Spending, not investing, is key to retirement

As my wife and I — and millions of other first-wave baby boomers — begin thinking seriously about income in our post-working years (and may those working years continue for years and years to come), an idea that has been floating around in my mind for a while finally has crystallized.

As my wife and I — and millions of other first-wave baby boomers — begin thinking seriously about income in our post-working years (and may those working years continue for years and years to come), an idea that has been floating around in my mind for a while finally has crystallized.

Simply, I’ve come to believe that successful retirement is a matter of saving enough and not spending too much, rather than being a function of successful investing. Before all you planners and advisers stone me to death in the comment section, let me explain.

First, what’s successful retirement? To me, it’s having enough money to live pretty much the way you lived when you were working, having enough to take care of emergencies such as a medical problem or a leaky roof, and having enough to give money to your children or others. That’s my definition, and I know there are many, many others. But play along with me.

Second, what does “saving enough” mean? If you work backward from the goal of living pretty much the way you lived when you were working, then having enough means making sure you have sufficient income to cover most of the costs you had in your working years. Sure, you’ll spend less on transportation, clothes and other work-related things, but you might spend more on entertainment, say. Since your post-working spending should equal your income (based on the premise that you don’t want to dip significantly into your capital in the beginning years, at least), you can pretty much figure out how much income you’ll need in retirement, again, at least for the first several years.

That income will come from a combination of Social Security and whatever pension you may have, plus the rents, dividends and interest earned on investments, as well as modest drawdowns of principal.

Now here comes the heretical part, especially after years of writing about investments and earning a living based, indirectly, on the sales of investment products: the investment part really isn’t all that important.

Recent research from Thornburg Investment Management Inc. of Santa Fe, N.M., found that among major asset classes, only common stocks and municipal bonds earned a net positive return after expenses, taxes and inflation over 30 years. But over other time periods, such as five and 10 years, for instance, only government bonds produced real returns.

Does that mean that we should give up on investing? No. But after years of hearing about asset allocation and risk tolerance, non-correlated assets, alternative investments and buy-and-hold versus trading — all interesting and important to some degree — I think that for most people, most of the time, all that stuff is academic and perhaps largely irrelevant.

Even if you believe John Bogle is wrong and that you CAN beat the market or find managers who can, will most average schnooks (and if you’re worth less than $5 million or $10 million, you’re a schnook) actually beat the market consistently enough and with such an inconsequential drag in the form of fees and commissions that the difference in results really amounts to much? I doubt it.

The key, then, seems to be having enough money, even if you wind up losing some of the principal through inflation, fees, taxes, poor investment choices or the misfortune of living through market declines and real estate busts.

Most wealthy people who aren’t heirs get rich from owning or selling a business or from earning very high incomes over many years and saving a lot of it, not from investing. Their investments are ways to maintain their wealth. For schnooks, investing can be the icing on the cake, but the cake has to be capital accumulation through saving.

This poses a challenge for advisers, because investing has sex appeal and most schnooks are under the impression that finding the right investment or the right adviser will produce consistent above-average returns. That’s one of the reasons Bernie Madoff was so successful for so long.

Advisers can’t perform magic, of course, but what good is telling that to the average client? Most are psychologically and intellectually incapable of accepting the fact that their future standard of living depends more on their saving and spending habits than it does on investment results.

Advisers I speak with tell me how hard it is to talk about spending with clients. My hat is off those advisers who tackle these conversations, which I think will become the hallmark of an increasing number of adviser-client relationships as boomers enter retirement. Many financial planners, of course, have long looked at the spending side of things in addition to investments, but I think we’ll see more of this over time.

I’m curious how you handle these conversations, and if, indeed, you think they are becoming more important. I invite your comments below.