Rewiring our brains is difficult no matter what the focus, but since we homo-sapiens have been hardwired from our hunter-gather ancestors to fail at money management, saving and investing for our financial future is particularly challenging. So says Jonathan Clements, longtime personal finance columnist for The Wall Street Journal and author of the new book How to Think About Money.
We’ve been told to work like crazy for several, maybe four decades, of our lives, saving as much as we can along the way, doing all the right things, before retiring and then spending the next 25 to 30 years on golden pond living off the fruits of all that past labor.
Jonathan’s position turns this conventional retirement “wisdom” upside down. For a number of reasons, this old way of thinking just doesn’t work in today’s culture: not only does it lead to boredom and lack of purpose, but since we can expect longer lifespans, we may not have enough money to see us through to the rest of our lives.
At least half of all males who are age 65 today have a life expectancy of 84 and for females that number is age 88. In fact, life insurance companies are now running illustrations out to age 115, which gives you some idea of the projected rise in mortality.
Throwing in the towel at the traditional age 65 increases the vulnerability of outliving your money, especially factoring in an unexpected low-return financial environment or perhaps cuts in Social Security. Adjusting to such uncertainties would be hard and, even though one can cut back on expenses such as travel and entertainment, it could also be devastating to your financial security. According to Jonathan, moving the retirement age up to 70 is a partial solution to this problem.
But the better way is to envision a gradual retirement phase whereby you pursue a passionate existence without a paycheck being the goal. “Doing something productive with our retirement years,” says Jonathan, “could actually make for a more meaningful retirement. Maybe we start to engage in part-time work. We continue to get some money. We continue to contribute towards society. Thanks to that, we also find it much easier to pay for retirement because we’re not starting to run down our retirements, maybe even starting in our early 60s.”
Jonathan also has an against-the-grain idea of how young people should proceed toward the future. The current trend seems to be you follow your passion in your 20s—whether that be as a rock musician, a poet, or as a planter of organic seeds in fertile farm land—before getting on to the serious part of earning a living. Jonathan says, “I actually think that that’s total nonsense, and, in fact, the total opposite is true. Psychologists make this distinction between extrinsic and intrinsic motivation, or external and internal motivation. People, when they’re in their 20s, are greatly motivated by external rewards. They want the promotions and the pay raises. By the time you get to your 40s and 50s, those are less important. Instead, you’re more focused on doing things that you personally think are important. In your 20s is the time to learn the rules of the work world; you’re highly motivated by those external rewards. Once you get into your 40s and 50s, those are less important and you want to do stuff that is personally important to you.”
Using millennials as an example of how tough it is in today’s world to graduate from college with student loan debt and then be unable to find high-paying jobs, Jonathan strongly advises a different style of parental advising long before the child even enters college. He believes we should counsel our children with a strategy of matching college goals to available well-paying post-graduate positions and delaying the follow-your-passion part of life until a certain degree of financial security is acquired.
Referencing the book by William Danko and Tom Stanley, The Millionaire Next Door, which examined those financially well-to-do people who exhibit modest lifestyles, Jonathan advises that sensible money management takes great mental strength and, since we’re all prone to making mental mistakes, we tend to favor today and shortchange tomorrow. “The key to amassing wealth is more than anything having great savings habits,” he says. “That minority of Americans who are able to live beneath their means and save great gobs of money are those who end up with the seven figure portfolios.”
How to Think About Money will have you re-thinking your financial goals and, no matter your age, you can always learn new tricks, especially when the goal is a secure and fulfilling life.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: I’m happy to welcome back my next guest. He’s been on our show before, and he always makes a good account for himself and helps us learn all things financial-and-investment-wise. His name is Jonathan Clements. He may be known by many of you as the personal finance columnist for the Wall Street Journal, or he was a personal finance columnist for the Wall Street journal, and he’s the author of the award-winning Jonathan Clements Money Guide. He’s just published a new book, How to Think About Money, which we’re going to discuss today. Hey, Jonathan, welcome back to the show.
Jonathan Clements: It’s great to be with you, Steve.
Steve Pomeranz: In your book, you put conventional retirement thinking… you’ve turned it on its head. You’ve put it under a microscope and you found a whole lot of things that just don’t look right or add up to the conventional way we’ve all been thought to think about retirement. Take us through that a little.
