By Guest Blogger Doug Rowat
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When can I retire?
Never has such a simple question been weighed down by so much complication. For clients asking this question I typically respond with a couple of questions myself: 1) Do you want to leave a legacy to your family and/or friends? After all, leaving every penny to your kids, for example, means a very different retirement than having your last cheque bounce. And 2) what kind of retirement lifestyle do you want? After all, watching sunsets from the back porch involves a different set of expenses than, say, racing Porsches on the weekends.
However, in recent years I’ve taken to adding a third question: Are you willing to accept less before and during your retirement? This question shifts the focus from what one desires to what one’s willing to sacrifice. Therefore, of the three questions, this is often the most difficult to answer. Why? Because people are hesitant to give up the extravagances that allow them to present themselves to the world as “successful”. People envy the affluence of their peers and, in turn, want their own affluence to be envied—at least the outward appearance of it.
Unfortunately, appearing successful matters, and it seems to be mattering more over time.
The median US home increased from 983 sq ft in 1950 to almost 2,500 sq ft in 2018 and the average new American home has more bathrooms than occupants. According to the OECD, Canadians like their bigger houses too, perhaps even more than Americans. The average Canadian house has 2.6 rooms per person versus the US at 2.4. The average for all other OECD nations is only 1.8. Interesting as well, the lessons we (or at least Americans) initially learned about making do with less following the 2008–09 housing crisis now seems to have been completely forgotten:
Have extravagant housing desires been curbed following the housing crisis?
Number of larger US houses (in thousands)
Source: US Census Bureau; New single-family homes
But our extravagances encompass not just housing. The price of an original iPhone was about US$400—expensive for its time. Today consumers will freely spend three or four times this amount on the latest model. Even something as simple as home entertainment now involves excess. How many streaming services do you subscribe to, for example? According to the Los Angeles Times, the average US consumer has four streaming services with almost 40% subscribing to five! Necessary? Hardly. But if your neighbour tells you all about the hot new show they streamed on Crave and you don’t have Crave? Well, the jealousy’s probably already brewing.
As Morgan Housel points out in his excellent new book, The Psychology of Money, spending money to show people how much money you have is the fastest way to have less money. Further, the respect and envy that you believe displays of wealth will generate for you is, in fact, an illusion:
When you see someone driving a nice car, you rarely think, “Wow, the guy driving that car is cool.” Instead, you think, “Wow, if I had that car people would think I’m cool.”… People tend to want wealth to signal to others that they should be liked and admired. But in reality those other people often bypass admiring you…because they use your wealth as a benchmark for their own desire to be liked and admired…
Does this same idea apply to those living in big homes? Almost certainly.
Jewelry and clothes? Yep.
It’s a subtle recognition that people generally aspire to be respected and admired by others, and using money to buy fancy things may bring less of it than you imagine.
Countless happiness studies have shown that the true value of wealth lies not in the extravagant things that it allows you to buy to show off, but rather in the freedom that it can provide, often in the form of an early retirement.
So, when it comes to planning and timing your retirement, what do you value more? The expensive trappings of “success” or your freedom?
Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.