One of the absolute best parts of managing ESI Money and the Millionaire Money Mentors forums is the incredible community that has formed around them. Over the years, some of our interviewees have gone from voices on a page to personal friends and invaluable mentors to others in the community.
Today’s guest author is exactly that. Millionaire Interviewee 18 (MI-18) was one of the very first millionaires to share his story on this site. Since then, he has been a pillar in our forums, consistently dropping wisdom, guiding others, and helping members navigate the tricky waters of post-retirement life.
As we’ve discussed many times in both the forums and on ESI Money, there is one psychological hurdle that trips up many successful accumulators: learning how to actually spend money after three or four decades of intense saving. It is an emotional barrier that logic alone doesn’t always fix.
MI-18 has spent a lot of time thinking about this, and he developed some very useful”math hacks” specifically designed to quiet that inner anxiety and help you exercise your long-neglected spending muscle. He relates what he’s created to another hack that was started by Millionaire Interviewee 73 (which he refers to as Jedi math).
You are all in for a real treat with this one. I’m going to step out of the way now and turn the piece over to MI-18!
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As a longtime member of the ESI Money community, I have been privileged to be a part of some amazing discussions across a broad set of topics. Many can be found here on ESIMoney.com, but the discussion threads on the Millionaire Money Mentors section is where we as a community go deep and wide. From estate planning to home building, from post retirement investing to how to sequence your asset drawdowns as you pay yourself once you stop working
One area that receives a lot of attention – I would say that it may actually be the #1 issue we encounter as a community, is how difficult it is for a lot of people to learn to spend their money after 3 or 4 decades of focusing on SAVING it.
In general it could be any spending beyond the bare necessities, though the issue is more isolated / specific to splurge spending. Webster’s definition of splurge:
An instance of spending more money than usual, to indulge oneself or spend lavishly in the context of buying luxury (Webster’s definition of luxury: is a condition of abundance, great ease or comfort).
There are a LOT of adjectives in that definition that would give the most frugal amongst us hives. A Splurge can be uncomfortable no matter if it’s nominal and it is a perfectly rational choice.
Moving from Saving to Spending
The transition from saving to spending can be difficult and lead to anxiety and fear — specifically the fear of outliving your money. If you read every millionaire interview on this site, this issue is easy to identify. That may be because the path to accumulating a million or more almost always comes from sticking to the discipline of saving a significant percentage of your annual income.
So naturally if you only exercise the don’t spend money muscle for several decades, once the burden to conserve has been lifted, it can be REALLY hard to activate the spend muscle. From the “we don’t need that” response to considering a splurge item, to the “why hire someone if I can do it myself” response to a home remodeling project. There is a lot more NO than YES going around. But a lot of the NO’s are driven by emotion and not financial calculus.
This isn’t about basic expenses; most everyone’s financial plan for their post work lives has a safe “pay for the basics” component. Usually expressed in the form of a monthly budget with a few discretionary items sprinkled in annually (travel budget, charitable budget, holiday budget, etc), but likely still within or constrained by the 4% safe withdrawal rate or an even more conservative spend down plan.
But a funny thing about most people’s post-work plans is they almost ALL result in a “living off the interest / never touch the principle” outlook. That is a far cry from DIE WITH ZERO, so is there a middle ground?
Probably, but this article isn’t about a large pivot or materially changing your plan or the way you think about your long term spending. It’s about how to learn to deal with that one uncomfortable thing that is almost always an obstacle on your predetermined path and that is how to overcome the emotions associated with breaking through your plan for an occasional spend that WASN’T planned for.
It’s an emotion that shows up at a nice steak dinner to celebrate a specific event in your life when you instinctively order the house wine instead of buying the 2022 bottle of Stag’s Leap Cask 23 — something you know you would enjoy but wouldn’t think of paying the restaurant price of $500.00 for.
Immediately — it’s not worth it, that’s not our style, I would love to but it’s so expensive, my parents would never do that, my friends wouldn’t understand, etc. If you do buy it — in spite of those feelings, what might have been a superior dining and personal experience will be less joyous and memorable when you get home and your anxiety over the “out of your comfort zone” spend overshadows the nights event when you look at your itemized receipt.
This is just an example. Many of you would spend $75,000 on a new car or truck you needed and would drive for a decade, but not $500 on a bottle of wine that is gone in an hour. We all value things differently. The goal of what follows is to give you a tool that results in feeling no guilt or anxiety, to make the selection without thinking of how your nest egg may be affected or any other negative thoughts. To feel comfortable with the decision without second guessing yourself. And ultimately be happy with it.
