Is the quest to “keep up with the Joneses” sabotaging good judgment and preventing successful individuals from building a solid financial future? For many, it is. The ‘I want it, so I’ll buy it’ phenomenon has contributed to short-term opulence that can lead to personal financial disaster in the future. While times might be good now and there’s plenty of money to go around, most people do not know how much they will need when they retire and their current revenue streams drop off. Unfortunately, only a vague, if any, notion exists about this eventuality. As a result, the vast majority does not know how much savings to put away every day, month or year. With awareness, education and planning, there is a way to achieve that level of financial security and still have it all. People just have to know how to do it.
Obstacles to financial security
A subtle, almost invisible peer pressure exists, regardless of social strata and income level. What occurs is that consumers buy things that make them feel good and thereby reinforce their sense of belonging and acceptance. This is the heart of the problem.
First, most individuals don’t know the true costs of those big-ticket items, like a car. For instance, a new $70,000 car, financed over five years at five-percent interest becomes a $79,259 car. After five years, the trade-in value won’t be much more than $30,000. The bottom line? The consumer paid $79,000 for a $30,000 asset. This is one example of the extravagance mindset, which is represented by the conscious or unconscious need for luxury cars, palatial homes, lavish vacations and more. It stems from a conspicuous consumption mentality that dates back to the kings and queens who reigned over empires centuries ago. Today, Americans have adopted the royal mindset, but it’s a costly lifestyle both in the short- and long-term. Few ask the question, “What could the same money spent on unnecessary luxury items accomplish when wisely invested in a retirement fund?”
Second, there is the issue of calculation. Most people don’t know how to calculate future financial needs because they don’t know how long they’re going to live and they don’t know how much they’ll need to survive after retirement. For that reason, even savvy individuals ignore the need for post-retirement investment income. Some incorrectly assume they will need significantly less to live on after they retire, during their twilight years, and therefore don’t worry about reduced income. Others, who may be making $100,000 or more a year today, believe that they can live on $40,000 a year because their expenses and taxes will be lower. In reality, if a person is comfortable living at the $100,000 level, it’s likely that throughout their retirement years, they will want to enjoy more, not less, of their hobbies such as traveling or golfing. It’s also important to note that medical costs rise as people age, which will increasingly draw down discretionary annual income. This is an important calculation to include when looking at how much money will be needed in the future.
It’s time to get realistic. While no one knows how long they will live, everyone knows they will not be able to work at some point in their lives. Therefore, putting off retirement planning can create enormous problems. The longer people have to save, the easier it is. The dangerous alternative occurs when people outlive their money and are forced to work beyond retirement just to make ends meet. A recent Pew Research Center survey finds that 77 percent of today’s workers expect to work after retirement, some because they want to but others because they will have to. Choosing to work after retirement should be a personal choice rather than a financial necessity.
In addition to taking action on retirement saving, agreement between spouses is critical in the area of financial management and spending. A recent Forbes Magazine article, 5 Financial Mistakes That Ruin Your Marriage, says “when a spouse feels the other spends their money foolishly, it increases the likelihood of divorce by 45 percent.” That’s why personal finance discussions are critical. While it might seem almost counterintuitive, couples who buy into a solid plan, review retirement investments frequently, and grow liquid assets increase the likelihood of enjoying their current lifestyle. In fact, worrying about the future creates anxiety and discord, which is not healthy for any relationship.
Steps to achieving retirement goals
What are some ways to enjoy some luxuries in life, not feel deprived, and still achieve one’s financial goals? Here are five tips to ensure financial security and experience peace of mind:
- Create a dedicated emergency fund to cover six months of living expenses. Every Certified Financial Planner (CFP®) agrees that this is the foundation of a good plan. Without it, a life-altering event such as losing a job, extreme medical expenses, major house repairs or other unplanned expenses can have a huge negative impact on a family.
- Practice “conscious consumption” instead of “conspicuous consumption.” It is important for people to ask themselves, “Do I need this or do I want it? Am I buying for me and my ego, or to keep up with the Joneses?” Making conscious decisions that align with plans and goals is essential.
- Don’t equate budgeting to a deprivation diet. Instead, think of operating within a budget as healthy spending and enjoy the sense of comfort and the satisfaction of emotion that come from preparing for a secure financial future.
- Use credit cards for necessary purchases only, and pay off the balance in full every month. It isn’t necessary to eliminate credit cards altogether. In fact, having a healthy credit history is necessary for major purchases like a car or home.
- Make a Certified Financial Planner (CFP®) part of every financial advisory team. A CFP® is licensed through intensive industry testing and agrees to rigorous professional standards that include abiding by the principles of integrity, objectivity, competence, fairness, confidentiality and professionalism. A CFP® helps people by developing an individualized financial plan for each client, utilizing a suitable mix of long- and short-term investments, provides advice on tax strategies and makes recommendations about appropriate types and levels of insurance (e.g. long-term health care, disability, life, etc.). To do this, these professionals analyze individual circumstances, and offer trained, insightful choices for various retirement scenarios. They help clarify what it immediately necessary to create a secure future and work with clients to help them stay on that path.
Do the Joneses really have more?
Many people overspend because it’s enjoyable and offers a sense of wealth and power, even if just for a few moments. But it isn’t a good idea to engage in extravagant spending often. There’s nothing wrong with treating ourselves to a decadent dessert, but most wise people choose not to eat them every day. It’s important to recognize spending limits in the same way it is important for individuals to know their maximum daily calorie intake. Once limits are established, individuals and families need to balance spending and saving every day, every week, every year, and for decades to come. A CFP® helps protect financial futures by keeping track of expenses and income, reminding clients of short-and long-term goals, and keeping people conscious of and accountable for spending and saving.
It’s time for a new financial mindset. Instead of thinking of saving for retirement as deprivation, individuals should say to themselves, “I have a plan. I’m doing this for a better future. I’m saving money and staying the course. I’m saving my marriage and I have money to spend if I really need it.” Knowing that liquid assets are available to pay for things without dipping into savings can be a great ego boost. It’s impossible to know what the Joneses have in their bank account. But when individuals have control over their own finances and are steadily growing their retirement savings, they experience comfort and security that comes from knowing that money will be there to provide for a comfortable and enjoyable future.
Matthew Hutton is a Certified Financial Planner (CFP®) for NBS Financial Services, Inc. in Westlake Village, California. NBS is a comprehensive wealth-management firm, committed to helping clients improve their long-term financial success. For further information, please call (805) 497-2497 or visit www.nbscompanies.com.