Why We Need To Save Ourselves Before We Can Save For Retirement

Posted by: Joseph Kuo | August 31, 2022

A very common question I get from current and prospective clients is “How soon can I retire?” or its variant, “Can I retire in [X] years?” As a result, I’ve created a fair number of retirement savings plans for clients who wanted to retire in a few years, as well as financial models for clients wanting to know how soon they could retire.

Creating a plan is great, but following the plan is not always a given. While my clients were advancing in their careers and increasing their earnings, many found that they actually weren’t making any meaningful progress towards their retirement savings goals. They weren’t making progress because their spending had increased to match their increased earnings. In some cases, they were even spending more than their increase in income, thus actually delaying when they could retire.

There were two general rationales for the increased spending. One was that the client was choosing to live in the present. Some just wanted to enjoy the fruits of their labors sooner than later. For some, it was a family decision—upgrading to a larger home to accommodate growing kids, or spending more on vacations and educational programs to better nurture their children. While very thoughtful and reasonable, especially considering that your children are only young once, the corresponding tradeoff of living better in the present is having to postpone the time of not having to work in the future.

For some though, the increased spending is an unforeseen and unintended consequence of earning more money. One of my clients had taken a new job that was a significant promotion with a nice salary bump. He took the job with the idea that the increased earnings would enable him and his wife to retire sooner. But after a couple of years, they found that they were actually putting in less into their retirement savings accounts.

I saw that the client had purchased a very expensive new car and was also spending a lot more on eating out. When I queried about the increased spending in these areas, the client mentioned that the new job was causing him so much stress. It was a tough job, and so he felt it was appropriate to reward himself with the car. Going out to more nice restaurants was a way of alleviating the additional day-to-day stress. Eventually we addressed the problem by coming up with some less expensive ways to alleviate stress.

While money is the ultimate measure of when we can retire, we have to be careful to not frame things solely in terms of dollar amounts. When we only consider raw numbers, we can fall into the trap of deciding to do something stressful or unfulfilling because it yields more money. This line of reasoning can actually backfire by causing us to spend more money to alleviate the headaches caused by making more money. Which then makes us stay in that job and incur more stress to make the extra money we need to spend. As a result we are trapped in a loop and our original intent of putting more money aside is never realized.

Ultimately, we can’t place a monetary value on our souls. We shouldn’t forget that in our financial decision making. In the end, when we choose to sell a bit of our souls each day to make more money, we might just be trading that extra money to try to buy those bits of our souls back. If that’s the case, is it really worth it?