Saving for the Future: Part 2

We all know someone who looks down their nose at people when they buy a new car, book a vacation, or do a home renovation. They feel that anybody who spends any “unnecessary money” is doing something wrong. Savey Saverson might have grown up in a poor household where even the necessities where sparse. They also could have grown up with one or more caregivers that would spend excessively leading to bad outcomes, or caregivers that saved excessively imparting this same quality on Savey.

Savey has some basic elements correct. It is definitely a good idea to save part of your income into retirement accounts, 529 accounts, emergency funds, and taxable brokerage accounts, but it is also important to make sure that you are enjoying a portion of the income that you are bringing in after covering the necessities.

?

Story time!

?

????????????? I worked with a client who was navigating the final few years leading up to retirement. He made a nice salary and had stock options and stock grants. When he finally retired the investment portfolio was approximately $8 million, and their net worth was over $10 million. He was also going to receive max Social Security and a pension of approximately $200k per year. His wife was also going to receive Social Security benefits equal to half of his.

????????????? He had always been a great saver. He maxed out the 401k and made significant contributions to taxable brokerage accounts. Even though he had a long time horizon, he always invested significantly more in bonds than in stocks. There was no plan for the money. It was always there just in case they needed it for something.

As retirement was around the corner we did a financial plan. Expenses were around $200k per year, so given the pension and social security benefits they were already covered. My suggestion at this point was to use more money.

He looked at me like I was crazy. His whole life was focused on saving as much as possible, and now I was telling him to do the exact opposite. Not only was I telling him to do the opposite but in a big way.

This client was a big golfer. He would play at least a couple of times per week when the weather was nice. He would always play on public courses or as a guest with a friend. One day he went to a club to play with a friend. He said that he loved the club and enjoyed the golf course, so he asked how much it cost to join. The membership fee was $25,000 per year. Without missing a beat I asked him, “What are the wire instructions?” He laughed and said that $25,000 was way too much money to pay for a club membership.

This led to a deeper discussion. My next question was, “what is a good use for all of this money that you have been stockpiling?” He was caught a little off guard and did not actually have an answer. The real answer was that he had always saved, and it was very difficult to flip the switch. There was also comfort in seeing the safety net continue to go higher.

?

Conclusion

Money is a resource that you make some type of sacrifice to acquire. When you are working you are trading time for money. When you are investing you are trading the ability to acquire something now for the ability to acquire more things later. What if later never comes? You kept sacrificing and never got the payoffs for these sacrifices.

The payoff does not have to be a luxury car, a giant mansion, or a month-long vacation all over Europe. It can be a nice dinner at a restaurant a couple time per month, taking the whole family on a vacation, or joining the Golf Club. Your legacy is not just the assets that you leave to your heirs, it is also the memories that people have when you are no longer here.

?

Please subscribe to “What the Finance?” to receive alerts when new editions come out, and don’t be afraid to share this awesome newsletter with friends.