Avoid Complacency – Time Catches Up
Stewart Stafford said, “The quickest way to run out of time is to think you have enough of it.” Time catches up. Sometimes it’s a doozy. How can we keep our futures bright?
There are two common reasons we make mistakes. One is we’re rushed in getting all the intel and insights to make smart decisions. The other is when ramifications of our decisions occur down the road. We hesitate in taking corrective action. There’s less sense of urgency. I’ll fix it tomorrow. It’s one of the reasons why people don’t really get serious about their finances until five to ten years from retirement. It may be why about 38 percent of American adults and 17 percent of teenagers are obese says the CDC. And five to ten percent of adults are morbidly obese meaning they’re at a higher risk of disease. Complacency can be an enemy to both our financial and physical health.
America’s nest eggs continue to grow. Retirement assets are estimated to be about $25 trillion or triple that of twenty years ago. And half of that money is in individual accounts. But an interesting phenomena is hidden. While younger generations are falling behind in saving compared to earlier generations, older Americans sit on more and more wealth. Normally retirees should be cashing in on their savings. However, according to 20 years of University of Michigan survey data the average wealth of Americans when they die gradually creeps upward from their 60’s to their 80’s and starts declining in their 90’s. Older Americans, especially the affluent ones apparently have ignored the saying “You can’t take it with you.” Here are a couple reasons.
First is financial – the stock market and real estate booms. Second are behavioral. Few retirees are intentional Jack Benny or George Costanza-like cheapskates. It’s a hard transition to make shifting to “spender” when you’ve been a lifelong and hardcore “saver.” They tell me “Kid, I take my checkbook to the grocery store, not my passbook.” I’ll translate for younger readers… retirees may spend investment earnings, but they’re reluctant to dip into principal. Other concerns are reflected in retiree surveys – they’re nervous about (a) maintaining their lifestyle, (b) not being a burden on anyone, and (c) leaving a large enough inheritance. And finally, behavioral issues are reflected in retiree spending patterns. Retirees generally spend less than they expected – it’s “tightening the belt” and “what-if-I-need-it-tomorrow” concerns. And there’s a phenomena called the ‘Retirement Spending Smile’ coined by David Blanchett that describes the typical spending pattern – high initially as retirees travel more, and catch up on honey-dos and deferred maintenance, then settle down into a groove, then spending escalates as the costs of aging (assistance and medical) start catching up.
So a couple of planning tips:
Careful about complacency and change before you have to – Have you adjusted your investments to the new world, or do you have the same red, white and blue (and possibly overvalued) portfolio? And if you’re the type who likes holding lots of cash, do you have it working for you in insured money market accounts that are paying about a percent versus point-zero-zero-nothing?
Chuck unnecessary expenses – Should I make XYZ discretionary expenditure? What about reviewing recurring expenses for possible savings? For example, insurance (shop coverage periodically or cancel unneeded life insurance (or put on minimum payment)), transfer the timeshares (and maintenance) to the kids, etc.
Know what you can spend (and gift) safely – I’m not encouraging you to be a spendthrift, but maybe your kids are right. “Why aren’t you more comfortable in retirement?” Or maybe you’re just fine. This exercise can give you better confidence about not running out of money.
Finally, here are three simple rules. Spend less than you make, save more and earlier, and don’t make dumb mistakes. And sometimes it helps to have a trusted advisor help you along the way.