Your Plan is Wrong
But before I get into the how and why, let’s first level set and acknowledge one very important thing about anyone’s long term plan, based on 50 economic variables, run through tools like Boldin subject to Monte Carlo analysis (several times over) with various longevity estimates and tax rate estimates. We all do it (too many spreadsheet addicts here) and like any plan once written down……. IS WRONG.
Your forecasted numbers won’t be perfect, things you assume are subject to change (anyone have a global pandemic in their 2018 view of 2020 and 2021 as part of their 10 year plan?). They are directionally correct, generally all increasing in value over time (since most will never subscribe to Die With Zero) and carefully planned.
Whether in the accumulating phase or spend down phase, they are all wrong. We do not have a crystal ball, just good educated guesses. That means your plan has a +/- standard deviation or two or three to it in any given year or period of time. Having a net worth of two million projected to be 5 million in 10 years won’t be affected if on your birthday you spend an extra $400 on a bottle of wine.
But most of us like numbers and ratios and think of each dollar on the pile as being integral to its growth just as every dollar taken off is critical to the amount that is remaining.
Splurge Hack
What is clear in a lot of our discussions in the forums here is that a journey of changing your relationship with how you spend money starts with the first step. Sometimes rather than attacking the issue with a deep dive into your belief systems and decades of thinking about how you spend money, maybe a simple “hack” will help you exercise that spend muscle, to do so enough that you see the impact of using it occasionally doesn’t have an impact on your expected outcomes. That the benefits of giving yourself permission to splurge every so often results in a greater satisfaction with the outcome you were pursuing.
In discussing this issue with friends in the real world as well as members of this community, establishing a sense of proportion next to something that is understood seems to be the best way to communicate. If you have $2,000,000 in assets and you put that $400 extra spend on that birthday steak bottle of wine, it’s a rounding error. Specifically it’s:
$400/$2,000,000=0.0002 of your net worth.
It’s a rounding error. It won’t be the reason your planning “fails”.
So I created the splurge decision tool called “Is it Even Material to my Net Worth” and the formula is:
(Item cost x number of times likely to purchase over your remaining active lifetime) / NW
I developed this over a decade ago when addressing a travel issue with my newly widowed mother. She went to visit my brother in Florida, booked a one stop (when she could have flown non stop for more) that turned a 3 hour flight into a 7 hour travel day — in a middle seat on both flights. She complained about the middle seat and the time it took to get there.
I reminded her that as a multi-millionaire at age 70 she had more money than she could ever spend and she should have flown direct in first class — approximate cost of about $200 more or so. But she responded your dad would have never done that. That’s true he likely would not have though I had been working on modifying his behavior as his health was deteriorating and time and comfort began to really matter.
My quick response to her was that it wasn’t expensive. I asked her how many times a year will you make that trip? Answer: two at the most. I then asked her how many more years do you think you can make that trip and be away from home for three or four weeks at a time? Answer: 4 or 5 years, maybe 10.
I said with your net worth today you can buy 10,000 “first class upgrades” (dramatic effect) and the most you might use is 10.
Now at 80 she finally gets that her money is a tool to create joyful moments with family and friends. But it took her to getting to the point where now she realizes she doesn’t have decades left to live that her friends are dying or in homes, unable to travel or get out much, that she doesn’t have infinite time. Time and comfort and joy are precious things to invest in.
Where to Put Limits
So where do you draw the yes / no line with the formula?
I tell people that if the answer is .00N (less than 1%) it’s a rounding error and immaterial. Spend the money and NEVER worry about it again. In her case it was:
($200 x 10) / $2,000,000 = 0.001
Let’s say she was going to fly 100 times over the rest of her life and the difference between coach and first class was $200 each time:
($200 x 10 x 10) / $2,000,000 = 0.01
Over a 10 year time frame a change of consumption of 1% is STILL a rounding error if your investing plan is solid, your needs are being covered, and your splurges are splurges and not some new routine daily cost.
While the math is not complex, the area where this becomes difficult for some people to accept is that it doesn’t allow for the accumulation of a lot of splurges in a short period of time. This is for unplanned infrequent “treating yourself” spending opportunities.
That lead me to share another Math hack to address a few things the crowd has often discussed which is how long will I be an active retiree? If I were to “dip” into my principle how far would I feel comfortable going? How long could that be sustained?
The Daily Declining NW Consumption Formula
I first did this with my father-in-law when he retired at 56 from his blue collar carpenters job in early 2000. He had never made more than $50,000 a year and lived a very simple life with his wife and dog in a paid off house with zero debt.
Not counting the house he had $750,000 in his retirement account at work (which was rolled over into an IRA so we could 72T him until he could take money out penalty free.)
