Underspending Paradox

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Florida Orange
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Re: Underspending Paradox

Post by Florida Orange »

meadowrue wrote: Fri Mar 29, 2024 8:12 am I think the demise of the pension (for most, not all) has been a net negative because when people know they have monthly regular income that they don’t directly manage, it takes the fear of running out of money and/or mismanaging the money you’ve saved out of the equation. No matter what, that monthly check will come in. Now that the majority of retirement savings have to be self-managed (or given over to a financial advisor, annuity, etc.) the fear of getting it wrong and losing that monthly “check” leads some, I believe, to hold tighter to the purse strings than they would if they had a pension. I believe I read somewhere that retirees with pensions are the happiest retirees.
This is me. I'm retired and I have a very low withdrawal rate because I don't have a pension so I can't risk running out of money. It's a good problem to have, but it's still a problem. I could probably spend a lot more and still be ok, but I just don't want to take the chance.
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Watty
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Re: Underspending Paradox

Post by Watty »

Underspending Paradox
There are a couple of big reasons that some people now have more in retirement than they need.

1) In the 2008 financial crisis the stock markets did not hit their low until March of 2009 which was only 15 years ago. Even then it was not at all clear that it would not continue to get much worse and maybe be something like the great depression. I was still working then so at least for me that caused me to crank up savings some and save more.

2) There have been a few dips but since the market low in March of 2009 when the S&P 500 was at 677 the S&P has increased to be about 5,250 which is a spectacular return over 15 years and that does not even include dividends. I retired in 2015 so that worked out very well for me especially for the new money that I invested between 2008 and 2015.

The reason that many people have more in retirement accounts than they need now is not that they over saved or that they are being overly frugal it is just that their investments have done much better than could have reasonably been expected.

3) When saving for retirement you also need to keep in mind that you might not be able to worked until your desired retirement age. I have seen a number of people run into things like layoffs or health problems in their 40s and 50s which greatly impacted their retirement. I knew that so I saved aggressively and I got lucky and did not have setbacks like that so part of the reason that my portfolio is doing well is just that I got lucky and was able to work as long as I wanted to.
Hebell
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Re: Underspending Paradox

Post by Hebell »

My husband and I just set up Maxifi Planner to address this decumulation stage of life. (He is 65 I am 61). We set it up so that we just take RMDs, and upon his passing his retirement assets roll over to me. We fiddled with the model, looking at how we could increase discretionary spending, particularly for charitable giving. We also looked at how we could adjust bequests (i.e. legacy, final estate value upon 2nd to die) and how that would impact discretionary cash above our essential expenses.

We found this to be an extremely productive conversation. We do not have any dynastic issues to deal with, with one child who does not want children, and who is doing well.

We did elect to move to a higher tax Midwest state, and move into independent living (IL), where the IL costs here are much lower than in S FL where we were. Seeing the impact of that decision over time, versus other alternative profiles we set up in Maxifi, was very illuminating. It was going to be more expensive for us to stay in Florida! Our cheapest solution would have been to move into the rental home we rent out in Asheville. The lifestyle would have been very different.

So moving into independent living very early, where everything is taken care of for us, with a highly walkable community with lovely parks and bike trails, just outside our back door WAS OUR BIG SPLURGE. (Costing us about $600,000 over the next 38 years, doing this rather than dying in the investment property we own in North Carolina)

Now that we better understand our spend down plan for tax efficiency, we can now think about gifting, and donor advised funds. We are at 16% equities, which we will never rebalance. The rest is in mostly laddered tips and I bonds, the rest being nominal bonds.
Parkinglotracer
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Re: Underspending Paradox

Post by Parkinglotracer »

22twain wrote: Fri Mar 29, 2024 9:08 am
Parkinglotracer wrote: Fri Mar 29, 2024 7:32 am I have to fight being a boring, stingy, penny pinching retiree like my grandma was. The challenge is real.
Boring to whom? Did she feel bored with her life?
Good point I should cut Gertrude some slack.
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Meg77
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Re: Underspending Paradox

Post by Meg77 »

If you don't touch it, your $4MM portfolio could double to $8MM in 10 or years and then double again to $16MM by the time you're in your mid 80s. At some point you're likely to have an estate tax problem in addition to the general (and enviable) problem of what to do with the funds. Giving it away, spending it, or paying taxes with it are your options.

Dream a little! There are lots of values exercises you can find online to identify what matters to you that may be helpful. Then look to see consciously whether you are spending in areas you say you care about. Romance and sex? Cue the date nights and weekend tropical getaways! Fitness and health? Hire a nutritionist or naturopath to run customized tests and give advice, decide you'll only buy organic food, join a fancy gym or hire a trainer. Status? No judgement here - splurge on that watch, handbag or car. Time with family? Buy a lake house or dedicate $50K a year to take all the relatives on a fun trip.

