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:
- Earn
- Save
- Invest
- Spend
- Give
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!
I had to smile when reading your post since it is on-point. FWIW, I find it easier to spend discretionary money from a nest egg when the stock market is rallying, since I view those unrealized gains as a ‘lucky’ windfall unrelated to my investment acumen. Conversely, though, I restrict discretionary spending when the stock is crashing because I view it as my ‘failure’ to invest wisely and so a newspaper-on-nose is warranted. Neither response is rational, yet it does weirdly guide spending behavior in retirement.
Very pertinent to us. I constantly use the excuse that 1- we are still in our 50s so we can’t be certain we have enough!!! (arguable- almost in our 60s, COLA adjusted pensions cover most of our current needs, and we have Tricare) 2- My income would drop a lot if I were widowed so I have to cover that risk!!! (As would my expenses drop a good amount; and I have calculated and had to admit that a small dispersal of our savings would replace the drop in income immediately even if we burn through some of the savings before then.)
I have successfully transitioned from ‘we should go back to work for this financial gain’. (Answer: we don’t need the gain! And retired because hassles outweighed gains!) I have calculated some amount of our savings we could spend each month above our usual income, even if I am widowed tomorrow- max if I go before him and he makes 100, min if he went this year- but haven’t actually verified if we are spending that amount yet. I’ll recalculate soon and will no doubt note that with big purchase (moving with prior home still unsold and less in value than new one) that the amount is lower than before, so we might have risked something had we been doing it! Hmm, and with current market contraction (what? Down to 1-2 years ago? Oh, the horror) I might come up with even lower numbers to fuss about.
Increasing the ‘bond/cash’ (we use CD ladder to try to encourage spending and to avoid bond fund dips when we do spend it) percent of our plan has made me sell some stocks but refusal to increase our tax bill much, and the big mortgage payoff/ chance to restock CDs once we sell prior home, has me depleting the ‘bond’ percent hoping the old house will soon replenish it. Already implemented stopping reinvestment and move all distributions into checking account ASAP. But still get more joy carving months off the new mortgage than with spending other than restaurant meals. Yes I have a problem. Spouse counters it some but he is used to our current lifestyle and letting me manage finances so he is not the counterweight he could be (but he has a boat and a sports car, me I live near my grandbaby now as does he).
Along the lines of we don’t need the $ gain of working, I am throwing money at the sell the old house problem (paying people to get it show ready instead of driving back to do it ourselves) but am hoping not to be confronted with ‘you can actually afford the loss on the sale and then all that worry is gone’ method of spending down our savings. Funnily enough the worry is all financial- “what if the realtor leaves the AC on and doors open and we have a $1000 electric bill?!? what if it burns down?!?”* Hopefully it’ll fall under ‘these people offering less than we hoped for are just made for the place- another crazy organic gardener like you…’ and be a bit like giving your young cousin your old car.
*USAA updated our policy as we moved out, and tried to make me insure it for 100% rebuild- which on a 2+ decades old home is some 160% of the list price in an obscure market where we likely won’t have a bidding war. They let me drop that to 80% rebuild but I still would have to admit if the place burns down that I am well aware that a check for 130% of likely sale price (and a near vacant lot to sell) beats 90-100% of sale price after some months of worrying about the transaction. Lead us not into temptation…
I have understood this differently.
I’ve only been in first class of offered a reasonable upgrade.
But I can envision a day (in the distant future) where I cannot comfortably travel in coach on a long trip. In that case my choice may be too not take the trip I want to take (maybe with family or to be with family), or to pay for first class.
In this case I want to choose to have experiences that are life giving instead of maximizing my portfolio. What is it I am really valuing?
Thanks for the article.
Very true that: “After spending 40+ years careful shepherding leftover earnings into a nest egg, it can be psychologically difficult to actually use that nest egg. ”
A co-worker nearing retirement said he had spent 30 years learning how to save, but once he retired he was going to have to learn how to spend.
I’ve found that having a large cash cushion/allocation in taxable portion of my investment portfolio makes spending easier than having to sell investments or withdraw more than RMDs.
Great subject.
It pertains to me.
I have employed, semi-subconsciously, some of those techniques and they work well.
Your best line, that I will never forget, if I do not fly first class then my beneficiaries will.
If that doesn’t get me spending I do not know what will.
Thanks for the post.
I am still afraid that once I fly first class, I’ll never go back, and for some reason believe I’m going to take so many flights before I die that that will drive me into bankruptcy
I guess i’m not the only one that feels this way. I’m worried first class is like a narcotic that may drive us to bankruptcy. Also, I hate feeling like I’m not getting my money’s worth.
There is an old tv commercial, I think Schwab, with a 40yr old guy on a plane and his 70yr old self sits down next to him to talk about saving and their future. He offers wisdom and then gets up. The 40-something guy asks where he’s going and the 70-something version of himself says “back to first class.”
Always resonated with me, but not sure I’ll ever find it justifiable in my head to fly first class. Happier to spend that money on other things.
That’s a fun ad. I’ll try to find it and use it in a post.
It’s not that great. I get upgraded there from time to time and it’s definitely nicer. But not 4X nicer. Probably not 2X nicer. So far we’re still buying coach tickets.
