Hedonic Tilt - Spend More Now, Less Later (in retirement)

[Sarah in SC]

Was talking with my boss about this a bit this morning. My own situation is so vastly different than that of our clients that I try to balance the advice we give versus the advice I should consider for myself.

I figure on coming up with the basic expenses that I'll have "forever" and separating that mentally from the "extra" money we will want to spend in the early years of retirement. If I know our base is covered, I will feel more confident in spending more early on. Though honestly we will likely be living bare-bones always, which suits me fine, but wouldn't be what I'd probably recommend for others.

 

[athena53]

It's definitely working that way for DS and me. Downsizing a year after retirement was a lot more expensive than we anticipated although we ended up in a house we absolutely love and I'm finally seeing decreases of $400-$500/month in expenses (including utilities and, for some reason, groceries) since we moved. We're also doing one major, expensive trip a year and a few road trips with hotel stays. That could decrease if DH gets to the point where the long-haul trips are too hard on him.

After a period with a possible lull in travel expenses, I could see home maintenance expenses picking up if I start farming out work that I do myself now, including housecleaning, lawn care and gardening.

 

[Gone4Good]

Your thought misses the point of maximizing nest-egg utility while you are alive. Leaving a large unspent nest-egg is seen by the authors as undesirable.

I agree.

But the alternative to dying with a large nest egg is living with a smaller one, and therefore a smaller cushion. That may be an acceptable choice for many folks, and that's OK as long as they understand the tradeoffs involved.

But those tradeoffs aren't things that get a lot of attention in many of these withdrawal optimization articles. The one linked in the OP is a perfect example. It's almost all free lunch.

 

[daylatedollarshort]

I think there is a third option - going a lot of places yet not spending much money. Frequent flyer points, parks and picnics, activity co-ops, free unsold seat tickets - there seems to be ways to do most activities in our area for free or low cost. Plus there is certainly no shortage of blogs on how to accumulate and use free travel miles.

 

[Texas Proud]

The U seems only to occur if health care spending increases, and as he states if you have a medigap policy, then even this doesn't happen. So it seems for many on this board the U doesn't exist at all. The exception, of course, is long term care.


Sent from my iPad using Early Retirement Forum

Yes, kinda what I was going to point out....

Most of the people I know who are up in age have not had big increases in spending.... and I do not know anybody who is in long term care... everybody died before getting to that point...

My mom is the closest to needing expensive care, but she is 96 and still living on her own, with a little help from a caregiver 3 days a week... pretty cheap IMO...

 

[Music Lover]

Maybe, maybe not! I was snow skiing last Friday and rode the chair lift to the top with an 80 year old guy. He was still skiing advanced runs. Last month I played 18 holes of golf with a 91 year old. You never know.

That's right...you never know. But, those are the exceptions. The reality is that there are a lot more 65 year old golfers than 90 year old golfers and there are very, very few 80-year old skiers....even on the bunny hill, never mind on advanced runs.

With careful planning, people can spend a little more in the early years without leaving themselves destitute in the later years.

 

[MasterBlaster]

I agree.

But the alternative to dying with a large nest egg is living with a smaller one, and therefore a smaller cushion. That may be an acceptable choice for many folks, and that's OK as long as they understand the tradeoffs involved.

But those tradeoffs aren't things that get a lot of attention in many of these withdrawal optimization articles. The one linked in the OP is a perfect example. It's almost all free lunch.

Granted, never spending (or lightly spending) your money will insure that you never go broke. If that makes you happy then go for it.

However that's not the point of the article. This is a spending optimization problem subject to the constraint that the nest-egg never goes to zero. That's what the author is speaking to - nothing more.


And for what it's worth, I suspect very few will use this strategy.

 

[Gone4Good]

However that's not the point of the article. This is a spending optimization problem subject to the constraint that the nest-egg never goes to zero. That's what the author is speaking to - nothing more.

I'm not sure this is a problem that lends itself to "optimization" and I can forsee great harm in pretending we can put too fine a point on something that is at best a guesstimate about the future.

 

[braumeister]

The reality is that there are a lot more 65 year old golfers than 90 year old golfers and there are very, very few 80-year old skiers....even on the bunny hill, never mind on advanced runs.

You may not be a skier, but my experience is different. I constantly encounter skiers in their 70s and early 80s while riding the lifts. Many ski areas offer free lift tickets if you're 70 or older, and plenty of people take advantage of it.

 

[MasterBlaster]

I'm not sure this is a problem that lends itself to "optimization" and I can forsee great harm in pretending we can put a fine point on something that is at best a guesstimate about the future.

"Problem" is defined as in a class of mathematical approaches. Not necessarily an issue you have to deal directly with.

 

[Danmar]

I wouldn't call this a "Problem" but rather an issue. I am constantly thinking about how to
"Optimize" our spending/giving over the rest of our lives. In our case our spending is not determined by some pre-determined idea of what is appropriate but rather by what is available and enjoyable to us in the circumstances. Always trying to optimize this but not easy given all the variables
"

 

[braumeister]

I am constantly thinking about how to
"Optimize" our spending/giving over the rest of our lives.

As long as we're happy with what we're doing, I consider our spending to be optimized.

Otherwise, I'd be afraid of getting into some kind of "This would make us 15% happier than that", which would be a dreadful frame of mind.

 

[Danmar]

As long as we're happy with what we're doing, I consider our spending to be optimized.

Otherwise, I'd be afraid of getting into some kind of "This would make us 15% happier than that", which would be a dreadful frame of mind.

