Maximizing Retirement Spending: Is That Really What It’s All About?

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Mainstream retirement planning these days is all about maximizing your spending in retirement. And that seems sensible, on the surface.

The theory is you want to spend as much as possible in retirement, subject to the whims of the stock market. So, if the market is down, you cut back. But if the market is strong, whoopee, you take an overseas vacation, do a bathroom remodel, choose a new vehicle perhaps….

But, is that really what it’s all about? The truth is, you don’t need to maximize your spending in retirement. You need to maximize your happiness.

The Cost of Happiness

And, financially speaking, that isn’t so difficult. Research from Princeton University’s Woodrow Wilson School shows that happiness doesn’t increase much above an income of about $75,000.

Let’s assume that’s also a proxy for the required spending in retirement. Unsurprisingly, it’s almost exactly equal to our own retirement budget in a typical year.

And how much does it cost you to be happy? It may be less than you think.

It’s not my place here to suggest when people are spending their money “correctly” or not. I can’t set priorities for others and their families. So I’m not going to pass judgment on particular lifestyles.

But I’ll offer one guideline: If your income is greater than the $75K or so that researchers say is necessary to optimize happiness, then you probably don’t need to spend ALL of it. Call that discipline, call it a safety cushion, call it conservation. But it’s good for you, and good for others.

Despite the lack of retirement saving in general, a lot of people work too hard and then spend too much. An article on MONEY reports that “Rather than retirement, Americans are saving for a “lifestyle choice” in their later years.”

Some people work harder and longer because they want the lifestyle, or maybe they don’t understand the retirement equation, or they’re fearful, or their advisors are too conservative or greedy to educate them. As a result they accumulate more assets than they need. Then they feel compelled to consume those assets on possessions and activities.

The Simplest Withdrawal Strategy

This is the fundamental disconnect in discussions of retirement expenses and income: Many people, and many financial advisors, have the view that you spend all that you possibly can in life. Somehow that’s supposed to maximize enjoyment. But it’s not my experience.

My retirement lifestyle is sumptuous in comparison to what most human beings have enjoyed throughout history. It includes a nice dose of luxuries corresponding to my key interests. And I won’t spend less than that, even if I have to go back to work, or risk running out of money in my 90’s. But I’m also unlikely to spend more than that, even if I have too much….

Technically speaking, many of us view variable withdrawal strategies as the best approach to retirement spending — because retirement is just too unpredictable to budget the same amount each year. But even using a variable strategy, you’re unlikely to cut back on essentials. Would we forgo medical treatment when we have 6- or 7-digit assets in the bank, just because some formula says we should cut back? No. Or, am I going to spend on exotic overseas vacations or a big car just because the formula says I can? No.

I’m going to keep making financial decisions based on current conditions, guided by the numbers, but ultimately from the heart.

Assuming you’re already retired, here’s an idea: Throw out all the fancy retirement withdrawal algorithms and try this: Spend the minimum you need to be happy. Then spend a little bit more. If times are hard, cut back on that. One you’ve locked in some baseline income, don’t worry much about how long your money will last. Make sure you’re happy today. Tomorrow may never come.

Am I suggesting financial recklessness? Of course not. But I am suggesting that, within reason, you disconnect your happiness from your spending level. Yes, there is a minimum you must spend for a comfortable lifestyle. And you probably need to splurge a bit beyond that to feel you are enjoying life. But do you really need to spend time and energy on maximizing your retirement spending? Is that the best path to happiness for you and others?

Enough, and Then Some

J.D. Roth, reformed debtor, serial entrepreneur, and founder of the Get Rich Slowly blog, writes that “spending too much can actually have a negative impact on your quality of life.” He quotes from the personal finance classic Your Money or Your Life: “Financial Independence is the experience of having enough — and then some.”

Based on my own experience, that “then some” is not a princely amount: We’re talking maybe just 10-20% more than “enough.”

Rather than trying to maximize spending, I find I actually try to minimize both spending and the complexity associated with having more stuff in my life. Beyond a point, I simply don’t feel good about burning through more of the world’s limited resources so I can experience slightly more entertainment or pleasure on a given day.

In the end, it’s not about money; it’s about resources. I fell in love with the natural world as a young boy, introduced to the outdoors by my father and Scouting. Today that love is tinged with sadness at the wear and tear we’re putting on the planet from our modern lifestyles and our sheer numbers.

Follow personal finance to its heart and you arrive at the door of prudence and stewardship. “Saving,” “investing,” “retiring.” These are labels for something deeper: saving means conservation; investing means caring for the future — our children’s children; and retiring means the freedom to give back to the world.

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Recommended New Book: The Simple Path to Wealth

Early in his career, my friend Jim Collins saved enough money for short-term financial independence, and he never forgot the freedom to make his own choices in life. Later he started writing down a few investing lessons for his daughter, and wound up building a popular blog based on his strong storytelling, congenial wit, and razor-sharp financial knowledge.

Jim’s Stock Series introduced passive index investing to a wide audience. His new book distills and refines the same wisdom in one place. He tells you how to avoid common investing fears, misconceptions, and mistakes. He teaches about diversification, asset classes, asset allocation and the best way to use retirement plans.

Jim advises new investors to “Stop thinking about what your money can buy.” and “Start thinking about what your money can earn.” This is an essential mindset that helped me on my own journey to financial independence. Money is much more than the things it can buy. In truth in represents the energy of our lives. Do you want to exhaust that on stuff and clutter, or use it to buy freedom for your most important pursuits? Jim does a great job of building motivation for the latter, and explaining how it’s done.

A key component is keeping your investing life cheap and simple. This is absolutely essential to the investing strategy outlined in the book. I thought my portfolio was simple at 7 positions, but Jim argues forcefully for extreme simplicity. For young people in the accumulation stage he suggests a portfolio with only a single holding: Vanguard’s Total Stock Market Index Fund (VTSAX). Even for retirees with slightly more conservative/complicated financial lives, he argues for a portfolio of only VTSAX and VBTLX (Vanguard’s Total Bond Market Index Fund), and some cash.

Given the financial complexity, fear, and uncertainty spread by so much of the financial media, perhaps you’re shocked by this level of simplicity. I’m not. After 20+ years of my own investing experience, I’m more in Jim’s camp than any other, and getting closer every year.

Jim has a knack for writing things I wish I’d written myself: “Avoid investment advisors. Too many have only their own interests at heart. By the time you know enough to pick a good one, you know enough to handle your finances yourself.” This is a profound truth. There is simply no getting around the need to develop enough expertise (it doesn’t take much) to take control of your own money. And, if you don’t, you aren’t necessarily going to do a good job of picking somebody else who can. Rather, you are likely to be subject to the whims of high-priced/low value advisors at best, and con men at worst.

The Simple Path to Wealth offers a simple, proven path to investment success from a guy who actually did it. If you’re new to investing, don’t miss this crash course in the essentials. True to its name, the book is a simple, easy, fun read.

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