Ready For Retirement
Ready For Retirement
This is the Biggest Way People Waste Money in Retirement
Meet Sarah—a retiree with a multi-million-dollar portfolio, no mortgage, and all her income needs covered by Social Security. Yet, she hesitates to furnish her newly expanded home, fearing it would “waste” money. In this episode, James unpacks Sarah’s story to explore why so many of us struggle to spend, even when we're financially secure.
James explores concepts like:
- The Purpose of Money: Money is a tool, not an end goal—it’s meant to be exchanged for experiences and joy.
- Diminishing Marginal Utility of Wealth: More money doesn’t always bring more happiness, especially as wealth grows.
- Time vs. Money: Time becomes more valuable as we age, making it critical to use wealth meaningfully.
- Mindset Shifts: Frugality that builds wealth can hold you back from spending in alignment with your values.
- Future Self Perspective: Align today’s decisions with the life you want in retirement to avoid future regrets.
This episode challenges traditional views on retirement spending, encouraging listeners to shift their mindset, embrace their financial freedom, and focus on living a fulfilling life.
Questions answered:
Why do we sometimes struggle to spend our money, even when we have more than enough to meet our needs?
How can you reframe your mindset to align your spending with the life you truly want to live?
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Timestamps:
0:00 - Wasting $ on furniture?
1:59 - What money is
3:26 - A different view of "waste"
5:30 - Diminishing marginal utility
8:49 - Consider what serves you
11:45 - An example from Charlie Munger
14:58 - Audit your decisions
17:04 - Consider your future self
18:55 - Conclusion
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I was talking to a client the other day and this client has done a great job of saving and preparing for retirement. They have all their income needs met by social security. They have a multi seven-figure portfolio a few million dollars in their retirement portfolio. They're perfectly squared away. They can meet all their retirement needs and then some. This client had recently done a home addition. They'd expanded their home and they were talking about furnishing it. Now, for our perspective, I think most of us would consider home furnishings more or less an essential expense. Sure, you can live without it, but kind of essential, kind of something that you need for a home, especially if you can afford it. Now, I was talking to them about this and they shared with me. They said we're struggling with this because we don't want to waste money. Now I'm going to remind you, this client had a few million dollars in their portfolio. Their social security needs met just about all of what they needed to spend in retirement. They don't have a mortgage on their property. Yet they were struggling to furnish their home because it felt like a waste. So I was thinking about this and I wanted to record an episode both with what I shared to that client as well as just higher level principles. Now, as we do this, today's episode has very little to do with numbers. It's attached to numbers, but more so, incidentally, this has little to do with the actual numbers, the actual nuts and bolts of preparing for retirement. Instead, it has everything to do with our mindset in retirement.
Speaker 1:This is another episode of Ready for Retirement. I'm your host, james Canole, and I'm here to teach you how to get the most out of life with your money. And now on to the episode. And today's episode may hit home with a lot of you. Some of you may not be able to comprehend how anyone could think or feel some of these ways that we're going to be talking about, and that's okay. But for those of you that it does hit home with, I want to reframe the way a lot of you think about your portfolio, the way you think about retirement and maybe even the way you think about your life to a lesser degree, because I'm going to go back to this client and this client story of we don't want to waste money. None of us want to waste money. We don't want to waste a precious resource. It feels irresponsible, it feels wasteful, it feels scary, even, especially if we have the scarcity around money and not necessarily knowing where the next dollar is going to come from. So waste can be a very bad thing. But here's what I want to unpack a little bit. I want to start almost from a first principle standpoint of reminding us all that money itself does not have any true intrinsic value itself. Now, before you go there, this isn't a conversation, this isn't a podcast episode about fiat money versus gold standard. That's typically where people go and they talk about store of value and what's actually backing money.
