[It's FIRE week here at WCI, where we celebrate all things Financial Independence, Retire Early-related, including the Physician on FIRE blog. Every post this week is going to be about topics relevant to the FIRE community.]
By Dr. James M. Dahle, WCI Founder
While the opposite is far more common, some people struggle to spend money. These people are natural savers, and when it comes to the five main financial tasks that one should try to do well in life:
The first three tend to be much easier than the fourth one. This can be particularly difficult for retirees. After spending 40+ years careful shepherding leftover earnings into a nest egg, it can be psychologically difficult to actually use that nest egg. While there are optimal methods for investing your money to maximize return and to minimize taxes, the behavioral aspects of spending down a nest egg are too often ignored.
Spending Tricks in Retirement
Aside from constant reminders from family, advisors, and themselves that they need to “fly first class or their heirs will” and “your hearse will not have a trailer hitch,” there are a number of techniques that can be employed at any age to assist one in spending more money.
#1 Spending Allowance
Some people have successfully employed a spending allowance. Most allowances put a cap on your spending, so that once you spend the allowance, that's it. In this case, we're using the allowance as a minimum spend. It's a bit artificial, but if you use this system, you must spend a certain amount every month or every year. You can even add a “penalty” if you fail to do so. Perhaps what you didn't spend must be given to a person or charity you don't really like all that much (or give to a charity you actually do like)!
#2 Use Credit Cards
Studies show that we spend more when we use credit cards. So, start putting all your purchases on credit cards. Yes, you can still have them automatically paid off each month with a transfer from your bank account.
#3 Have Someone Spend It on Your Behalf
In many couples, there is a spender and a saver. Even in two-saver couples, one of you is likely a bit less of a saver. So, have that person spend the money. Katie and I employ this one all the time. She buys the airline tickets. She goes to the hotel front desk while I wait with the kids in the car. She orders the stuff on Amazon. She grabs the bill when the server brings it to the table. We have the kids give the tour guide the tip. Katie doesn't particularly enjoy any of that, but it's not painful to her. I simply enjoy stuff more when I don't know what it costs and I'm not directly involved in paying for it.
#4 Don't Look at the Price
Here's a similar technique. Don't look at the price. You already know if you can afford it or not, but if you never see the price, you'll avoid the psychological pain of spending. This is how we dealt with our home renovation. I totally enjoy our home renovation, by the way, and am super glad we spent the money on it. We certainly had the money to spend, and I knew the total amount because I was transferring the money around and writing the big checks to the general contractor. What I did not know, however, was the price difference between one option and another with all of the countless decisions we had to make. If you have trouble spending, try not to look at the price when making your decisions. You'll probably choose the more expensive option a lot more frequently, and that's not such a bad thing.
#5 Buy All at Once
The old adage is “buy nice or buy twice.” I really don't spend much time at all thinking about what fancy outdoor gear cost me AFTER I buy it. I try to only pay for it once. High-quality gear, like furniture, lasts a very long time. While you might be financially better off with less nice stuff—even if you have to replace it once or twice—you can buy less frequently and experience the psychological pain of spending less frequently by just buying nice. Plus, you have nicer stuff to use! It's also a good idea to just pay cash, rather than any sort of ongoing payments that cause psychological pain each month for years.
#6 Pre-Pay Vacations
Studies show that the best way to maximize happiness from a vacation is to just pay for it all upfront as much as possible. Then, you can just enjoy the trip without having to make multiple spending decisions a day. For someone who normally only buys something once or twice a week, having to buy meals, hotels, tours, etc., a dozen times a day on vacation can be painful. Prepay it so you can enjoy the vacation.
#7 Buy All-Inclusive Packages
In that same vein, buying an all-inclusive vacation also reduces the number of times you must spend. Once you're there, you know everything is already paid for so you might as well enjoy it since the money is already spent. Now go get your money's worth out of it!
#8 Combine Giving and Spending
How about this technique? Need a new car, but your old car still works fine? Why don't you find someone who needs that old car more than you do? Maybe it's a niece or a broke medical student. Who knows? But once you give your old car away, well now you HAVE to go buy a new one. You've turned a want into a need.
Now I know all you natural spenders out there are rolling on the floor laughing at this point in the post. “Those stupid savers, they're so dumb,” they say. “Go get some therapy.” Maybe they're right, but retail therapy clearly isn't going to work.
Molding the Nest Egg to Assist Savers with Spending
All of those tricks still work in retirement, but there is more that can be done. Some money is simply easier to spend in retirement than other money. This isn't a logical thing, of course; most savers realize the trouble they have spending isn't logical either. It's a behavior thing, and even if it isn't necessarily the correct thing to do mathematically, you have to remember that personal finance is both personal (behavior) and finance (math). Frankly, it's probably 80% behavior.
Let's make a list of retirement assets in order of how easy they are to spend and why.
As you work your way down this list, you move from assets that are psychologically, financially, and behaviorally easy to spend toward assets that cost taxes, interest, and hassle. The assets lower on the list may also get your scarcity mentality to kick in as you feel like you might run out of money. You might even feel like a jerk for spending money that your heirs could use a lot more than you.
This is a bigger problem for savers than anyone else because they end up having much larger nest eggs in retirement than a natural spender. The general idea here is to get as much of your spending money from the assets toward the top of the list as possible. Theoretically, this will help you to spend more money. Obviously, if that isn't your issue, maybe assets toward the bottom of the list would be better.
There are a number of things that you can do to move assets up the list. You can delay Social Security by spending other assets until you reach 70 so your Social Security benefit is larger. If your employer offers you a pension or a lump sum, you could take the pension. You could buy a SPIA or two. You can invest in rental properties and even pay them off sooner than you otherwise might to maximize the income from them. Turn off the reinvestment option on your fixed-income investments and mutual fund dividends. You can even have them paid directly into your checking account. Make sure when you're selling assets, that you sell the highest basis ones. This helps reduce your tax bill and maximizes the inheritance you leave behind.
Sometimes it is better to borrow against assets such as your taxable account, rental properties, home, or life insurance policies rather than sell or surrender them. The interest cost may be much less than the tax and transaction costs. Lots of insurance agents argue that whole life insurance helps people spend their money in retirement. I don't buy it. While a partial surrender can be tax-free, a full surrender of a policy you have had for decades means all of the profits are taxable at ordinary income tax rates. Perhaps more difficult for a great saver, it feels like you're spending your kids' inheritance since they are the beneficiaries of the policy. The life insurance death benefit feels like it is supposed to be for someone else, not you.
This post might not apply to you. But if it does, I hope some of these tips help you to enjoy the money you worked so hard to earn and grow.
What do you think? Have you had an issue spending money? What tips do you have for natural savers to spend their money now and in retirement? Comment below!