Well, I don't think of it that way, More like should I buy a new boat now, or wait till this one dies? Is 3.7% WR too conservative vs a 4.1% rate? Should I try to maintain my principal as a bequest to my daughter. Should I gift her more now to help with a house purchase?

In all cases I am trying to balance off the competing objectives of current consumption/gifting vs future consumption/gifting Everybody does this in some way or another. Agree that trying to measure "happiness" is difficult. What I don't do is think. "This is my spending level and I don't want to change it". I try to remain flexible and since our finances give us a fair bit of flexibility, I try to keep an open mind as to spending levels in order to try (at least in a general way) to maximize utility.

 

[NW-Bound]

Ah, but the incremental hedonic thrill is ever diminishing, and must be balanced against the pleasure of seeing your stash grow.

 

[Danmar]

Ah, but the incremental hedonic thrill is ever diminishing, and must be balanced against the pleasure of seeing your stash grow.

Agree. But I guess the decreasing marginal thrill is pretty personal. I haven't noticed it much, maybe more of a theoretical thing? This coupled with the realization that you can only spend it or give it away and let someone else spend it, keeps things in equilibrium?

 

[daylatedollarshort]

Ah, but the incremental hedonic thrill is ever diminishing, and must be balanced against the pleasure of seeing your stash grow.

Understanding the hedonic treadmill has saved us a lot of money. I think most research shows after a certain point spending more doesn't bring more happiness, and in fact too much stuff to deal with can add to stress levels.

I think advertising tends to skew our perception of what things really make us all happy. I have learned a lot from books and watching Ted Talks on happiness:

https://www.ted.com/topics/happiness

Supposedly the happiest person on the planet based on MRI analysis is actually a Buddhist monk.

 

[NW-Bound]

I can only speak for myself, but when I was faced with a life-threatening illness I thought to myself that if and when I came out of it I would get myself a new fancy class B RV. I had in mind one that went for a low 6 figure. It would be 4x what I have ever paid for a vehicle.

Then, when I have fully recovered, I changed my mind. The market has knocked down my stash a lot more than the cost of this RV, but even if it had not I would most likely not take the splurge. Old frugal habits die hard.

 

[Hermit]

That's right...you never know. But, those are the exceptions. The reality is that there are a lot more 65 year old golfers than 90 year old golfers and there are very, very few 80-year old skiers....even on the bunny hill, never mind on advanced runs.

With careful planning, people can spend a little more in the early years without leaving themselves destitute in the later years.

Have you been to Monarch ski area lately? They have a season pass for $20 if you are over 69. In prior years it was free. The place is overrun with geezers during the week.

 

[audreyh1]

Just as long as people realize that long-term care costs are NOT covered by Medigap! Yes, the health part will be covered, but not the rest of the care costs in a facility.

Kitces mentions in the U article something about using LTC insurance to help with the possible sudden rise at the end (the part not covered by Medigap). But in a later article he realizes that the protection one might normally expect for the cost when buying insurance as there isn't a "high deductible elimination period" version available and the amount that will be paid out is capped.

https://www.kitces.com/blog/can-inc...ination-period-make-coverage-appealing-again/

In a later presentation he talks about how the LTC insurance industry is struggling. https://www.kitces.com/wp-content/u...-FPA-Central-Virginia-Jun-4-2015-Handouts.pdf

I expect to have the amount an LTC policy would pay set aside for one of us, and the survivor can spend down the assets if needed. And that's why I plan on a U shape in our spending.

 

[Danmar]

LTC less an issue in Canada. So I really have no excuse for hoarding the stash.

 

[Gone4Good]

LTC less an issue in Canada. So I really have no excuse for hoarding the stash.

Good point.

Along those same lines, that smile curve may be a lot less smiley for us younger ER's who can't necessarily depend on the same generous benefits from Medicare as the folks in the study.

I know I'm paying a heck of a lot more now for both health care and insurance than my 70 year old mother does. I don't really expect my health spending to decline when I'm her age - although that would be something to smile about.

 

[pb4uski]

My experience is that we were fairly conservative during our first year or two of retirement because it was an unknown. After a couple years and the sky not falling (and our portfolio actually growing) we loosened the reins a bit and spend a bit more. We have not felt a need to alter withdrawals for inflation yet.

 

[Meadbh]

LTC less an issue in Canada. So I really have no excuse for hoarding the stash.

While there are subsidies, you're going to be on the hook for significant costs. See tab 04, revenue by source.

https://www.cihi.ca/en/residential_long-term_care_financial_data_tablesweb.xlsx

 

[Danmar]

While there are subsidies, you're going to be on the hook for significant costs. See tab 04, revenue by source.

https://www.cihi.ca/en/residential_long-term_care_financial_data_tablesweb.xlsx

Yes, I understand but LTC costs will only be a fraction of our current spend so won't be an issue as long as I can stop spending on other things.

My mother is currently in a very expensive LTC facility with the costs around $7k per month. Can't see how LTC could cost more than $250k per year?

 

[Meadbh]

Yes, I understand but LTC costs will only be a fraction of our current spend so won't be an issue as long as I can stop spending on other things.

My mother is currently in a very expensive LTC facility with the costs around $7k per month. Can't see how LTC could cost more than $250k per year?

True enough, from your perspective your final years might be cheaper, provided you sell three or four homes and all your toys!

My lifestyle expenses are less than $50K per year but if I need LTC I want to be able to afford the best, just like your mother. For $7K a month, it had better be good!