If you don't make any decisions here, your wife will have the problem/opportunity all to herself once you pass (sorry, you're statistically likely to go first). Many stereotypical wealthy married males earned most of the money, obsessed about the investments, and begrudged most of the spending during their lives. Then they usually die first, and their widows take the reins. Not to put a bee in your bonnet, but If you pass tragically young, there is a lot of time left for her to remarry, in which case that portfolio may help support a future spouse or partner...in case you need a little jolt to motivate you to buy that first class plane ticket yourself!
"An investment in knowledge pays the best interest." - Benjamin Franklin
kleiner
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Re: Underspending Paradox

Post by kleiner »

Morgan Housel says:
The more money you have, the harder it becomes to know how to spend it in a way that will make you happy. And that confusion sets in at fairly low levels of income.
Our household liquid net worth is now $8M (and we are entitled to another $1.5M in pensions when we turn 65). I am retired but my wife is still working and making a big salary so money is still accumulating.

Our kids' college is fully paid for. Our home is paid for and has been fully renovated from top to bottom over the years. We have no interest in buying a second house. We don't have expensive hobbies. We have two relatively new cars that serve us very nicely. We are definitely not RV or boat people.

Where we have increased our spending:
- I shop for groceries and buy whatever I want without looking at the price.
- We have signed up for personal training at our gym and this has been money very well spent. There is a huge difference between lifting weights on your own vs doing it under the careful supervision of an experienced trainer. This is about $8k per year.
- Travel: We only fly business class now and stay in nice hotels. But even in this category, I'm finding it hard to spend over about $30k per year. There are diminishing returns beyond a point. We really enjoy luxury travel but its really nice to come back home :happy
Tub84
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Re: Underspending Paradox

Post by Tub84 »

HausaPain wrote: Wed Mar 27, 2024 2:10 pm I created a VPW Retirement spreadsheet and it suggests we should be withdrawing over $15,800 per month. After reading the Decumulation Paradox paper and articles I'm wondering, Should we start the monthly withdrawals now (say $12,000) and just have fun (more vacations, gifting, charities, beer, ...) with it?
Doesn't VPW guidelines also suggest adding an annuity at a later age, for those without quite as ample portfolio as yours, to guard against longevity risks as well as benefit from mortality credits? The supplement of an annuity at a later age as suggested by VPW could help with the underspending as noted in the article (and experienced by many on this forum).
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TheTimeLord
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Re: Underspending Paradox

Post by TheTimeLord »

Part of my solution is to invest the excess (unspent) in equity index funds because I can afford to take risk with that money right? But if that works out then my portfolio value increases and likely so does my underspending :oops: . Total hamster wheel.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
CraigTester
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Re: Underspending Paradox

Post by CraigTester »

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Last edited by CraigTester on Sat Mar 30, 2024 10:57 pm, edited 1 time in total.
afan
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Re: Underspending Paradox

Post by afan »

There is this notion that one always has something else they wish to buy. Always wants a fancier car, a bigger house, more expensive clothing and jewelry.

What about people who do not find those things desirable?

What about those who would rather read library books about the Sistine Chapel than go there? (Someone pointed this out about me. I think it was intended as an insult and they got even more upset when I said that it was absolutely true. I gather the logic was that going to the Chapel would be expensive and reading in the library would be free. Therefore, the expensive thing must be better).

What about those who would prefer a simple meal at home over dinner at the "best restaurant in town?"

Many of the things people consume are manufactured needs. Built by advertising devoted to convince the public they are not only worth wanting but worth paying large sums to obtain.

We could spend more than we do. We do not feel any mandate to spend as much as we can. We are not going to clutter up our home buying stuf we would rather not have. We are not going to take expensive trips when we would rather stay home.

This is not "underspending". It is living our lives as we choose.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
delamer
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Re: Underspending Paradox

Post by delamer »

afan wrote: Sat Mar 30, 2024 2:56 pm There is this notion that one always has something else they wish to buy. Always wants a fancier car, a bigger house, more expensive clothing and jewelry.

What about people who do not find those things desirable?

What about those who would rather read library books about the Sistine Chapel than go there? (Someone pointed this out about me. I think it was intended as an insult and they got even more upset when I said that it was absolutely true. I gather the logic was that going to the Chapel would be expensive and reading in the library would be free. Therefore, the expensive thing must be better).

What about those who would prefer a simple meal at home over dinner at the "best restaurant in town?"

Many of the things people consume are manufactured needs. Built by advertising devoted to convince the public they are not only worth wanting but worth paying large sums to obtain.