Speaker 1:No, when I say money doesn't have any true intrinsic value itself, what I'm saying is that money is simply a store of value in a medium of exchange. What do I mean by that? Well, let's assume that you are a software engineer and you want to take a trip to Hawaii. You're not going to call Hawaiian Airlines and offer your services in exchange for a round-trip ticket. No, that's what you offer money for. Money is an exchange of value. You are going to get paid by your employer to the extent that they value your services. As a software engineer, you're going to get paid in money. That money is a store of value, and then you exchange it for things that you want, in this case, a flight to Hawaii. Now, that's a very basic and simple example.
Speaker 1:But what do I mean by that? The money, in this instance, is simply a store of value and it's a means of exchange. It's a medium of exchange. So here's the problem. That sounds obvious, so obvious that some of you are thinking that this is maybe the weirdest episode I've ever recorded. Well, I state that because the problem is, when we go from thinking of money as a store of value or an exchange of value, we wrongly begin to think that money has value in itself. So we must remember that money has no intrinsic value outside of what it can be exchanged for.
Speaker 1:So when my client told me, she says I don't wanna waste money, this is what I told her. I'm gonna call her Sarah. I'm gonna say Sarah, you know what? You are actually wasting a tremendous amount of money by not furnishing your home with the furnishings that you want. And here's what I mean by that. Your money balance is going to continue to grow. Your seven-figure portfolio, your healthy seven-figure portfolio that's likely to continue growing for the rest of your life because you're not going to need to spend all that much of it to meet your needs. Your seven-figure portfolio could very easily be an eight or even multi-eight-figure portfolio by the time that you retire.
Speaker 1:And from that standpoint, you have preserved your money, but you have wasted it. In my opinion, you have wasted it because you never actually exchanged it for the goods and services. You never actually exchanged it for what you wanted. So by not quote unquote wasting your money on these furnishings, you're actually wasting a significant amount more money because, as we run your projections, you're more than likely to not only meet all of your needs throughout retirement, but have a big, giant portfolio left at the end of it. And if that portfolio simply goes with you, if we go back to money and its actual purpose of being an exchange of value, you never got to exchange it for anything. You worked for it, you saved it, you invested it, you grew it, you did all those things right until it actually came time to use it.
Speaker 1:And if we think that money itself is the be all, end all and that has value in of itself, we've missed it, because its value, again, is only in terms of what we can exchange it for. What we can exchange it for in terms of experience, in terms of things, in terms of giving, in terms of things that we can do to increase our quality of life and the lives of those around us. So that's what I shared with Sarah. I said, sarah, I know you don't want to waste this money. I am encouraging you to do what, in your mind, is a waste, because if you don't actually spend any of it, that will be the true waste. That will be the true waste when you pass away, hopefully sometime distant in the future, and realize that none of the things that you wanted to do were actually done because you had so much trouble spending it.
Speaker 1:So this transitions nicely into two points that I want to make in today's episode, and these points come down to the diminishing marginal utility of money. If you've ever taken an economics class, you remember talking about diminishing marginal utility. So there's two reasons for this. Number one wealth has diminishing marginal utility. What does that mean? As you acquire more money, the additional satisfaction or benefit you gain from each additional unit of money. So call each additional $100, $1,000, $1,000,000, that decreases. Now this makes sense. We all know that if you're making less money, if you get a little bit more, it feels way better than if you're making a lot of money and get a little bit more no-transcript, that feels really big and the importance of saving that and preserving that and growing that is pretty significant in this example. But if you're making $500,000 a year and you only need $50,000 to live, someone handing you a $100 bill is a nice gesture but it's not going to change your life in any material way. That's because of the diminishing marginal utility of those dollars. This is the principle that as your wealth grows, each additional dollar saved, each additional dollar received, has less and less marginal impact. Now here's the thing Many people who are wealthy today, many people who are retiring today, they are approaching retirement with almost this learned frugality.
