“Two of the hardest things to do is save when you’re young and spend when you’re old.”
– The Maxims of Wall Street, Page 19
Attention, readers. This could be the most important column you will ever read from me in Wealthy Retirement!
The first section of my book The Maxims of Wall Street focuses on the vital necessity of saving, investing, and spending your money wisely so you don’t end up in the poorhouse when you retire.
I find that people have three main uses for their money:
- Money to live on – earning enough money to pay for basic expenses, such as housing, transportation, food, and other essentials, including funds for emergencies.
- Money to retire on – earning enough money to start a savings or investment program so that, when you retire, you can enjoy life and not run out of money.
- Money to burn (or spend freely) – funds for travel, vacations, second homes, artwork, charities, conferences, and other good causes.
Ultimate Financial Freedom
Once you reach the third level, you have true financial freedom. This should be the goal of every investor.
Yet most investors never reach this level.
Indeed, studies show that only a small number of Americans have accumulated enough liquid savings to withstand a major financial shock.
For example, just 38% could cover an unexpected $5,000 expense using savings alone. Eighteen percent could handle less than $100, and another 12% could handle only $100 to $499.
Approaching retirement does not guarantee financial security. Among nonretired Americans aged 45 to 59, only 43% said their retirement savings were on track. Among those aged 60 and older, the figure was 53%.
You May Be Saving Too Much!
When I report these statistics to retirees, it causes many of them to cut back their spending and save even more.
This too could be a big mistake. Why?
Because many wealthy people are so well off that they save too much! They live with an irrational fear of running out of money before they die, so they become misers and refuse to spend money on many enjoyable activities and good causes.
They are willing to spend their monthly income from Social Security, rents, or annuities, but they regard their investment portfolios as something they must preserve and never touch.
Financial economist John Maynard Keynes compared saving money to a cake never to be eaten. In his bestselling book The Economic Consequences of the Peace, he wrote…
The duty of “saving” became nine-tenths of virtue and the growth of the cake the object of true religion… And so the cake increased; but to what end was not clearly contemplated… The virtue of the cake was that it was never to be consumed, neither by you nor by your children after you… Society was working not for the small pleasures of today but for the future security and improvement of the race – in fact for “progress.”
Indeed, one study estimated that about 80% of seniors’ net wealth is ultimately left behind for their heirs – and for what purpose? Perhaps to pay for a grandkid’s education or some other worthy cause, but oftentimes, it ends up being wasted.
The Standard Spending Rule for Retirees
There’s a conventional rule in retirement: Conservative retirees can safely spend 4% of their liquid assets – from an IRA, 401(k), etc. – annually without fear of running out of money.
However, a recent study by David Blanchett, Ph.D., head of retirement research for Prudential Financial, showed that the average retiree aged 65 withdraws only around 2% of their financial assets per year.
The reason is simple: We tend to be more protective of our savings than our income. In fact, Blanchett estimates that retirees’ spending would increase by about 80% if they converted their investment wealth into lifetime income streams!
My advice: If you can, it’s time to spend more – a lot more! Don’t be afraid to spend some of your children’s inheritance. “Live long and prosper!”
The story of Arkad, “The Richest Man in Babylon,” is worth imitating (quoted in Maxims, Page 22):
In old Babylon there once lived a certain very rich man named Arkad. Far and wide he was famed for his great wealth. Also was he famed for his liberality. He was generous with his charities. He was generous with his family. He was liberal in his own expenses. But nevertheless, each year his wealth increased more rapidly than he spent it.
Many retirees – and that includes many Oxford Club Members – may be oversaving and underspending. It’s important to have balance in your financial life.
A Personal Story
In 1980, my wife and I went on a tour to Israel with my uncle, Cleon Skousen, who was the tour guide. Among the 100 or so tourists, we were by far the youngest couple. Everyone else was 65 to 80 years of age, and many of them were physically challenged.
We determined then and there that throughout our lives, we would not wait until retirement to go on trips, engage in good works, spend time with family and friends, learn new hobbies and skills, and enjoy all that life has to offer.
Whenever I suggest to a friend that they travel to their favorite destination or attend a valuable conference, I often hear the response, “I can’t afford it.”
In most cases, that’s not true. They are likely to die rich.
My advice: Don’t die rich; live rich, useful lives!
Benjamin Franklin said it best: “The years roll round, and the last will come; when I would rather have it said, ‘He lived usefully,’ than, ‘He died rich.’”
If you make a tidy profit following the advice of Oxford Club experts, reward yourself by spending some of the profits. Give to a charitable cause, learn a new hobby, buy a beach condo, go on that vacation you’ve always wanted to go on, or attend a conference in a resort town or exotic country.
Enjoy!
— Dr. Mark Skousen
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Source: Wealthy Retirement
