Is There a Cure for Tightwad-itis?
In January, I danced around the issue of spending in retirement when I wrote about the propensity of some folks to "over save." It’s an affliction usually contracted when someone is very young and impressionable. For some folks, memories from penniless times lodge themselves deep in the gray matter of one’s brain and stay there for a lifetime. I recently got a question that touched on "oversaving," so I'm focusing on that in this week's blog. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.
Q: Hugh - do you agree with the statement by Ric Edelman that “Spending retirement savings too slowly is almost as bad as spending it too quickly.”?
I definitely agree with Edelman's statement. It's great to save hard-earned dollars but when does saving becoming more of a sickness and less of a good habit? Probably when you have trouble spending those hard-earned dollars for what you intended them for - to be comfortable in retirement.
Most of us begin our adult lives with very limited funds but some of us had wise parental advice, and later, good financial advice about NEVER dipping prematurely into retirement savings accounts. In fact, we were constantly advised to set aside emergency funds specifically to avoid invading our retirement funds.
Smart people told us to hoard our long-term, revenue-producing capital accounts at all costs. Why? Because that’s what makes The Amazing Power of Compounding work so efficiently as we head for retirement. In short, money steadily saved and the income it produces in those capital accounts will grow like weeds if left untouched.
An Ingrained Habit
For hardcore savers, this capital preservation habit can become so ingrained in our psyche that we never relent…even after we enter that phase of life known as the golden years. In short, at the very time we should be enjoying the fruits of our labor, we just can’t seem to do it. Hands off those hard-earned reserves, our subconscious screams! Thus, we spend as little of these carefully accumulated retirement reserves as we can manage (without looking too gaunt).
It's easier said than done…breaking this habit. The government reinforces it constantly by slapping our hands and penalizing us 10% if we tap into our 401(k) or IRA retirement funds prematurely. Also, financial experts warn us not to request those hard-earned Social Security checks prematurely (wise advice, but not always). And we’re constantly bombarded with scary tales of how many folks enter retirement with insufficient savings.
These frightening words take a toll on hardcore scrooges who fret about living beyond their resources – often while watching their capital reserves grow in size. So, how much is enough?
My critics tell me to brush up on one Economics 101 principle in particular that might be applicable to this issue: The diminishing marginal utility of income and wealth. Translated to real-speak, this means that each additional dollar you hang onto provides less satisfaction and happiness than the dollar you saved before it. For example, going from zero to $500,000 in retirement savings provides a much bigger boost to our sense of security and well-being than going from $500,000 to $1 million.
I suppose they’re trying to tell the scrooges of the world that the same diminishing marginal utility principle applies to security as well as satisfaction and happiness. So, where does one draw the line about the degree of security a person needs to feel comfortable in retirement?
Eye of the Beholder
Security, like art, is in the eye of the beholder. I suppose we all try to optimize that margin of financial security that gives us peace of mind. Point is, don’t overdo it. Don’t require so much financial security that you fail to enjoy the well-earned fruits of your labor – keeping in mind, of course, important potential factors like the ravages of inflation, a stock market crash, glaucoma, onset of macular degeneration, debilitating arthritis, cardiovascular disease, diabetes, cancer…now, I digress.
Which suggests that maybe there is no known cure for being a tightwad.
Bonus Q: Hugh, should you reinvest most of your profits from investments?
Absolutely, unless of course, you need the money to pay for life’s current necessities.
As to those profits, I assume we’re talking about interest received on bonds, dividends and capital gains on stocks and mutual funds, and routine gains from the sale of other types of assets. Several important investment principles are at issue here: Saving, Investing, Consistency, Compounding, and Dollar-Cost Averaging. The first two principles speak for themselves, except to note that by automatically reinvesting your profits, you will be assured of meeting that important goal of consistency.
As to dollar-cost averaging, by automatically reinvesting your various types of profit, you gain the benefits of buying additional units of value in roughly the same amounts on roughly the same timetable each week or month or quarter. As to compounding, you are employing all of the ingredients that make the amazing power of compounding work, whereby, your initial investment will grow both in units and in value (given that it’s a quality product in a healthy market).
Paired with my PDQ Principles, the choice of automatic reinvestments will serve you well throughout a lifetime of saving. In the world of investing, you make your own luck. Automatic reinvesting helps do it.