We could spend more than we do. We do not feel any mandate to spend as much as we can. We are not going to clutter up our home buying stuf we would rather not have. We are not going to take expensive trips when we would rather stay home.

This is not "underspending". It is living our lives as we choose.
The OP said they were thinking of increasing their spending to “just have fun (more vacations, gifting, charities, beer, ...).”

So the increased spending would improve their quality of life.

If increased spending wouldn’t improve yours, then don’t do it.

I’ve visited the Sistine Chapel twice. Looking up at that masterpiece on the ceiling and contemplating how it was created is an unforgettable experience. Maybe that’s why someone suggested going there was something to consider, rather than simply because it was more expensive.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
drzzzzz
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Re: Underspending Paradox

Post by drzzzzz »

I view this as the pleasure principle - you get more pleasure and less regret over not spending the money rather than spending it especially since you can afford to. However, I would encourage experiences since those are what we remember and talk about and find unique. We went to a Michelin two star restaurant in Budapest last year while visiting Hungary and it was the most impressive and delicious meal we ever have had (and also the most expensive) - we still talk about it and share pics with friends. We don't talk about how much our portfolio has gone up or down, however, since that experience is not as satisfying.

Lastly, sounds like you have no children. When we decided that we were going to be leaving a lot to charity, it made no sense to continue to do Roth conversions when QCDs are available and/or designating a charity as a beneficiary of a traditional IRA means no taxes ever need to be paid on those funds. No need to pay taxes on Roth conversions if you decide to donate the traditional IRAs to charity - only entity losing out is the government.
afan
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Re: Underspending Paradox

Post by afan »

delamer wrote: Sat Mar 30, 2024 6:47 pm [

The OP said they were thinking of increasing their spending to “just have fun (more vacations, gifting, charities, beer, ...).”

So the increased spending would improve their quality of life.

If increased spending wouldn’t improve yours, then don’t do it.

I’ve visited the Sistine Chapel twice. Looking up at that masterpiece on the ceiling and contemplating how it was created is an unforgettable experience. Maybe that’s why someone suggested going there was something to consider, rather than simply because it was more expensive.
I suppose. But I am not after unforgettable experiences. I am, however, very interested in knowledge. Standing in the Chapel and looking up would not tell me how it was built, how it was sited, what sort of foundation was required, the load-carrying capacity of the ground in that location, the sources of the materials and skilled labor needed, the training of the workers, what they had been doing before the built the structure or what they did after their work on the Chapel was complete. And all of that is before even considering how the art was commissioned and created. The interplay between the religious and secular traditions of the time, the available materials and technology...

I can learn about that in a library. I could read a great deal about that in the time it would take to plan a trip, pack, drive to the airport, fly to Italy, go through customs, get to my hotel, arrange food, then visit the Chapel. All of that would take up far more time than I would spend in the room. All this down time would have zero educational value.

Between the two choices it is not even close.

But back to spending money as equated to happiness. My core point is that the hedonic treadmill is a trap. People who spend large amounts on money on these things do not appear to reach a point where they say "I just spent $10,000 on this thing and now I have achieved lasting happiness." Instead, they continue spending because the purchases they have already made brought, at best, transient gratification. If they had unlinked spending from happiness, they could have focussed on things that are more important. And saved the money they spent.

So, no. I do not feel any need to spend more money because I have what I want and I attribute little or no value to travel, fancy dining, expensive entertainment and such. I assign negative value to consuming alcohol, so wine, beer, and hard liquor are things I would be healthier without. I value health positively.

From an actionable financial point of view, cultivating low-cost interests that are safe and healthy can lead to greater longevity, better health and a higher networth. It is win, win, win. And cheap.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
placeholder
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Re: Underspending Paradox

Post by placeholder »

Barsoom wrote: Thu Mar 28, 2024 5:44 am We even started going to some Major League Baseball games.
Being retired gives you flexibility as to when you are able to go to games and I have found that for a week night against a nonpremium opponent I can find tickets for very good seats at bargain prices on stubhub like loge seats behind home plate with a private club for the section for $40 to $60 when they're over $200 face value.
iim7V7IM7
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Re: Underspending Paradox

Post by iim7V7IM7 »

Paradox is an interesting term to use to describe underspending one's assets. There is not anything really contradictory here. There is complexity, market volatility, fear of longevity and low probability/high consequence events as the article discusses.

For ourselves, while Bengen's (and others) inflation adjusted constant dollar approaches for withdrawals to fund spending is a good rule of thumb to assess whether one has enough funds to potentially retire,, I have never liked approach (same goes for flexible spending rules like guardrails). They are based on probabilistic poor outcome scenarios and not running out of money.

