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May 31, 2008


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A truly brilliant article. We deceive ourselves into imagining that we'll be happy as retirees living on much less than we live on now. If that's true, why don't we begin lowering our lifestyles now to come closer to matching what we expect we'll be living on then? Amazingly, every time I hack into my current lifestyle and save that money, I'm also increasing my retirement standard of living. Maybe the transition won't be as *ahem* abrupt as it might otherwise be, if I keep hacking away.

The government matching program is SO MUCH better than what they're doing.

FMF, May I link to this article on your site?

David, I'd have to disagree with you on your premise for the article. Reports are coming in that state a majority of people are using the rebate checks on cost-of-living maintenance; instead of suffering from involuntarily lifestyle retraction due to inflation, they are preventing it from dropping for a month or so. These people expect the money to be gone very soon (if it's not already spent) and worry about the further slide down in living standard. Don't misunderstand; I do see your point and agree in theory with what you are saying. One of the easiest ways to pad your retirement is to cut your overhead, and the easiest action in cutting your overhead is to reduce your standard of living. I also agree that saving your check is the "best" answer to the question of what to do with it. But for a majority of people out there, this isn't going to impact their retirement; it's merely going to stave off household inflationary effects for a little while.

Disclosure: My check is sitting in one of my cash flow accounts waiting to offset the inflation caused by the very government that issued the check, so I might be projecting a bit on this one - even though I am seeing reports stating the same. Not to mention, I am nearly finished writing an article for FMF on inflation and retirement, so I'm a little inflation-and-retirement focused today :).

Although I generally enjoy the articles from Marotta, I find the premise of this one dubious. Specifically, I don't buy the claim that one must save $23 to make up for every $1 he spends now in order to maintain his lifestyle in retirement.

For example, if you are spending $2,500 a month on a mortgage now, if you pay off your mortgage before retirement then that's $30,000 a year you don't need anymore to maintain the same lifestyle. And there are numerous other areas in which one can expect to save, such as owning one car instead of two.

And how about saving? If you are saving $20,000 a year now, that's $20,000 more that you won't need to maintain the same lifestyle in retirement.

Thus, in short, if I'm living on $100,000 now but will see reduced expenses of $50,000 in retirement then I can live precisely the same lifestyle in retirement on half the income (not accounting for inflation, which cuts both ways, of course).

I spent all of my rebate the day I got it, yet I still have all the money! I "purchased" $600.00 worth of mutual funds, which is how much I got.

This theory is ridiculous.

Interesting article, though I'm trying to get my head wrapped around what this means for any tax cut. I know for some people this is a hand out, but for most people (and probably the vast majority of people who read this blog and actually received a payment) this is a one year tax cut. I assume this means the Bush tax cuts have ruined my retirement as well since that was 10 years of me having more money to spend through lower taxes and increasing my lifestyle, since taxes are likely to increase again. (Maybe this is the point, that any tax cut that we can't be sure will continue is a bad idea. Therefore any one-time tax break (that by definition does not continue) would always be a bad idea.

Totally fallacious nonsense!

Hopefully Congress will continue to ruin our retirements by extending the tax cuts. :)

This post gets a little carried away with consumption smoothing orthodoxy.

I think it is possible to blow a one-time windfall without it permanently recalibrating your standard of living. It's like saying one cigarette is enough to make someone a smoker for life.

That's not to say I think the "economic stimulus" checks were a good idea. It's a pretty pointless redistribution of money, a rather crass attempt to placate the masses.

If the idea is to stimulate the economy, lower the corporate tax rate to zero, along with taxes on capital gains and interest. To alleviate energy prices, allow drilling of ANWR and offshore, let oil companies turn the parts of New Orleans below sea level into refineries, and eliminate summer blends and ethanol mandates. Finally, unilaterally eliminate all tariffs and take the farm bill out back and shoot it.

I find the theory dubious for many reasons but mainly because it seems to imply that people don't have common sense. It also assumes that everyone is the same.

1. This amount doesn't represent the same thing to everyone. For one family it may be more than their whole savings or at least a significant percentage of their savings. For another family it may be too small an amount to make any difference in lifestyle whatsoever. Most people would fall in between. If the amount is indeed most of one's savings, it may indeed be smarter to save, but not as much for the nebulous "lifestyle" reason as for the fact that in this case one may just not be able to afford to spend it. It would still depend on the type of purchase, person's age, and individual circumstances.

2. Every purchase is different. Spending the rebate on a fancy handbag isn't the same as spending the rebate on your child's braces or anything that you really needed to do for a while and couldn't afford.

