Ben Stein was on Consuelo Mack's PBS show over the weekend in a short interview that had a couple of great, albeit simple, tenets for financial planning.
The nature of the interview was such that Consuelo seemed to cut him off continuously but he got some good big picture stuff out there.
He talked about equilibrating (I had never heard that word before) consumption and income over ones lifetime so you don't "wind up broke."
The other important (to me) point that he made was that "liquid assets equals freedom." He used that phrase several times and then went on to talk about the importance of saving. He quoted his father as saying liquid assets equals security and living beneath your means equals freedom. He also said that every time you buy into a fund (or whatever) you are buying freedom and there is nothing more important than buying freedom.
I have been trying to convey similar ideas since the start of this blog and trying to live this way for even longer. I have only had a couple of occasions to have the live beneath your means conversation professionally (I manage portfolios, I am not a financial planner) and I am no good at compelling people toward understanding this to the point of making better decisions.
One argument that came up in the comments and that came from a client who doesn't read the blog is that people are more active in their 60s when they first retire and slow down as they get older. This makes sense but medical expenses go up a lot as people age too, an awful lot. The notion of slowing down the activity/spending assumes a certain amount of discipline. Some will have the discipline and some will not. Anyone thinking they will spend less on activity when they hit 70 needs to have a long look at themselves in mirror to make sure they can follow through.
My thinking is probably quite limited here but when people talk about being active don't 95% of them mean traveling? I have a couple of thoughts on this that will probably go over poorly. One is to take a couple of trips-of-a-lifetime before you retire while you are still making money.
The other thought is spend a little less when you go. With a little time spent researching you can find great places to stay that are not expensive. A couple of $20,000 cruises a year can be a killer.
As for saving; I have written a couple of times about studies that say people save too much because the brokerage firms scare them into saving more than they need to collect more fees. I'll save less, that'll show them!
If you have no bills to pay (here I mean only one car payment instead of two and having less mortgage than you could otherwise afford), have a lot of money saved, or some combination of both you will be able to weather almost anything which I think is the type of freedom than Stein refers to.
16 comments:
Roger said: "With a little time spent researching you can find great places to stay that are not expensive."
Quite right.
"Working stiffs" around the world, especially Americans, do tend to splurge when on vacation. The amount of over spending is a function of the brevity of the vacation. The "I have only 10 days of vacation a year so I am going to enjoy it no matter what the cost" syndrome.
Before my daughter started school, we travelled around the world for four years (2000-2004). Our all inclusive year round cost (including airfare, accommodation, car rental, meals, etc.) was in line with what we spend being home (~ $50-60K). Travelling for longer periods of time, brings down many expenses. For example, when you stay longer in one place, you can rent houses or apartments instead of being in a hotel. This also means you can cook at "home". You can also purchase "round the world" or "special circuits" which are much more cost effective than buying regular round trip tickets.
Most importantly however, staying at one place for an extended period of time while renting accommodation within a community provides you a cultural experience that is impossible to have lounging at the poolside of your hotel sipping margaritas.
This is a value issue, perhaps more so than pragmatics would suggest. When I hunker down I experience an intrinsic reward. To an extreme, this is what Scrooge experiences and I know many of my parents' generation(now in their 80's and very wealthy) who enjoy frugality. This is how I was raised. Cultural imprinting. I was taught to pass on capital plus some to the next generation. Leave the family treasury a little better than what was bestowed to you. Ironically, I am just coming to terms with a discrepant reality. My mother and only living parent loves to pamper herself beyond her means. When I look at her spending habits she will exhaust it all and certainly aid the economy. The heart of this issue I think resides in how poorly our society is coping with extended life cycles. Huge amounts of assets is disproportionately applied to medical expenses and plush nursing homes that do not lead to well being or fulfillment. Depression, isolation, fear, and anxiety can't entirely be bought off. Money, though, mistakenly, helps to create choices.