What has appealed to us is trying to understand and fund:

-Essential expenses associated with longevity (e.g., housing, household, medical, transportation, telecom, insurance & professional services),
-A reasonable amount of LTC expenses,
-Buffer/Liquidity expenses to allow for planning errors, assumptions and unknowns

We prefer to fund Essential Expenses with secured sources of income from delayed/maximized Social Security, my company pension and SPIAs to address longevity. Yes, inflation risk and sequence of returns risk is not totally eliminated, but it they are significantly mitigated. For LTC a combination of LTCI and dedicated portfolio self-funding to cover a reasonable amount of care and protect some assets from Medicaid (worst case scenario). For a liquidity buffer, a portion of our portfolio dedicated for these unknowns. Being able to visualize our portfolio against specific spending needs is comforting.

Yes, some of this is "mental accounting", but as the article suggests, I feel like it frees us up to spend on discretionary lifestyle expenses.

Once the funding of these types of expenses are known, what remains can be used for discretionary lifestyle expenses and any legacy bequests that we might have. This frees us up the spend the remainder assets. We want to spend more when we are younger and more active over the first decade of retirement (go-go years), taper down spending to 75% of initial rate (adjusted for inflation) during the next decade (slow-go years) and down to about 25% of initial adjusted for inflation during the last decade (no-go years). We might front load spend 2/3rds of of our discretionary funds over the first decade.

I have worked for decades on complex, decade + long R&D projects for a living. These are complex and impossible to prospectively predict despite our best efforts. Retirement is even longer and more complex. Using probabilistic, inflation adjusted constant dollar withdrawal methods is too amorphous for us and in most cases results in underspending of one's assets that you spent a lifetime setting aside.

Don't get me wrong, those approaches make sense and likely work fine. I do think they ignore behavior as the author suggests resulting in many dying with significant net worth so their children will fly first class.
Barsoom
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Re: Underspending Paradox

Post by Barsoom »

placeholder wrote: Sun Mar 31, 2024 10:20 pm
Barsoom wrote: Thu Mar 28, 2024 5:44 am We even started going to some Major League Baseball games.
Being retired gives you flexibility as to when you are able to go to games and I have found that for a week night against a nonpremium opponent I can find tickets for very good seats at bargain prices on stubhub like loge seats behind home plate with a private club for the section for $40 to $60 when they're over $200 face value.
Thanks for the tip. I'll have to check it out at Minute Maid Park.

-B
Catalina25
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Re: Underspending Paradox

Post by Catalina25 »

Before reading supposed "articles", I first note the source or author to see what kind of bias or ulterior motive that might be at play going in. In this case, it was quite easy...The URL's are New York Life Annuities and Insurance Newsnet... Hmmm, I wonder where this may lead?

It's similar to the millions of so-called "articles" that arise when Googling "Retirement Planning". Virtually all of them are doom and gloom, scare the pants off of you pieces, that end in..."Let us help you secure your future"...Uh, yeah, sure.

I never really got, or understood, annuities. One spends their entire investing lives chasing low fees and ER’s to the thousandths of a percentage only to hand it over to lucrative sales commissions, high management fees, administrative costs, underwriting, and a plethora of other charges. I didn’t work hard all my life for my nest egg to then just hand it over to put some sales agent’s kid through college. Unless I find otherwise, thanks, but no thanks.

Part of the sales brochure brought a smile to my face, the paragraph involving self-insurance.

"Self-insuring these risks is like foregoing homeowner’s insurance and choosing to set aside potentially hundreds of thousands of dollars to build a new home if a catastrophic event occurs."

When I started sailing almost 30 years ago, I became friends with an older gentleman, a fellow single handed sailor, who had immigrated from Hungary sometime in the early 1950’s. He was a scruffy old salt, funny, with a thick old world accent and around 30 years my senior. We spent many, many, hours sailing together, some on his boat, some on mine, especially in his later years (80’s plus) when his mobility was becoming a challenge. In those long hours on the water, he would talk about his rather fascinating life experiences and a lot about saving and investing, always trying to impart his life lessons upon me. He was a factory worker, a millwright just like my father, who had amassed a substantial fortune through investing in stocks beginning in the 1950’s.

Regarding self-insurance for vehicles specifically, he told me many times, from his first car on, instead of purchasing full coverage/collision insurance, he would invest the premiums in stocks, then paying out of pocket if the need arose. After several decades of this, he said in his thick Hungarian accent, “My self-insurance fund is so large, if my wife wrecked her Taurus, I could replace it with a Ferrari without batting an eye.”

About 5 or 6 years ago (could be longer?), when nearly 90, he sold his boat due to age-related issues and we didn’t see each other much after that. I miss him and the many conversations we had over years, but whenever I think of him, a smile comes across my face. That is what I got out of the article, a smile, and for that I say, Thanks!
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