Jonathan Clements: If you think about conventional wisdom, what it tells you is that you’re meant to go out and you’re going to bust your butt for 4 decades, save like crazy, maybe qualify for a traditional employer pension, put money into Social Security. Then you retire and you get to spend 25 or 30 years relaxing. A lot of people say, “That sounds pretty good.” I say that’s a terrible idea. Most of us get to retirement, we spend 2 weeks relaxing, and we’re bored out of our brains.
The fact is, many of us get a lot of satisfaction from work. We may not particularly enjoy the job we currently have, but we enjoy working towards goals. We get a lot of satisfaction from spending our time on things that we’re passionate about, that we find challenging, that we think we’re good at. I think that’s a notion that you really need to keep in mind as you approach retirement. We spend these 4 decades preparing financially for retirement, and yet we give scant thought to what we’re going to do with all that free time. What I would really like to see is the distinction between work and retirement start to disappear and retirement redefined as a chance to pursue your passions, to do work that you find meaningful without worrying so much about whether it gives you a paycheck.
Steve Pomeranz: The question it really comes down to is can we expect longer lives and is it really sustainable for us to just quit work—for many of us anyway—and hope that the money that we’ve accumulated is actually going to last throughout our lifetime. Is that realistic?
Jonathan Clements: That’s a great question, Steve, and for many of us the answer is no. We are moving towards a society, and in many ways, we’re there already, where we have too few workers and too many people dependent on those workers. We’re getting to a point where those people who are still in the workforce simply can’t produce enough goods and services to satisfy societies. Something has to give. That something is retirement age is creeping upward. Maybe closer to age 70, maybe even into the early 70s. A lot of people given conventional wisdom say, “Oh, that’s terrible. We can’t have people age 70 still in the workforce.”
At age 70, you may still live another 20 or 25 years. It’s not like you’re going to end up with this horribly short retirement. As I mentioned at the outset, a lot of us get a lot of satisfaction from work. Doing something productive with our retirement years could actually make for a more meaningful retirement. What I hope we move towards is a model where retirement comes upon us gradually. Maybe if we’ve done a good job saving and investing in our 40s and 50s, we might downshift into a career that’s perhaps less lucrative but which we may find more fulfilling, then getting into our 60s, maybe we start to engage in part-time work. We continue to get some money. We continue to contribute towards society. Thanks to that, we also find it much easier to pay for retirement because we’re not starting to run down our retirements maybe even starting in our early 60s.
Steve Pomeranz: There’s an extreme power in actually delaying the retirement date even by a year or so. You have one less year of life expectancy and one less year when you’re counting on your accumulated assets to pay for this long life. Half of us or half of males, anyway, are going to live to age 84, right?
Jonathan Clements: That, age 84, is an average for the broad US population as of age 65. If you’re somebody who’s taken reasonable care of your health, you’ve gone to the doctor regularly, your weight isn’t excessive, you exercise occasionally, if you fit that profile and you go to an insurance company and you say, “I want to buy an annuity that’s going to pay me lifetime income.” That insurance company is going to assume that you live until age 88. If you have a spouse, they’re going to presume that your wife is going to live until age 90. Life expectancies for people who have taken reasonable care of their health are actually extraordinarily long. If there are two of you, you essentially have two tickets to the life expectancy lottery. There’s a good chance that one of you is going to live into your 90s.
Steve Pomeranz: I see policies being written and, looking at the illustrations, they’re running them out to age 115. Those are tremendous outliers for sure, but just the fact that, when you see that age 115 on the illustration, it makes you stop and pause a little bit. Something is going on that the insurance companies are keenly aware of. The other aspect, which is something we deal with within our practice pretty much every day, is what happens if when you retired, you’ve accumulated this money, and you’re expecting a certain rate of return, but maybe we end up in a low return environment for an extended period of time or maybe we have surprise inflation for an extended period, or maybe cuts in Social Security. How do people adjust to those uncertainties going forward?
Jonathan Clements: The answer will involve a handful of different strategies. One of the most powerful strategies and one of the strategies that gets overlooked all too often is the ability to vary your spending. During working is if you have to put a new roof on the house or you have to replace the car, if you find yourself out of work, what do you do? You cut back your spending. For a month or two you don’t go out to eat, you postpone the vacation or you do something more modest. If you’re faced with a tight budget during your working years, you cut back.