Wait till you fly international long distance biz or first, day and night difference, you arrive refreshed and ready to explore instead of tired. BTW I didn’t buy the international biz, I was upgraded few times for free or minimal mileage. I assure you, able to sleep flat vs cramped in coach is 10X better…
It better be because that’s what it costs!
I suffer with this issue. I am still working but could easily afford not to work. I like to fly business/first, but at the same time I have a hard time justifying the expense. Typically I will force myself not to follow my old, deeply ingrained invest and save habits, I bite the bullet and buy tickets up front. Heck, we could probably afford to fly private but I just don’t have it in me.
I do not have this elaborate hierarchy of spending sources. All of our spending comes from earned income. When we start SS, that money will be invested, not used to increase spending.
I view everything that shows up as cash in the taxable account as equivalent. Fungible. Dividends and interest in the taxable account get reinvested because we are still in the accumulation phase. That is where I hope to remain throughout my life.
We avoid doing things that reduce our networth, such as paying taxes or fees that we can avoid. So no selling of appreciated assets or taking money out of retirement accounts.
Let’s unpack this
“fly first class or their heirs will”
So I should buy a first class ticket to fly somewhere I DON’T want to go. Why should I do this? In order to prevent my heirs from flying first class to somewhere they DO want to go.
This makes no sense to me.
I could take actions that make both myself and my heirs better off- I stay home, leave the money to them, and they use it on something they DO want.
Instead, it is proposed that I should deprive myself of the pleasure of NOT travelling in order to deprive my heirs of something they apparently will want in the future. Why would I do this? Negative sum proposition.
If someone is happy with their current level of consumption, then it is crazy to increase it by purchasing things they would rather not have.
Think of it as going to a restaurant. I would not check my outstanding credit limit and then order as much food as my card will cover- knowing that all I want is part of one entree. Yes, by spending much more money on food that the restaurant will then toss out, because I don’t want to eat it, I reduce my assets. That will mean my heirs inherit less money.
But why is that a goal?
Buying things I don’t want and throwing them away is the definition of waste. What problem is being solved by this behavior?
Afan-
We all know you’re on the extreme end of the spending/saving continuum. You’ll have some very fortunate heirs. I’m not sure you recognize how unusual your views on this subject are though.
Fly first class or your heirs will does not mean go on a trip you don’t want to go on. It just means if you’re going, buy a first class ticket instead of an economy one.
Fair point. It seems clear that you should NOT be forcing yourself to make a purchase you do not want.
Instead however, you should allow yourself to make a purchase you DO want… and perhaps even when it is an expensive purchase, and even though you’ve trained yourself your entire life to sacrifice up that sort of luxury.
At a certain point, you should recognize that you’ve sacrificed/saved enough… and that at a certain point, additional sacrifice provides only a marginal benefit.
I do feel sorry for people who have such long lists of things they want to buy that no amount of money could satisfy their desires. These people are constantly forced to deny themselves the infinite level of consumption they seek. Each little bit extra they can afford will be spent, on something, in an unsuccessful attempt to satisfy themselves. They can never spend enough to be happy, so they always want to spend more. For me, that would be a painful way to live.
Again my restaurant analogy. Once I have enough food, I don’t want any more. I could afford to buy 3 more entrees, but since I do not want to eat them, there would be no point in buying them. If you have what you want, do not buy more.
I am not a MMM type. I am not living in a shack and hunting and gathering for food.
I live a comfortable life, similar to friends and relatives who have similar or greater assets. Perhaps that is why I do not perceive myself as being deprived. Living a comfortable life in the US is expensive. Fortunately, my comfort does not require, and is not enhanced by, fancy cars, expensive travel, expensive hobbies, expensive food, expensive clothes, expensive toys or the other things that some people prize.
“No thank you. I do not want another 5 entrees. The one I have here is more than I care to eat.”
I don’t buy it Afan.
Everyone has things that they want. I am a practical spender and committed saver as well, but of course there are things I want.
And of course nobody wants 5 entrees. But think about it a bit and you’ll find things you want. Maybe you want an occasional filet instead of a hamburger. Or maybe you want live music at your restaurant instead of a drive-thru.
Or perhaps you want more time with your kids or grandkids. Maybe even a meaningful trip somewhere that both you and your family will find memorable.
Or maybe you want to help others with their challenges. These all require a cost at some level.
Surely there is something you want.
I have understood this differently.
I’ve only been in first class of offered a reasonable upgrade.
But I can envision a day (in the distant future) where I cannot comfortably travel in coach on a long trip. In that case my choice may be too not take the trip I want to take (maybe with family or to be with family), or to pay for first class.
In this case I want to choose to have experiences that are life giving instead of maximizing my portfolio. What is it I am really valuing?
We have been retired 2 years and started buying first class tickets. It has been so worth it. The food is minimally better, the seat definitely roomier but the decrease in hassle factor is where the real value is. No overhead storage issues, board when you want, be the first off the plane, skip the line at checkin, etc. We are fortunate to have oversaved and the better experience is definitley worth it and we don’t regret it for a minute.