By Brad Thomason, CPA
When you think about the much-mentioned “1%,” you probably don’t immediately jump to the image of a slow-talking farmer from a little rural town in the South.
But he was most certainly a 1%-er. In addition to cattle and some row crops, he grew high quality sod on river-bottom land that had been in the family for several generations. This was back during the housing and golf course booms of the early oughts, and his sod was rolling out on trucks just as fast as they could grow it.
We were discussing his long-term plans, and a standard part of that discussion is based on questions about what a person wants to do in the future and how they plan to spend – and enjoy – their money.
I remember he smiled at me and said something to the effect that there were only two things he really needed to have an enjoyable life. The first was clean clothes to put on every morning – and he made a point of reiterating that they merely needed to be clean, not new. The second? Sharp razor blades.
After that, everything was extra.
He went on to say that he already had both of those, and as such he was already in the midst of what seemed to him like a pretty luxurious life.
Now to be sure, part of this exchange was theatrics, and he had a wry look on his face while answering the question. Nonetheless, he was also completely serious. Those were the things he really wanted, and with them attained, his zeal for any particular extra thing was not that high.
When we think about the future and the idea of luxury, as such, it is common to imagine many places and toys and experiences which all have the commonality that they cost a lot of money. That’s fine to a point, but when it comes to actually setting budget numbers for retirement income, it’s always better to have projections come as close to reality as possible.
I had a very different discussion with another person, who claimed a love for travel. The result? A line item in the permanent budget of $50,000 every year for trips. I told this person a story of some family friends, an older couple who also liked to go on several trips a year, but who, as they had gotten older, had come to look forward to supper on the first night back home as much as the trip itself. After a week or more eating restaurant food, they were ready for something different, and they always had the same thing on the day they got home: dry beans, cornbread, and a bit of country ham.
I concluded by saying that the odds of actually traveling enough every year for the rest of his life to spend that kind of money was highly unlikely. Many people who think they love to travel, pre-retirement, come to find out after three or four marquee trips, that they have a growing sense that they have checked that box on the list. They view the production of it all – even if they remain ok with the cost (which many don’t, by the way) – as more than they want to tackle. Turns out being away from home takes more of a toll than folks tend to factor in when the excitement of a coming big trip is all that they’ve got room to think about. You have an intrepid bunch who follows through on the plan to keep on moving all throughout their retirement years. But they are the minority. Most get the trip to Italy, or Alaska, or wherever out of the way, and slide one step closer to being decided home-bodies.
Well, so what? Is financial calamity going to ensue because you budget a bunch of money for something and then never spend it? Probably not.
But as I said, at a theoretical level, closer match between what gets put into the plan and what is most likely to actually happen, is better practice. And at the level of practice, do be aware that setting a particularly high bar for future income needs can affect you substantially, as a stressor, in the years leading up to retirement. Funding an actual $50,000 annual line item can require well over a million dollars in capital. So to set yourself the task of saving an extra million dollars on top of what you already need is a pretty steep hike. So much so that you could work yourself, and worry yourself, into a state of health that you wouldn’t be able to enjoy the money even if you did managed to set it aside.
So balance, moderation, and realistic expectations about what the future is likely to look like. These are what we want to favor. Obviously we can’t predict everything. Yet there are still some possibilities which we can all look at in sober fashion and make a pretty close guess. If you didn’t spend your working years staying in thousand-dollar-a-night hotel rooms, driving European performance cars, or living out of a suitcase four months a year, you are unlikely to start doing so on a repetitive basis for the duration of your retirement years. You might do some of it to see what it’s like. But that’s an altogether different thing. One-time expenses, even rather large ones, affect financial models very differently than ongoing expenses.
In the end, it is a lot more sensible to look for the luxuries you will actually engage in. When you do, don’t be surprised if what rates as luxury to you makes you chuckle a little. Maybe not in embarrassment, per se. Just recognition that it might not be all that exciting to anyone else, even if it means the world to you.
A lot to be said for clean clothes and sharp razor blades. Freely admit, I’m a big fan of both, myself.
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