Spendable Worth

My favorite finance professor loved this maxim: “If you don’t know where you’re going, any road will get you there.”

People come to me for financial advice. I ask them: what is your most pressing financial concern? Very often it’s about that maxim. Where am I going—in financial terms, how much money do I need? And am I on the right road to get there?

To answer this question involves data gathering. How much do you save, earn and spend? How long will you work, how old are you, and how is your health?

I can manipulate this information and model a projection, and this is very useful information. My favorite financial planning software results in a dollar figure called Spending Capacity, and at a very high level this tells my clients how much they can spend on a monthly basis in retirement.

But the mechanics of that is not what this blog post is about. It’s about when this information meets our neurology because that’s the struggle I see when people stop working.

The habit many financially successful people have mastered is what our parents and grandparents called “making do.” They get good at thoughtful spending decisions and delaying gratification.

The other habit of financially successful people is earning what they’re worth. These two together are powerful forces that shape a life. Spend what you earn—live within your means—and earn what you want to afford the lifestyle you desire.

Both get turned on their head at retirement. We are wired for our survival to be highly attuned to crisis, and the disappearance of a paycheck feels like one. When faced with the fear that a crisis triggers, we seek calm and comfort and so we go to what we know. Spend carefully, limit indulgences, clip coupons.

Things can get especially tricky for married couples, because rarely do the expenses under consideration set off the same gut sense of “too much.” For one it might be the new cabinets in the kitchen remodel, and for another it’s the premium travel on the trip to Europe.

For those I’m describing who have earned and saved well, their Spending Capacity typically exceeds what they are spending now to maintain the lifestyle they want. This “Spendable Worth” gap holds tremendous possibility: how they can align what’s at their heart’s core with their financial behavior?

It might be accelerating plans to stop or reduce working. It might be helping adult children buy a home. It might be charitable giving.

However, embracing this opportunity often requires that my clients take a hard look at their Money Story. If “it’s better to save than spend” feels hard-wired, it’s going to take time and energy to look at how that Money Story worked for them in the past but needs to be updated for different circumstances so that it isn’t an obstacle to current joy.

How do you do this? With knowledge.

E.L. Doctorow said, “Writing out a plan for your life is like driving at night in the fog. You can only see as far as your headlights but you can make the whole trip that way.”

Here’s where I suggest pointing your headlights:

• Figure out what really matters—set your sights on what is essential to have in a life you love.
• The tendency is to focus on things we can put a price tag on—recognize that uncertainty (“driving at night in the fog”) is part of the journey.
• Use online tools or get professional help to get a clear picture of where your money goes: current expenses and debt.
• You have more control over your spending than your income, so if you aren’t where you need to be, here are the two areas to shine your high beams: do you have the right-sized car and house?
• Know the sources and amounts of income after you stop working.
• Timing makes a difference. Again, on your own or with the help of a financial professional, test the optimal strategy for when to take Social Security benefits. Make sure your investment portfolio is cost effective and tax efficient and designed to provide the income you need after retiring with the growth you need for the long term.
• The greatest risk to living with vigor in your later years is poor health. Take actions now to prevent loss to physical and mental functioning later.

My goal is to reimagine aging so that the last phase of our lives can be filled with vigor. Money is no doubt one of the necessary resources. It’s critical as well to track the data over time and make adjustments when necessary.

The most rewarding part of my job is giving my clients freedom from financial stress and worry by helping them understand what they have, how it’s organized to meet their goals, and knowing they have a thinking partner to turn to when life changes—as it inevitably does. Please reach out to schedule a Get Acquainted call if you’d like to learn more.