That was $2,500 a month at the time plus $1,000 a month from savings and he was all set. But he feared outliving his money and I said at the time you plan to spend about $100 a day, if you never grow your portfolio you have 20 years of money but if it grows 8% a year you’ll spend $100 a day and 20 years from now you’ll have 2 million. You can easily retire.
And for the past 26 years he has done just fine. He didn’t understand my points fully because he really didn’t think he could spend $100 a day all year but it was a simple way of helping tie his consumption to his nest egg. Social security came and doubled his number. He spends nothing close to his daily number now at 83.
Over time I adjusted it for me. I do not take into consideration inflation or investment returns. I mean I do but for a simple rule I made it simple. And you can “update” this number annually as the variables change.
Net Worth minus the Amount you have at the end of your active retirement divided by the product of years left of active retirement life times 365)
So for my wife (I am 60 years old) and I our formula today looks like this:
($30,000,000 – $10,000,000) / (15 x 365) = $3,653 per day or $1,333,345 per year
I focus on the daily number and psychologically that is very important as you go about your day. So if you want to spend $5,000 on something today but “spent” nothing the day before (or the entire week before) it’s covered for sure.
This is designed to give you guidance when you leave the house and see something you want but didn’t plan to buy or need, plan a trip, splurge on line, remodel the house, give a gift, fix a car, etc. It also helps you realize how infrequently you need to think about this rule. Just going about a typical day? No need to think about it.
I added an element of “active life” for a reason. I committed to retiring when I was 50 (it took nearly two years to put all the pieces in place before I quit my 7 figure a year job. My decision was to give my wife and I a solid 20 years of active retirement (statistically) before she would begin to limit the intensity of our “active” retirement. We expect to live into our 80’s but plan to do the more physical activities well before then. We felt this was an important element of how we structured our post work lives.
There has been studies that show that age 72 is when retired people begin to slow down. In the Millionaire Money Mentors section this was a recent discussion thread and while we don’t have crystal balls that predict the future, we can observe and mostly agree that physical decline does appear in your early to mid 70’s
So retirement at 60 means you may really have just 12 good years to do what ever you want physically and mentally. This is an important self realization. Time takes its toll. Don’t waste it. This math hack is designed to give you a reference point so you have the freedom to act.
So while our NW is not typical (in the example above) let’s use $2,500,000 for a 62 year old couple who want to make sure they have $500,000 left over when they may need LTC and something for the grandkids.
($2,500,000 – $500,000) / (10 x 365) = $548 per day
It’s not as high as mine but think about this you’re retired, you haven’t left the house in a day or two and you go out for dinner together. You see a nice bottle of wine that cost $120 – something you would never think of buying while you were saving, but always wanted to do. The short answer knowing your “daily” budget is over $500 means buy it guilt free.
Even if you eat out 365 days a year and buy $120 bottles of wine each night you are not destroying your nest egg. The more powerful point of it psychologically is that if you knew you hadn’t been out of the house and spent something extra in the last few days, the number that night at dinner wasn’t $548 it was over $2,000. Get the $300 bottle instead – especially if a nice dinner out is something you do a few times a month and enjoying dinners out bring you joy.
Enjoy Your Savings!
The point of this is to LIVE and ENJOY what you have earned, the freedom to choose, making a memory, or having a more pleasant experience (first class over coach). Do so without the thought of having to save money (while retired) and instead know with confidence that you can easily afford it.
Now some will point out without inflation and net worth growth, it’s not a true consumption model. I will be the first to agree that’s true. But I will tell you if you did that your number is likely 3 or 4 times the number this simple rule gives you besides you can recalculate this each January first – insert your prior year end NW, review your “active years left” number and compute.
You see those additional calculations are a safeguard – when added to the fact most everyone here won’t spend that much a day, simply means when you get into your 70’s your net worth will have likely doubled or tripled since you turned 60 and you still spent when ever you wanted. It was like the example I used with my father in law.
The end result is you never compromised on creating a joyful moment, you could confidently expand your spending occasionally to enjoy the fruits of your labor. You were no longer constrained because you thought you couldn’t pay for it (and think of all the moments that are free!)
This is Jedi math to free you from the shackles of doubt, and to help you master the spend muscle.
Money doesn’t buy happiness, but money can augment or elevate or even create a family experience that everyone will talk about for years. A trip to see grandpas favorite band at the sphere in Vegas, a family safari vacation in Africa, an Alaskan cruise, college tuition for grandkids, a hot tub for your patio, a fine wine on your anniversary, a home theatre, a golf simulator in the basement man cave, a sleep number bed.
There is no limit to the options or paths you can take to create those experiences.
I hope these are useful to you in your life’s journey — you’ll see these themes in my ISE post from years back.
Congratulations on your ESI and ISE achievements and good luck and much success in your pursuit of joy in your life.
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