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Discovering the Freedom to Spend

The persistent low savings rates among citizens in the United States and the ongoing retirement crisis make headlines regularly. This post is NOT about that.

There is a lesser known crisis - exceptional savers can be terrible spenders. Those who have the gene to save, so-called “Super Savers”, have created incredible attitudes, systems, and habits around the accumulation of money. In fact, they’ve become so good at saving that it becomes challenging to spend later in life.

A recent survey by TD Ameritrade found that Super Savers sock away an average of 29% of their income1 as opposed to non-super savers who allocate an average of just 6% to savings. These folks began saving early, hopefully using some of our delayed gratification techniques, with 54 percent starting an investment program before age 30.

According to this survey, these people are motivated primarily by “Financial security/peace of mind” and “Freedom to do what I want.” As told by one of our Super Saver clients, financial independence and the joy of watching growing balances has now become a “game.” I like this game, but eventually the switch flips and savers will become spenders, either by their own readiness to stop working or out of necessity.

Create a Spending Plan

How does a Super Saver become comfortable spending their hard-earned nest egg prior to or during retirement? The most important step is to create a spending plan. A spending plan is not the same as a budget. A budget is restrictive while a spending plan is liberating. Some of the components of both are roughly the same – income and expenses – but a spending plan focuses on what is possible. A budget is more like being yelled at during boot camp while wearing a straight jacket. Trust me, plenty of people out there need a budget. Super Savers, and those that have experienced a fruitful business exit, simply need a spending plan.

A spending plan examines the long-term potential cash flows from all available sources – savings, investment accounts, real estate, pensions, social security – and then provides probabilities of success at various levels of spending. What you’re left with is a rate at which you can enjoy your wealth with a significantly high probability of success. 

A client recently called concerned about what he perceived to be lifestyle creep. He and his spouse conducted a quick analysis of their monthly spending and found the number had grown. A few more trips, a few more things, a little more living. I could tell this was making them very uncomfortable and he agreed. Given what I know about their financial picture, I suspected this increase in spending would not negatively affect the outcome of their overall plan. After testing the plan and running scenarios, I was correct. They could comfortably spend this additional money. 

Freedom is in knowing. Having a plan delivers a release from the tyranny of wondering. We’ve told plenty of clients they were spending too much. Happily, we’ve also told many they have room to spend more.

Automate Distributions

After a spending plan is established and agreed upon, it’s important especially for retirees to automate cash flows. Super Savers are used to having a steady paycheck and they are accustomed to seeing their account balances grow. 

An automated spending plan mimics the steady paycheck experience by directing all cash flows to one checking account each month. For instance, social security flows here. Net rental income flows here. Distributions from the investment portfolio flow here. Every month, like clockwork, this checking account is replenished delivering close to the exact psychological experience Super Savers have enjoyed during their working years.

Would you believe that many Super Savers on a spending plan rarely use the entirety of their monthly income? Of course! That’s fine because they either adjust after a period of time or the excess allows for a greater buffer later in life.

Leave Room for the Big Things

With a spending plan in place, it would be nice to never think about it again. However, the plan must be reviewed periodically to adjust for changes such as future market return expectations, inflation, and health care costs. It’s not all rainbows and puppy dogs, however. Due to economic forces, there may be times the spending plan must be adjusted down. Those same forces can also cause the plan to be adjusted higher to cover dreams unfulfilled, investments not yet made, kids and grandkids to help, and trips not yet taken. Circumstances change even in the most well-crafted spending plan. 

Super Saver clients typically visit with us prior to making a major purchase. Most of the time it’s after they realize that a lifetime itch needs a scratch. They are looking to us to give them the final word on whether they can pull the trigger in the context of their plan. Often, I get the sense they are unconsciously hoping we’ll say no. Perhaps deep down they want their financial coach to “talk some sense into them” so they can go back to saving and investing. 

Again, we simply run the plan with scenarios that reflect the contemplated spending adjustments and review the impact together. More frequently than you can image, the major purchase does not materially change the future outputs or put the spending plan at risk. The answer isn’t always no!

Live Your Best Life

Transitioning from Super Saver to Spender can be a challenging mental shift. We were engaged by a client many years ago whom we affectionately nicknamed “The Squirrel” for her amazing ability to sock away money. She had done such a good job of saving that it took us two years of working together to get a complete picture of her various accounts spread across many banks and investment companies. She revealed during a recent conversation that when she first retired it was very difficult to adjust mentally to not receiving a traditional paycheck. She’s been retired for four years now and has really found her groove. How could this Super Saver make such a wholesale shift from master accumulator to joyful spender? 

In her words, she turned the corner by having regular meetings with us to review “the charts and graphs” which demonstrated the reliability of her spending plan. She also knew in those early years that she was spending less than the plan dictated which gave her time to gain confidence.

Now she has become comfortable spending on major travel, is moving to her dream neighborhood, and has even helped her son with a down payment to purchase his first home. All this is possible because she created a plan and set up a system to be successful.

It may seem counterintuitive to hear an investment advisor advocating increased spending. However, we derive our happiness from yours. While we watch and discuss markets daily, we don’t benchmark our success to the S&P 500. Our benchmark is the accomplishment of your goals. If you live your best life, we all win.

Yes, Super Saver, you too can find the will to spend and perhaps indulge. We can help. 

What major purchase have you been holding off on? What dream of yours is left unfulfilled? Come talk to us. Share your dream in vivid detail. It’s not about dying with the most money and you might be surprised by the things you can do while still maintaining your financial peace of mind.

Happy Planning,

Brian


Further reading and sources

1. https://www.businesswire.com/news/home/20190327005057/en/Secrets-Super-Savers-Revealed