimpy emergency fund—would almost certainly hurt.
That said, if we spend our life saving voraciously, we might regret our sacrifice if we get scant pleasure from the money we amass. This doesn’t mean we ought, at some point, to start spending with wild abandon, though opening our wallets a little wider strikes me as a fine thing to do.
But there are also other ways to get pleasure from our savings. For instance, we might use our money to help others, perhaps making financial gifts to family members or supporting our favorite charities. We might also choose to hang on to our savings and enjoy the sense of security that money bestows. I’ve come to believe that the pleasure that comes with being generous and from feeling financially secure often exceeds the pleasure that comes from spending.
Diversifying. Ever since I got religion about sensible investing and started diversifying broadly, I’ve found myself owning parts of the global financial markets that have generated lackluster returns for a decade and sometimes longer. Think about the poor performance of U.S. stocks in the 2000s and that of foreign shares in the 2010s.
This is not something I regret. Obviously, if I knew with certainty that tech stocks would sparkle in the 1990s and 2010s, and stink bigtime in the 2000s and also in 2022, I would have invested accordingly. But without such clairvoyance, I take what strikes me as the only prudent course of action, which is to own a little bit of everything.
Funding retirement accounts. I’ve lately seen a spate of comments from retirees bemoaning the amount they stashed in traditional tax-deductible retirement accounts, and the big tax bills that are now coming due as they draw down these accounts. These retirees suggest that Roth accounts would have been a better choice—and that even a regular taxable account would have been preferable. But this smacks of financial amnesia. How so? It ignores the earlier tax deduction that likely compensated largely or entirely for the later tax bill.
If you’re in the same tax bracket when you fund a traditional retirement account as when you draw it down, you effectively get tax-free growth, just like you would with a Roth. To understand why, read this explanation.
But what if you end up in a higher tax bracket in retirement? In that scenario, a Roth would have been the better bet. But what about a regular taxable account? Suppose you’re age 25, and your combined federal and state income-tax bracket is 15%. You invest $10,000 in a tax-deductible retirement account that grows at 8% a year. Forty years later, at age 65, you empty the account, paying a combined 25% income-tax rate on the proceeds. Result: You’d net almost $163,000.
What if, at age 25, you skipped the tax-deductible retirement account and instead stashed the dollars in a regular taxable account? Right off the top, you’d lose 15% to taxes, leaving you with $8,500 to invest. The money again grows at 8% a year. Let’s be (absurdly) optimistic and assume you paid no taxes along the way—because you received no dividends and realized no capital gains.
At age 65, your taxable account would be worth close to $185,000, with a cost basis of $8,500. You then cash out the account, paying taxes at a 15% capital gains rate. Result: You’d be left with some $158,000, or $4,700 less than if you’d stuck with the tax-deductible retirement account. What if we used more realistic assumptions? The taxable account could easily have fallen short by $30,000 or more.
Owning insurance. I haven’t submitted an insurance claim—other than to my health insurer—in the past three decades. Does that mean carrying life, auto, homeowner’s and umbrella liability insurance has been a waste of money? Hardly. I paid my premiums to protect against a host of financial risks, I got the peace of mind that the insurance provided—and I’m happy none of these risks came to pass.
The case for carrying insurance is similar to the case for diversifying. We’re protecting against the unknown. More things can happen than will happen—and, when it comes to the sort of things that good insurance covers, the financial consequences of not having coverage can be devastating. In the absence of a crystal ball, we need to manage risk so we aren’t hurt financially if our home burns down, our neighbors sue us, we need major medical care or some other costly misfortune strikes. That’s what our premium dollars buy and, if we have the right coverage, it’s money well spent.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.
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As an add-on to the insurance perspective: Right now, companies are pulling out of or going bankrupt in Florida. Those companies aren’t pulling out or going bankrupt because they’re too profitable. They are not being allowed to charge what they need to offset the losses. Then there is the problem that people can’t afford the premiums the companies need to charge to offset their losses. The reason insurance is affordable most places is because everything bad that can happen does not happen, just as Jonathon said.
About getting religion about diversification … Your satisfaction with diversifying is nothing other than faith in the research on diversifying.