Sounds like Ben was borrowing from Milton Friedman's Permanent-Income Hypothesis.
http://www.ingrimayne.com/econ/FiscalDead/PermIncome.html
What I spend now should be a function of what I make over my entire lifetime, not of what I'm making today. If I know my entire expected lifetime income, I can "smooth" out my consumption by saving when I make a more (working years), and spending savings when I make less (retirement).
Seems like a pretty good idea, no?
I agree with Roger's comment about travel. I'm about 2 years from retirement (I hope) and just returned from our first 2 week vacation, having visited Colorado-Wyoming-Utah to see sights my wife has always wanted to visit. Definitely worth it. I'm not sure we can do as much in retirement. Nor is our health likely to be as good.
The comment about the economy and quality of long term stays is a great one, too. Just compare the weekly costs for a rental home or condo at the beach to renting monthly in the "shoulder" seasons, when Spring is blossoming, or Autumn is quietly coloring the world. We hope to do that after retirement, while we can still enjoy it.
These are great comments. Renting an apartment of some sort is cheaper and is available all over, we did this in Iceland four out of five nights.
Further, having a kitchen or not having to eat out for every mean also makes traveling cheaper.
The shoulder season tip is a good one too.
MattyP chances are Friedman wasn't the first person with the sentiment but it stands up nonetheless. THanks for the link.
Jey,
The idea of spending a month or two in a place sounds great to me, please email my wife with this idea, lol. Dogs=no can do for us.
I try to live by the Millionaire Next Door attitude. I have always lived below Madison avenue's thoughts on what is hip. I hate to say it, but I have sweat shirts that are 15 years old. You'd think that I'd be sitting pretty, but the fact is everything is getting expesnive and with Milk approaching 5 dollars a gallon its getting tough to save. Oh...and then throw in 3 kids that all think they need the latest Gameboy DS......kids....can't live with them...and you can't leave them by the side of the road.
15 year old sweatshirts, LMAO.
A few years ago my wife made all my fraternity shirts and beach volleyball tourney shirts into a quilt so I would never wear them.
This is right up my alley.
Yup....actually 16 years old. Its Sweat Shirt from Champs in Albany NY, which I picked up while going to college. It says Notre Dame on the front.
RUDY RUDY RUDY RUDY...
I kinda feel like the rudy of traders. I've been trading since 1997 and once of these days I'm hoping to be on the field with the big boys, even if its just for 3 plays :)
Some very good suggestions and observations.
Roger said: "Anyone thinking they will spend less on activity when they hit 70 needs to have a long look at themselves in mirror to make sure they can follow through"......
Here's one view from the mirror:
Roger, I am halfway between 60-70 and have experienced a big drop in my options for traveling and retirement activities.. Once a runner - now I walk, hike the Grand Canyon - how about a stroll along the rim, camping and backpacking are no longer an option. Do you see the trend. My options are being limited and when I am 75 they will narrow even more.
Of course health issues will increase but I am banking on Medicare and my gap insurance to cover most of the costs. Hopefully this will not be a budget breaking time of my life. All I can envision is that I will have fewer optiions to spend my retiement $ - yes mainly on traveling. I forsee shorter less costly travelling in my 70 & 80s. If by chance my health remains stable lthen I will have to carefully budget my trips and follow some of the above worthy suggestions. But I still submit to you that retirees, when planning their retirement, should at least consider spending a litttle more of their assets in the early years when you can physically enjoy them. Of course one should not overspend and put your retirement at risk, but a little splurge (trip of a life time) from my perspective is justified. Especially when you have decent health that allows you to enjoy it
Taking those dream trips early is a worthy suggestion but IMO not an option for most due to time constraints of family and work.
Hoping for RAIN From the north end of Walker,
Ed
Ed made some good points. We are young (60 and 53) and seven years into retirement. I follow closely what Ben Stein and Ray Lucia preach for retirees. Ben is a consultant to Ray Lucia these days (among all his other jobs). We budget each year based on about a 4% drawdown of our assets. However, within that 4% I heavily tilt our discretionary budget toward more expensive and active travel NOW while we are still relatively healthy and young. We are getting ready to leave to go Helicopter Hiking in the Canadian Rockies for a week or so. I don't envision spending this kind of money on trips with this activity level in another 10 or 15 years. At that point I'll probably have to budget more for medical expenses and less for travel. My point is to 'go for it while you can'. Yes, it requires some discipline not to totally blow your budget but, to my way of thinking, there's no sense getting to the end of your life with lots of regrets for not having done things.