Speaker 1:Meaning when they first started out in their careers they weren't necessarily wealthy. In fact, many of them are far from it. They weren't wealthy but they lived frugally, they lived within their means, they prioritized saving, they prioritized investing and they learned this mindset that you must save and you must live frugally. There's nothing wrong with that. But as they get older, as they approach retirement, as that sense of scarcity lessens, that mindset stays the same.
Speaker 1:I've told this story before, but my grandma she's in her 90s now and she grew up in the depression. Now she always finishes her meal. I've never seen her not finish a meal. And a while back we were getting dinner at my parents' place and my grandma was there and you know we'd all finished our meals and we were kind of moving on to other things and my grandma Jean, she was still there finishing her meal and I, in kind of a tongue in cheek way, said, hey, grandma Jean, when was the last time you didn't finish a meal? Kind of just a fun jab, a fun poke at her doing that. And she took the question seriously and she said oh, you know, I think it's probably actually been since I was a little girl you know maybe 85, 90 plus years that I haven't not finished a meal. And it blew me away because to me it's no big deal if I don't finish a meal, okay, I get a meal, I eat what I want. If I don't want the rest of it, I don't eat it.
Speaker 1:But to her, growing up in the depression, growing up when food was scarce, growing up when you didn't know when your next meal or where it would come from, of course you finished your meal. The importance of that was enormous. Now, by the way, kind of a side note, this can pass on generations. I remember as a kid my dad, who is my grandma's son. He would often say waste, not, want not. Never thought much of it, but I got to believe that that's something that came from my grandma and my grandpa and their generation of growing up. In the depression, it was so important not to waste money, not to waste food, not to waste anything. So I want to go back to this term waste. Waste is somewhat relative here and we're going to see that as we continue to explore this.
Speaker 1:So my grandma's mindset around food was you don't know where the next meal is going to come from. Therefore, you need to eat everything. Well, now she does know where her next meal is going to come from. She is in a position where that's not necessarily a concern or a fear that there's not going to be food the next day. However, she still eats everything, not from a gluttonous standpoint, but from the standpoint of this is scarce. I must preserve it. Now.
Speaker 1:This reminds me of a term or a saying that I've been hearing a lot more, maybe over the last five to 10 years. I don't love it all the time, but there are certain instances where I think this term makes a lot of sense. It is the term or it's a saying, that you should cut out whatever doesn't serve you, out whatever doesn't serve you. So I'm going to borrow that saying for a second. For my grandma, when food was scarce, when it was the Great Depression, eating everything really served you, because you didn't know where your next meal was going to come from. You had to eat what was in front of you. That's what best served you.
Speaker 1:Today, knowing where her next meal is going to come from and continuing to eat everything, I would argue she might disagree, but that no longer serves her. There's no longer a need to do that. At one point, that mindset was helpful and it served her. Once that basic need was met, it no longer does. Now.
Speaker 1:Why do I tell that story? I tell it because I'm going to relate it to the attitude and the beliefs a lot of people have around money, even if these are subconscious attitudes or subconscious beliefs. Early in our career, we think I need to cut out eating out, I need to cut out vacation so we can save. Or we think don't waste money so we can save, or we don't spend money foolishly so that we can save. Now that served you. It allowed you to get ahead, it allowed you to save, it allowed you to invest, it allowed you to get to the position where, like my client, you can be in your 60s with a few million dollars and have all the money that you need to maintain a comfortable lifestyle. So that mindset once served you.
Speaker 1:But now that you've saved, now that you've built, now that you're financially free, that mindset maybe no longer serves you and in fact, it might actually backfire, backfiring for the reasons that I stated before, that by not quote unquote wasting money on things today, there's going to be much larger waste where, in the future, you end up passing away with a lot more money than you know what to do with because you didn't know what to exchange it for, because you didn't properly value that money and the context of what it could do for you. So that's one of the principles that I wanted to talk about today that we need to understand the diminishing marginal utility of money. This isn't just an economics term in a textbook. This is very real and I see it a lot that people who have grown their wealth, that have saved that, have done well. It's difficult for them to spend. It's difficult for them to feel like they can spend money because it feels wasteful, because back in their early 20s or 30s or 40s even maybe, it was wasteful, but now they're in a completely different position and if they're not spending that money, that's money that's ultimately going to become wasted. Now the second thing is this as we talk about the two core components I see with the diminishing marginal utility of money, the first is just wealth. As wealth increases, the value of money decreases to us, or at least the value of the next marginal dollar decreases to us. The second has to do with age Charlie Munger, warren Buffett's business partner.