Why shouldn’t you do that during retirement? If you retire and suddenly the stock market drops substantially, suddenly you see an increase in inflation, it makes sense that you would cut back your spending for maybe 12 months. Maybe it isn’t the year to go to Europe on vacation. By cutting back your spending, you reduce the amount you have to draw from your savings. You can wait for the bad times to pass and then continue as before.
Steve Pomeranz: There are many tools to use to quantify how you’re doing in real-time, like a GPS reading of where you are exactly looking at all the variables in your life and seeing whether in fact you are underfunded or adequately funded or perhaps even overfunded. If you fall into this underfunded or red zone, you can make the adjustments that Jonathan is just talking about. My guest is Jonathan Clements, his new book is How to Think About Money. I’ve read it and it’s an excellent book for all of my listeners to read. I will be putting it on my recommendations list.
You also have an unconventional way at looking at young people working and accumulating and the jobs that they should be thinking about in the early years of their work. Take us there.
Jonathan Clements: Once again, Steve, you go back to conventional wisdom. Conventional wisdom tells us that when you’re in your 20s, what you should do is you should pursue your passions. If you want to be a poet or a Broadway actor or a rock musician, this is your chance. You should take those years to see whether you can make it as a poet or a rock musician while you don’t have a family to support, while there’s no mortgage, before the financial crunch arrives. Underlying this is a rarely examined assumption. The assumption is this, that pursuing your passions is more important in your 20s than it is in say your 40s or 50s.
I actually think that that’s total nonsense, and, in fact, the total opposite is true. Psychologists make this distinction between extrinsic and intrinsic motivation, or external and internal motivation. People, when they’re in their 20s, are greatly motivated by external rewards. They want the promotions and the pay raises. By the time you get to your 40s and 50s, those are less important. Instead, you’re more focused on doing things that you personally think are important. You think about that.
If you’re in your 20s, going into the corporate world, getting one of those boring jobs where you have to go to meetings all the time where the work can seem like drudgery, if you’re in your 20s, that can actually seem exciting. You want to know what the rules of the work world are. You want to get those promotions and those pay raises. You’re highly motivated by those external rewards. Once you get into your 40s and 50s, those are less important and you want to do stuff that is personally important to you.
That’s the point at which you want to make a career change, maybe shift to something that’s less lucrative but which you would personally find more fulfilling. If you’re going to be able to make a career change in your 40s and 50s, you’re going to need to have your financial house in great order. In order to do that, you’re going to need to be saving and investing diligently through your 20s and 30s. If you do that, you’re going to have ample financial freedom, you’ll be able to make that career shift.
Steve Pomeranz: That is, go ahead, sorry.
Jonathan Clements: If you haven’t got your financial house in order, you’re going to get into your 40s and 50s, and you’re going to have no choice but to go back to the job you’ve come to hate.
Steve Pomeranz: We’re finding a lot of young people, millennials so-called, that are finding themselves in the opposite condition. They’re working at jobs, they’re not making a lot of money. Actually, based upon your concept here, that’s going to put them in a greater deficit as they get into their 40s and 50s, right?
Jonathan Clements: Yeah. This is definitely a tough work environment for people in their 20s. They’ve come out of college, they have a substantial amount of college loans, and yet they’ve not been able to find the high earning careers that they had hoped for. I lay a substantial amount of blame on parents. Parents do not seem to be guiding their college-bound children particularly well. They’re allowing kids to go off to college, rack up substantial amounts of student loans, even though their career possibilities are not great and, in fact, they’re not going to have the sort of job that will support the loans that they’re taking on. If you’re a parent, I would say to you, if your kid is going to be a social worker, you should make sure they are not walking out of college with $80,000 in student loans. That is crazy.
Steve Pomeranz: Yeah. The amount of loans or the cost of your school should be commensurate to a large degree with the kind of career you expect to get out of that very costly degree. If you’re going to be a doctor or some profession that is a high paying profession, fine. You’re taking a risk, there are no guarantees, but at least you have the potential for reward. Again, you mentioned social worker and other lower paid careers. It doesn’t make any sense just to spend all that money just because your kid’s going to college and that’s good enough.
