by James M. Dahle, MD
This post is going to be a little odd. Most personal finance writers write all kinds of articles motivating you and teaching you how to spend less money so you can save more and actually reach your financial goals.
However, many of the people who actually read personal finance books, blogs, and magazines don’t have that problem. Personal finance is their hobby. They’re already highly motivated to save money. They generally start early, save a big chunk of their income, and do a great job investing.
It’s a huge disconnect.
The writers are writing for people who don’t read their stuff and the readers are reading stuff not written for them.
To make matters worse, a certain percentage of personal finance hobbyists not only end up with gobs of money, but they also have a certain amount of anxiety about money. This anxiety is readily identified in others, but difficult to see in ourselves and is manifested in many ways.
Perhaps it shows up in an ultra-low withdrawal rate, like 2-2.5%. Or recommending others save 50%+ of their income. Maybe it shows up as a difficulty transitioning from saving to spending. Or maybe just an unwillingness to spend money on something that will obviously make your life easier and happier.
So if you’re one of those who needs to loosen the purse strings a bit, this post is for you. (By the way, if someone forwarded this post to you, you probably need to consider loosening those purse strings up!) And lest you think I’m criticizing you, bear in mind I write this sort of a post for myself just as much as for you!
There are thousands of charities out there doing incredible work. The likelihood of you not being able to find one whose mission you agree with seems awfully low. WCI readers support hundreds of different charities. Giving to charity has two benefits- first it helps the charity and those who it helps, but second, it helps you. There is a psychological effect of giving some of your hard-earned money away voluntarily (sorry, taxes don’t count.) It sends your subconscious a message–“You have enough, quit worrying about running out of money.”
Some who struggle to spend do so out of a fear, conscious or subconscious, of running out of money. Sometimes we need to step back for a moment and recognize the law of averages. While you may have a chance of living to 105, you’ll probably die at 85. It can be helpful to remember that. As you realize your time on this planet is likely to be shorter than most safe withdrawal rate studies might suggest, perhaps it will be easier for you to get out and start ticking off those bucket list items before it is too late. I’m only in my 40s but I’ve already got a bucket list that is at least two lifetimes long.
That fear of running out of money can be very powerful. The financial technique that is most likely to allow you to accumulate (and thus leave behind) the maximum amount of money is to keep the money invested in aggressive investments like stocks and real estate throughout your life. Although they do get a step-up in basis at death, those risky assets can always go down in value, sometimes severely. That fear of loss (and thus running out of money) keeps a lot of people from spending as much as they could.
There are a number of financial products out there that give you “permission to spend.” The most useful of these is a single premium immediate annuity (SPIA), where you give an insurance company a lump sum of money in exchange for a monthly payment every month from now until your death. However, if you not only want to ensure you don’t run out of money, but also ensure you leave a certain amount of money behind to your heirs or a charity, a permanent life insurance policy can be very useful, particularly inside an irrevocable life insurance trust (ILIT) if you have an estate tax problem. If you want to leave a guaranteed nominal amount of money, a guaranteed universal life (GUL) policy is best. If you want the amount left behind to slowly grow as the years go by, a whole life policy is probably better, although the premiums may be twice as high.
Love to save but already have enough to meet your own financial goals? You can save for someone else too. You can save for your kid’s college using a 529 account. If you’re married, you can contribute $140K per kid in one fell swoop. You can save for your kid’s future cars, down payments, marriage, European vacation, or anything else in an UGMA/UTMA account (think taxable account for kids.) If your kids have earned income, you can put it in a Roth IRA. If they don’t want to save their money, let them spend an equal amount of yours (the daddy match) and put theirs in the Roth IRA. This doesn’t even have to stop once they turn 18. You can let them spend your money while contributing their own earnings to a 401(k).
If your underage kids don’t have earned income, you can save for their retirement in a low-cost variable annuity. Over multiple decades, the tax-protected growth in the annuity will overcome the higher costs (and ordinary income tax rates at withdrawal) of the annuity. Are your kids set too (or do you already have enough set aside for them that you’re afraid any more will ruin them?) You can start saving for others too. Start a 529 for your nephew. Or your grandkids. Or the neighbor kid (if you can talk his parents into giving you his birthday and Social Security number.)
To see the remaining four ways, continue here…
Editor, The White Coat Investor
James is a practicing board-certified emergency physician a little more than a decade out of residency. He has always been interested in personal finance and investing. And, one days he had an ephinay:
Most financial professionals take a one-sized-fits-all approach; many are just commission-based salesmen who are usually peddling loaded mutual funds or whole life insurance.
To help his colleagues, James started The White Coat Investor, a blog that offers doctors and other high-income professionals advice on personal finance and investing.
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