Speaker 1:He died in November of 2023. And when he died, he was worth an estimated $2.6 billion. Now, I'm not going to say that Charlie Munger wasted $2.6 billion when he passed. I know he left some to charity, some to family. I have no idea what that was like or any of the actual details around this, so I'm not going to go so far as to say he wasted it. I do not think he did and I don't know much about his personal life, but what I do know is this Shortly before he died, he sat down and did an interview and in that interview they were reflecting on Charlie Munger's life and with a tinge of sadness in his voice, he said I would have paid any amount of money to catch a 200-pound tuna when I was younger.
Speaker 1:I never caught one. There are things you give up with time, end quote. And that seems simple enough. But as Charlie Munger a billionaire who's accomplished a ton over the course of his life and lived to the ripe old age of 99, as he was thinking back on his life, it wasn't this giant pile of money that he valued, it wasn't this $2.6 billion. What he valued was this experience, or really that lack of experience of seeing what I would have done to catch a 200-pound tuna when I was younger. Now, in that moment, how much of his $2.6 billion fortune do you think he would have paid to have his health, his strength, his vitality to go catch that tuna Heck, to even be on the boat to go watch other people catch that tuna? I think it's 1 million, 10 million, 1 billion? I have no idea, but I do know that it would be a lot.
Speaker 1:So, going back to my client conversation, they said they didn't want to spend money on furnishing their home. They feel like it would be a big waste. I get that, but let's compare this to the Charlie Munger case. All he could think about a few weeks before his passing was I wish I would have had. This. Experience had nothing to do with how much money he had or didn't have.
Speaker 1:For my client I said let's assume that you don't do this. Let's assume that you don't waste this money on furnishing your home and you live a great 30, 40 plus year of retirement and one day, as you're getting close to the end, you look back. Are you going to be really happy that the money you could have spent continue to stay in your portfolio? And now you have several million dollars in your portfolio that you're never going to have any use for. Or are you going to look back on that and wish you know what? I wish I had spent the money to furnish the home. I wish I had created that environment. That would have been good for me and my family. I wish I had created that environment where we could live the course of our retirement happily, to host, to do whatever we want to do, whatever is most important to you. Which are you going to regret more? My guess is that at that time the bigger waste will feel like not having spent it. We'll feel like the missed experiences. We'll feel like the things that you could have done but you didn't, for fear of wasting dollars when instead you wasted experiences and quality of life.
Speaker 1:So as we get older and as we get more money, I would argue that money has less marginal utility. It becomes worth less and less to us, but time is the opposite. As we get older, time becomes worth more and more. So one key principle here that's slightly unrelated but I think mostly related to what we're talking about, is that while we learn to overvalue money over the course of our working lifetime, we also, in a way, learn to undervalue our time and the precious resource that it is. And when I say learn, I'm not necessarily saying it's a good thing. I think it's a bad thing in this case. So what can we do about it? Well, my takeaway here is how can we audit our decisions? How can you look at yourself almost as if you're outside of yourself? It starts by becoming aware of the decisions that we're making. This goes for all aspects of our life. But become aware of the decisions that you're making and ask yourself why do you continue to make those decisions? Are they? To use the term I used before, are those decisions serving you, or did they maybe once serve you, but they no longer do so? Take it a step further Not only are they serving you, but maybe are some of those decisions actually in direct contrast to the life that you say you want to live. So that's the takeaway, and the solve, I think, is this Benjamin Hardy is a great author that I learned a lot from.