About that free lunch, see the essay “The Academic Failure to Understand Rebalancing” by Michael Edesess:
https://caia.org/blog/2022/06/13/academic-failure-understand-rebalancing
I always suggest to my kids and younger colleagues that if their firm offers 401k and Roth 401k accounts that they place 50% in each. That way they get some tax breaks now and tax breaks in the future. So… unless you are a rich heir or own a company the best way to build wealth is with 401k accounts IMO, if you are a salaried of hourly employee. Oh, and live within your means and not on credit card debt or go on expensive travel experiences.
I especially appreciated your comment about opening our wallets a little wider (assuming, of course, that we can). Saving is a life-long habit that is not easily loosened once our (often elusive) savings goal has been achieved. Nevertheless, the old axiom that “you can’t take it with you” remains true. What also is hard for some to grasp is that there can be real pleasure in giving away things and money to family, friends and charities. Partially, this can be a practical way to declutter our lives as we grow older, but helping others now also allows us to share in the experience while we are still living.
Jonathan: I attended college back in the late 1960s and our favorite tune at the dorm was We Gotta Get Out Of This Place” by the Animals. An excellent article about how to be prepared for retirement.
Thanks for publishing two articles on HD this week, Jonathan! I hope this means that you now have more time to write than you have lately.
The “My Money Journey” book is pretty much wrapped up, so I do indeed have more time for writing these days.
Thanks for this, Jonathan, and I have to say that your college group’s taste in music late at night and after a few drinks was considerably more sophisticated than my group’s. And your point about the overarching benefit of peace of mind that comes from certain investments (insurance, adequate savings, etc.) is very well taken.
The other late night college song I recall was Frank Sinatra’s “My Way,” usually played at a loud enough volume that we couldn’t hear each other singing along, for which everybody was grateful.
We just reviewed our homeowners insurance with USAA. I was absolutely shocked that the replacement value of our house had jumped almost 50 per cent. The current cost of materials and skilled labor rates have really inflated the coverage we need to carry. Unfortunately the replacement cost is still higher than the market value but my wife and I will use the value that the insurance company’s software estimated.
Being a strong supporter of capitalism and competition, Jonathan occasionally posits the question: What other financial websites or blogs do you read in addition to HumbleDollar? After all, he is secure in the community he has birthed. There are others I read but truly none pack the common sense wisdom of HC, as evidenced by this article. Have a feeling Messrs. Buffet and Munger would (are?) be vociferous supporters.
Thanks, Jonathan. Yes there are a lot of things we’d wish we’d done differently. But, we’re blessed to make it to retirement and not have a ton of worry about the many things that can befall us. Especially liked the entry on insurance. We don’t want to collect on life, homeowner or vehicle insurance for any reason. Policies are there for the major things, not the inconveniences that arise (ball thru a window, fender bender in parking lot, etc.). One should be able to pay those things out of savings, have appropriate deductibles, and not run to your insurance agent every time something happens. It’s important to know why you have what you have and when to use such instruments. Thanks again for your insight.
Thanks so much, Jonathan, for this sensible and reassuring post. In the 1980’s, we were living quite frugally on my husband’s very good income and I often wished we were spending a bit more and saving a bit less. Our circumstances later changed. Though we never had to live off our savings, we were never again able to save as much as we did in those years. Thanks to Doug’s prudent financial management, I am now very grateful that, in addition to my modest pension income, I have a decent nest egg with which to support myself and our teenage grandson. Doug’s insistence on always having insurance of every kind is also a source of gratitude: several of his relatives were surprised and touched when they learned that they were beneficiaries of one of his life insurance policies (with my previous knowledge and consent). Thanks again.
Great article as always Jonathan. Back in the old days of an earlier career as an actuarial trainee we called folks like you a ” preferred risk”.
Great article Jonathan. It is hard not to regret certain actions, but it’s rarely helpful. These are great examples.
Your comparison of retirement funds is a first for me as a casual student of financial matters. That made me feel much better about my own choices decades after first signing on to my employer’s 401k Plan. The incentive of matching the first 3% was the hook and I took it. The only mention of taxation I recall was the then current reduction in taxable income and the far distant future taxation at age 72 on the proceeds at an expected lower tax bracket.