More than 15 years ago, some colleagues and I were talking about how effective we were in building our savings. We were all making a good living, but some were more successful in building their net worth than others. One colleague – a single guy with a snappy car – mentioned that he started out being a good saver, but had recently been spending too much and needed to put himself on an “austerity plan”.
In contrast, I said that my wife and I needed to do the opposite – go on a “frivolity plan”. A financial advisor told us we were likely in the top 1% of all savers – and that we would have plenty of time to save what we needed before retirement. His surprising line of thinking was that we shouldn’t sacrifice the present for the future and could begin spending more on the here-and-now.
Needless to say, we didn’t listen (we also didn’t make him our advisor). While we certainly have enjoyed our share of luxuries along the way, we maintained an extremely high savings rate – probably between 70-80% of our income over the last 15 years, once you factor in the value of deferring the exercise of stock options. That’s obviously a very high rate and it paid off with our ability to retire to an enhanced lifestyle before we turned 50.
That said, our austerity plan seems now to have followed us into early retirement. I just read this article from Jane Bryant Quinn who reports on this exact phenomenon. She notes that while “everyone praises the habit of thrift,” when it comes time for long time savers to start spending, “They can’t do it. They’re so used to thinking of savings as sacred that they don’t touch the money, even if it crimps their retirement style of life.” Jane Bryant Quinn is my absolute favorite personal finance writer and she perfectly captures the notion that “some die-hard savers stay thrifty for too long.” We just have a hard time breaking into those piggy banks we spent so much time filling.
I just did a quick estimate of our spending for the year and find us coming in a little less than what we spent last year. We were supposed to be enjoying ourselves and spending more, especially since our investments have done well and we’ve picked a little fun money through some consulting & board work. While our spending only includes one-fourth depreciation on an almost new sports car – a definite splurge – our annual spending in retirement isn’t higher than any of the last five years. It’s a little less actually. I showed my wife the math I had on this (we use Mint.com to track spending) and she was as surprised as I was.
Here’s a chart based on US Federal Bureau of Labor Statistics data from ThinkAdvisor.com that shows the direction that spending typically goes over the course of one’s retirement:
So looking at this, isn’t it time for a frivolity plan? I thought so, until I started researching possible winter vacation destinations. I couldn’t believe how expensive every place looked. I thought: Who are these people that splurge on a week at the Atlantis in the Bahamas? Who are the people that book a suite on a Caribbean cruise line to southern islands? Who are the people that book an all-inclusive resort in San Diego in January? I had definite sticker shock. I humbly told my wife I didn’t think could afford any of these vacations. After all, going to sunny climates in the middle of winter means paying full fare.
It was bullsh*t. Again, I was naturally falling into the same thrifty habits that got us to early retirement. After revisiting the travel framework that I set up prior to retiring, I was surprised to see that we were fully budgeted for any of these trips. I guess I’ve been so focused on saving & austerity, I forget that we are now supposed to be spending more.
In retirement we are supposed to be enjoying the literal fruits of our labor – so I guess we better get our act together and start indulging a bit. It’s finally time to take the advice that financial planner gave us more than 15 years ago!
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