Speaker 1:He talks a lot about viewing yourself from the perspective of what would your future self say. He has a quote from one of his books. Let me read directly. He says quote your actions come from your identity. When your identity is rooted in current commitments rather than your future self, your actions are weak and unaligned with your goals. The only way to realize your future self is to be your future self now. Now that quote, outside of the context of what he had been talking about in the book, may not mean a lot, but I'll try to summarize to the best of my ability and I'll use myself as an example. I will look at myself and say who is future James? What's his relationship like with his wife? What's his relationship like with his kids? What is he doing to live out his personal values. Then I'll look at my current self, the current James, and what I do today. I'll say am I prioritizing the types of things that will lead to that type of a relationship with my wife, that will lead to that type of a relationship with my kids that will lead to that? You fill in the blank. Whatever outcome is desired, is my life on the right trajectory? I think we can do the same thing when it comes to retirement.
Speaker 1:When we look at our future self, psychologically it's like a completely different person than us. So if I was to go back to my client, we're going to call her Sarah. Sarah, look at your future self. Are you going to be happy that you have a few more dollars in your portfolio but didn't have the ability to furnish the home, to create the environment that you want to live in? Is that what your future self would be glad that you did? Or would your future self say you know what, sarah, I really wish you had spent some more money to furnish that home. I really wish you had spent some more money to do these things that would have led to the types of memories and type of fulfillment that I, as your future self would advise you to make.
Speaker 1:So when we can start to think of ourselves as those two different people, both our current selves making the decisions today, as well as our future selves helping us to prioritize those decisions, that can become a very effective exercise. So, as we think about money, as we think about retirement, you want to retire, you want to travel, you want to volunteer, you want to play, you want to do these things. So why are we so concerned about wasting money if and this is a big assumption, of course if we have already the means to do everything that you want to do? So, as we think about this, this episode may mean nothing to a lot of you. You might say James, I have no problem spending money on the things that I want to spend money on. Others of you, I know are probably saying at least, james, you know what? Me and Sarah, we probably have that same issue. We've done well, but that mindset that got us here isn't going to get us to the next level. What got you here isn't going to take you to where you want to go.
Speaker 1:One of the best things you can do for this is probably just journal Audit your decisions, audit the things that you're doing, audit where you want to be in the future, or at least write down where you want to be in the future and see if there's congruence. There Is where you want to be. Keep that in mind, or get that in your mind. Are the things that you're doing today moving you closer to that version of yourself, or are they moving you further away? This applies to more than just money, but of course, this is a podcast. This is a message about retirement and how we can make it the most meaningful, enjoyable time possible. So that's a wrap for today. I hope that was helpful.
Speaker 1:I know this is a little bit of a non-traditional topic in the sense that it doesn't actually have to do with the numbers, but it doesn't matter how much the numbers work out. It doesn't matter how much you're doing in terms of tax strategy or how big your portfolio is or what your income strategy is. If you're not doing the things that you want to do to create a meaningful retirement, none of that actually matters. So this actually becomes a foundational piece of retirement planning is making sure that we're viewing money in the right way, in the proper context, to ultimately get the most out of life with our money. That's it for today. Thank you, as always, for listening, and I'll see you next time.
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Speaker 1:Nothing in this podcast should be construed as investment, tax, legal or other financial advice. It is for informational purposes only. Nothing in this podcast should be construed as investment tax, legal or other financial advice. It is for informational purposes only. Thank you for listening to another episode of the Ready for Retirement podcast. If you want to see how Root Financial can help you implement the techniques I discussed in this podcast, then go to rootfinancialpartnerscom and click start here, where you can schedule a call with one of our advisors. We work with clients all over the country and we love the opportunity to speak with you about your goals and how we might be able to help. And please remember, nothing we discuss in this podcast is intended to serve as advice. You should always consult a financial, legal or tax professional who's familiar with your unique circumstances before making any financial decisions.