Jonathan Clements: You cannot expect your kids to make that sort of judgment on their own. They simply do not have the capacity to look further enough into the future to appreciate what this debt is going to for their life possibilities once they’re out of college. Of course, the worst possible outcome (and this is where the student loan crisis really bites) is the kids who go off to college, take on substantial amounts of student loans, and never graduate. That’s when the crisis really emerges because they have the debt but they don’t have anything close to the earnings they need to support that debt.
Steve Pomeranz: My guest is Jonathan Clements, and the book is How to Think About Money. Jonathan, I want to switch gears here, and I want to talk a bit about one of your chapters which, in effect, is that we are hardwired for financial failure, that sensible money management takes great mental strength. You quote William Danko and Tom Stanley who wrote the book The Millionaire Next Door which came out—it was a revolutionary book. It described those people who are the quiet millionaires as the next-door neighbors who don’t show a tremendous display of wealth. Even to say to the fact that those who do, you never really know what’s going on behind closed doors because they may be in debt up to their eyeballs and not be in great financial shape.
I like this, if I may just take a second, Stanley said in the book—and it’s actually in a subsequent book—that those with a million dollars or more of investable assets, 70% of them ever owned a boat. 64% of them never owned a vacation home. The most popular car based on their latest purchase was a Toyota. The median price paid for dinner at a restaurant they frequent but most often was 20 bucks. For a haircut, it was 16 bucks. The median price they paid for a bottle of wine when having guests over was about $13.50. What do you make about all that?
Jonathan Clements: Going back to what you’re saying at the outset, Steve, we make all these mental mistakes. These mental mistakes have been explored in great detail by experts in something called behavioral finance. One of the biggest mental mistakes we make is we favor today and we shortchange tomorrow. We spend too much today; we don’t save nearly enough for the future. Yet, as you know from your practice and I know from the many successful individuals that I’ve met, the key to amassing wealth is more than anything having great savings habits. That minority of Americans who are able to live beneath their means and save great gobs of money are those who end up with the 7 figure portfolios.
That comes back to the Danko and Stanley concept of The Millionaire Next Door, the title of their 1996 best-selling book. What they discovered was the millionaire next door was this quiet couple, lived in a modest home, drove secondhand cars, didn’t wear designer clothes, and yet if you saw their financial account statements you would be astonished. They may not appear to be millionaires but they in fact are. The reason they’re millionaires is because they spend far less than they earn and they stock away the difference. That is the key to financial success.
Steve Pomeranz: One other aspect of that is time. As you age and as your time well invested has its time to compound, it’s truly amazing how quickly or how much you can amass over time. I often think about the TV show Do You Want to be a Millionaire. Do you remember that one, Jonathan?
Jonathan Clements: I do.
Steve Pomeranz: I forget exactly how many steps there were. Maybe there were 6 or 7 or 8 steps. The first step is you win 250 bucks. Then it doubles to 500, maybe it goes to 1000. Then it goes to 2500. The bottom line is really the first, let’s say, 6 steps don’t make you very much money. It’s the final 2 steps, when you get to 250,000, it goes to 500. Then it goes to a million. It’s in those final steps that most of the money is made. That’s really the way it is for those who accumulate wealth. They start relatively small, but they use many years to accumulate and to compound that wealth, and then you look at someone like Warren Buffett. Yeah, sure, he’s worth this insane amount of 60-something-billion, but I can pretty much tell you that if his money grows at 7%, Berkshire Hathaway stock grows by 7% a year, he’s going to be worth $120 billion in 10 years, another massive amount. Final words?
Jonathan Clements: You’re absolutely right. The only additional thing I would say to older listeners who hear this and say, “It’s too late for me.” I would say, “it’s not.” If you have money to spare and you have heirs you want to leave it to, you could set aside money, invest it in the stock market, leave it to your heirs, instruct them to continue to invest it. You leave that money to your 20-year old granddaughter and she’s not going to spend it until retirement, that’s a 50-year time horizon. Plenty of time for you to put her on the path to financial success.
Steve Pomeranz: Very good. My guess Jonathan Clements, the book is How to Think About Money. Recommended reading on my part. Thank you very much for joining us, Jonathan.
Jonathan Clements: Always a pleasure, Steve.