I'm 74, my wife is 73. I've been retired for 14 years. We took a lot of trips in our 60s - hiking in Europe twice, safari in Kenya and Tanzania, a month long tour of Spain and Portugal, many trips to Canada and Hawaii, which included hiking and fishing.
For the last five years our trips have been less active and we do not enjoy long airline flights. (Although we flew non-stop to London [9 hrs.] last year for our 50th wedding anniversary. Two years ago my wife developed a chronic ankle problem, which required surgery to fix.
We both enjoyed doing gardening and home maintenance, but we have now decided to move to an over 55 active community where we can do as little or much work as we want. Our trips now will be driving to nice places in the U.S. and Canada or an occasional cruise if we don't have to fly long didstances to connect to the cruise.
Our energy is less, we are creakier, and sleep no longer comes as easily. We are extremely happy we spent the money for all those wonderful trips we took in our 60s. It took some budgeting, but the 90s bull market helped our finances a lot.
We may have 7-10 more years when we can travel but it will be less ambitious as each year passes I'm sure. We seem to be in pretty good health for our ages and, if we're fortunate, we may have 20 more years ahead.
My pension and social security pay our bills. Our investments are 40% equities and 60% fixed income. Our required minimum distributions from IRAs are our travel and "mad" money. We seldom spend it all, so we put what's left over into a fixed annuity or a closed end muni fund.
Ed and Retired in Prescott, we should meet at the Raven for coffee sometime.
This thread seems to be evolving into a discussion about balancing this stuff out. Balance is a good thing; yin and yang if you will.
Jimmy, thank you for the candor.
One thing also evident in all the comments is that very rarely will two paths be the same.
One thing that might be overlooked by all of us is the really wealthy, which might be some of you, can do whatever.
Also the fact is we are all adults and ultimately accountable for these decisions we make.
Great conversation.
Scott Burns and Laurence J. Kotlikoff
have written about "consumption smoothing". Essentially what they say is income and outgo vary greatly at different points in your life and traditional financial planning don't take these changes into account but that they should. And not doing so skews planning and potentially reduces the standard of living.
I've never used the tool because I didn't want to pay the $200, but it could prove an invaluable for a variety of practical real life scenarios.
http://www.esplanner.com/
http://www.dallasnews.com/sharedcontent/dws/bus/scottburns/readers/stories/consumption.58f007ab.html
Roger,
If I remember correctly, you also had a second blog "Random Roger's Retirement Planning" - am I correct?
Why not restart it? I think that I speak for many retirees who would appreciate more of your perspective and thought provoking ideas. If this is not possible why not make a "Retirement related Post" a weekly event.
The Raven ?- how about your place so we all can cool off. This is the hottest summer in Prescott's high country that I can remember since 1994.
Think RAIN! But for your sake no lightning.
From the North End of Walker
Ed
a symposium of sorts?
as for the other blog, my work load has increased a lot and seems poised to keep growing (generally a good thing) which taxes my time for new things.
Roger, As I type I am hearing the sound of thunder. Looks like the monsoon has arrived.
Well, I finally watched the Stein interview and your summary was spot on. Thanks for bringing it to our attention. Loved his comment "liquid assets = freedom". But could have used more of an explanation in that area. He continually emphasized living beneath your means. A worthy suggestion. In his own words he described a retiree as living "a quiet, pleasant life". No dream trips for him
I would like you to comment on his "lazy portfolio" style of investing - mostly ETFs and variable annuities. It appeared very broad based and should be sufficient to grow into a decent sum but will never hit a home run. It mirrors his philosophy of living beneath your means.
A symposium? A lively topic for us retirees would be appreciated -since we are limited to a quiet pleasant life as we sit in from of our PCs & watching CNBC. (humor attempt).
From the North side of Walker
Ed
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