3. Assuming one can afford to spend the amount and has common sense, a one time purchase or activity doesn't constitute a permanent "change in lifestyle". If every time you get some "gift" of an item that you wouldn't normally buy you "change your lifestyle", then you shouldn't accept any gifts. One example would be business trips. A lot of people stay in better hotels and eat in better restaurants when on business trips. Doesn't mean next time one goes on a trip as a tourist one would travel in the same style. Sure if someone spends a rebate on a handbag and decides that from now own she'll only buy the same type of handbags this would be a change in lifestyle. Again, people should use their common sense.

4. Our lifestyle isn't a constant. Not only do we splurge one month and may be really stingy the next month, but our whole lifestyle changes based on our circumstances - kids, salary increase, loss of a job. We adapt. Someone earning a 6 digit salary wouldn't continue living the same lifestyle after losing his job, not if one has common sense. So why would a one time purchase affect our whole lifestyle?

5. One should calculate retirement needs based on one's estimated future expenses, the age when one plans to retire, plans for retirement and not on what one spends now. Some expenses (e.g. medical) may be higher, other expenses are likely to be lower. Are you still going to be paying mortgage? Are you still going to be paying for kids in college? Would you need the same clothes if you don't go to the office every day? Would you drive as more or less? What would you like to do after you retire? One should also keep in mind that one's interests change as well as the amount of energy. If you like to go on bike tours around Europe in your 30s, you may not want to do it in your 70s.

For the record: I am not getting any rebate, but if I were getting it it would've been too small an amount to make any difference in my lifestyle. I'd probably save it simply because I can already easily afford to spend as much or more on anything I want. Now, if I were getting 10K and were to spend it on, for example, a more expensive trip than I usually take, it still wouldn't mean the next time I take vacation I would be compelled to spend as much. I have common sense and I'd like to think so do other readers of financial blogs.

Bad analysis based on a dubious premise. I expect better from FMF. kitty said it well, but I want to reiterate just in case.

The statement "every time you increase your spending by $1, you need $23 more in your investments when you retire" is misleading. A better statement would be, for every dollar by which you increase your expected yearly spending in retirement, you need $23 more in your investments. But "actual spending this year" and "expected yearly spending in retirement" don't necessarily correlate -- current outlays may or may not be predictors of future costs.

If I spend my whole $1200 or whatever at Starbucks over the course of the year, I may form a $1200/year Starbucks habit, and if I maintain it in retirement I'll need an extra $27,600 in my accounts to be able to handle it. But if I spend my whole $1200 as part of a down payment on my (first) house, I'm not necessarily starting a house-buying habit that I'll need to maintain in retirement; more likely, I'll simply have my mortgage paid off faster and therefore more money to invest later.

In other words, the article is flat-out wrong when it says "spending the extra $900 means you are expecting to continue living a lifestyle $900 greater than the lifestyle you have been living." Spending the extra $900 may or may not mean anything about my expected future lifestyle.

I agree with Kitty's and LotharBot's responses. I think the theory that $600 windfall will impact your lifestyle for life is really grasping and based on way too much assumption and over generalization.

I think it would have been much more reasonable to simply point out to people how much money they would have at retirement age if they simply invest the stimulus now and then let it grow with compound interest in a tax sheltered retirement account. Thats the point of the article right, encouraging people to save rather than spend? Why not just point out the straight forward benefits of saving rather than cook up some absurd stuff about permanent lifestyle changes.


Katy --

Of course!

If the author doesn't like the rebate, then just state the policy reasons why he doesn't like it and leave it at that.

We received 1800, 600 for me, 600 for my wife and 600 for our two kids. This was money we never expected to receive; it was a windfall for us. So to say that by spending it, or any portion of it will affect our future lifestyle is unsupported speculation. If a person takes the rebate and spends it on something that will take annual expenses to maintain, like cable TV, cell phone service or a much more expensive car (with higher insurance, licensing and maintenance costs), then yes, the lifestyle has changed and becomes more expensive. But if a person spends the money on a one-time purchase, like a trip they had not planned to take, or a new bicycle, then there has been no permanent change in lifestyle unless you can prove they will do the same thing year after year, when there is no rebate.

I think the poster's logic is flawed, or at least needs some serious clarification.

Personally, we put 300 in each kid's 529 account. The other 1200 went to our Roth IRAs. Otherwise, our monthly expenses and income remain the same, as does our "lifestyle".

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