By Brad Thomason, CPA
There is a lot more to retirement income than simply saving money. But saving money is the thing that sets everything else in motion, and the better the job you do of adding principal to the equation, the easier it is for all of the other factors to do what they need to do.
People often lament that it is difficult to save for retirement because they don’t have any money left after paying for “the basics.”
In my experience, most people have raced right past the basics and are living lives that are quite a long way from mere subsistence.
Still, an admonition to just spend less isn’t really very helpful advice. So instead let me point out a few places where money has a tendency to go.
The first distinction I would make is between one-time expenses and recurring expenses. The single price tag stuff tends to get the attention, but the stuff that you pay for year after year has the potential to be what really drains your batteries. For a stark example that you can do for yourself, compare the cost of a tube of toothpaste to the amount of money that a person is likely to spend on toothpaste over the course of a lifetime.
It is because of this aspect of spending that people can end up allocating more money to their pets or their yards than they do to saving for retirement. Making such expenditures in the moment seems pretty innocuous; yet when viewed big-picture one comes to see how frankly absurd it is.
As a result, this little mundane stuff can hurt you more in the long-run than a single big chunk spent at one time. A person contemplating some special trip of a lifetime might decide it is too expensive. In which case saying ‘no’ will feel like a responsible act. Which it is. But from a strict financial perspective, had the person required himself/herself to tighten up on nonessential routine spending, and then taken the trip as reward for being diligent, the net effect could easily have been better than denying the trip and letting the leakage continue.
Now that said, if we are talking about an expensive trip every year, then we are right back to talking about a recurring expense. Recurring doesn’t necessarily mean there’s a cash flow every week or every month. If you drop $10,000 on a vacation trip every year for two decades, that’s a recurring expense. Not to mention an eventual $500K to $800K or so that won’t end up in your portfolio.
Another key place to look at is vehicles. With cars, there are two main culprits, which often occur in tandem. The first is spending more money on a vehicle than is really necessary to get from point A to point B. The other is replacing the “old” one (before it is actually old) with a new one, too frequently.
People buy more car than they need just because they do. I tend to drive pretty basic stuff, but admit to having bought my wife nicer vehicles than was necessary. Doing so had the twin benefit of avoiding an argument, and doing something that made her happy. So those things have value in their own right, and I’m not trying to come off as judgmental in any of this. I’m just pointing out the mechanics. Which in this case is spending behavior that I’ve done, too.
As far as the replacement interval though, this one is largely based on superstition. The general line is that you want to get a new one before the current one starts wearing out and having problems. As such, at around 50,000 or 60,000 miles, it has to go.
This is basically hogwash. Modern vehicles routinely go 150,000 to 200,000 miles without any need for anything but standard care and maintenance. Early replacement is a classic example of how risk looms larger, and people take actions which are outside what the data suggests simply because they perceive the negative outcome as more costly and more likely than it actually is.
These two factors working in tandem can cost you a lot of money over the course of your life. Cars depreciate faster the newer they are. So if you flip that around, you realize that your average cost for owning any particular car – whether a basic car or one that was more luxurious than strictly necessary – drops every year that you own it. Therefore, if you are always buying new cars, then you are always getting the highest yearly costs.
Bottomline is that most people end up acting out of fear of a repair bill, and in so doing spend many times the amount the repair would have likely been, by way of steep depreciation on expensive cars that they turn over at a high rate.
Also on the vehicle front we should mention boats. Which some wiseass years ago defined as, “a hole in the water into which one pours money.” An accurate description, it turns out. Enough said.
Now, to the extent that some or all of that sounded like a rant, please know that wasn’t the intent. I have been a consistent advocate of the principle that you can do with your money that which you wish, and that position is well-documented now in a written record that is approaching a decade’s worth of blogs, alone. Moreover, I have spent money - at least a little bit - on every single one of the things I mentioned. So don't receive any of this as preachy.
That said, if you were wondering where you might look for a few extra bucks to stick in your retirement account, perhaps now you have a few ideas that you weren’t thinking about five minutes ago.
By Brad Thomason, CPA
As the rapidly-passing summer is now more or less in the past, many of us have started to reorient to our young-uns being back in school. So I thought now might be an opportune time to tell you about an interesting conversation that I had a while back.
The general theory that a lot of us operate on – me included – is that the cost of getting a kid ready to go live his/her life is a cost that Mom and Dad (perhaps with some assistance from the Grandparents) should be picking up. Or to say it another way, it is not the ideal situation for a young person to have to pick up the tab for his/her own education. They need to be focused on getting the education, not finding the means to pay for it.
Up to a point, by the way. My kids have been told quite clearly that they can have all the extra majors and Master’s degrees they want. But Daddy ain’t payin’ for ‘em. You get one Bachelor’s degree on your package deal of being raised. After that, it’s on you.
But as I alluded to earlier, a year or two ago I had a conversation with a fellow which I thought was particularly interesting, because it offered some perspective on the down-side of this philosophy.
Essentially this guy had gone to college and his parents had paid for it so he wouldn’t have to work or end up with a bunch of student loans putting drag on his ability to start building wealth once he got out. Which he appreciated.
But they did so at the expense of saving enough for their own retirement. Then, due to medical reasons, one of his parents had to stop working at a younger age than had been originally planned. The net result was that he was pretty sure that at some point in the next few years he would have to start helping them to keep the bills paid. Because the balance of the retirement accounts never grew to the heights they had hoped for, it wasn’t going to last as long as it needed to. And although it wasn’t the only factor, the prime factor was the reduced amount of principal which was added in the first place. Principal that paid for his education, instead of endowing their retirement portfolio.
The person who was telling me this story seemed genuinely grateful for the fact that his parents wanted him to have smooth sailing, and that they cared enough about him to put their money where their mouths (hearts?) were. But he also pointed out that from the very start of his college years he was on track to enter a well-paying field; and that while he acknowledged that not having to pay off student loans was nice, it was something that he reasonably could have done. Significantly, he said that the cost of doing so would have ended up being less than what he felt like he was in store for, in terms of having to supplement his parents’ income.
The whole situation had naturally put strain into the relationship, and was causing him to rethink what he would do when his own young children got to the point in their lives that this set of issues would resurface. He did not want to propagate the problem into the next generation.
Frankly, the whole thing was not a lot of fun for me to listen to, either. Even though I know how important it is to properly fund the retirement need, and needed neither an example nor a reminder to make the point, hearing about a real world cases of not doing so still bummed me out. I felt bad for the guy, and I felt bad for his parents. But what could you do? Which was sort of the whole point. The actions were in the past, and all that was left now was the future effects; which unfortunately didn’t seem reversible. He concluded by saying, “Sometimes I wish they hadn’t done me any favor.”
Food for thought.
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