Afraid to Give Your Money Away?

On this episode of The Long View, author and blogger Mike Piper discusses charitable giving, retirement spending, and his latest book, More Than Enough: A Brief Guide to the Questions That Arise After Realizing You Have More Than You Need.

Here are a few excerpts from Piper’s conversation with Morningstar’s Christine Benz and Jeff Ptak.

The ‘Battle-Tested’ 4% Rule

Christine Benz: In the book, you note that 3% to 4% initial spending rate is sort of battle-tested. It’s meant to be there for worst-case scenarios. But from a practical standpoint, many people end up underspending at that level. Can you walk us through that?

Mike Piper: There’s a few reasons why we need to use those low 3% to 4% figures. Reason number one is that we obviously don’t know what investment returns we’re going to get. We have to plan for mediocre to poor investment returns. Reason number two is that we don’t know how long we’re going to live. So, you can’t just plan to run out of money exactly when you reach your life expectancy because there’s a 50% chance roughly that you live past your life expectancy. And no matter how old you get, that’s always true. You always have whatever remaining life expectancy, and you have to be planning for a longer period of time than now.

And then, the third reason—and it’s a complicating factor that gets left out in some of the retirement spending research—is that spending isn’t entirely within our control. Imagine that you have a spending strategy that you’ve decided on that this year and it calls for spending 4% from your portfolio. But this year you receive a cancer diagnosis, and your doctor is saying you need the surgery and then you’re going to need chemo. Nobody in their right mind is going to say, “Nope. Sorry, I’ll wait on that until next year because that would mean spending 6% this year, and I’m not going to do that.” You’re going to spend 6%, or you’re going to spend 7%, or you’re going to spend whatever it costs to do that. That’s what everybody is going to do.

And then, there’s also other things. You need a new roof on your house or something like that. There’s basically just the fact that spending is somewhat outside of our control. So, we need to use this low base level of spending to give yourself some wiggle room, so to speak. But what usually ends up happening? You’re basically creating a plan that will work even if you live to a very advanced age, even if you have really high medical expenses, and even if your portfolio returns are really poor. You’re creating a plan that still works in all of those cases. But, of course, you’re probably not going to get unlucky in all of those ways. You’re probably going to have reasonable investment returns, and you probably won’t live to age 105 in a nursing home. What usually ends up happening is that on the day you retire you had enough, meaning enough to make it work at this low spending rate. But the normal course of things, if you don’t get super unlucky, is that enough ultimately becomes more than enough. Meaning that there’s going to be a significant chunk of money left over at the end of life. And in a lot of cases, if you’ve run Monte Carlo simulations and so on, you’ll see that these low spending rates in the median outcome—it depends on what assumptions you use and so on—actually result in a larger portfolio balance at death than on the date the person retired.

Psychological Barriers to Giving

Jeff Ptak: In the book, you discuss some of the psychological barriers people face with respect to giving money away, which is the situation they’re in in the median cases you’ve just laid out, or even spending it on themselves. You work with clients directly on financial plans for their retirements. Have you encountered people who actively underspend relative to what they could spend because they’re afraid? And how do you help them overcome that?

Piper: I think there’s a few reasons that a person might be feeling that way, right? Sure. I encounter it all the time. Do you want to know what my suggestions are?

Ptak: I do, yes, if you could offer those.

Piper: I think there’s a few reasons that a person might be feeling that way, that they might be having that experience. I think sometimes it’s just natural personality. The character traits that led a person to accumulate a large sum of money, it might be that they’re an anxious person who is typically nervous about the future. And so, they were throughout their career making a point to save, save, save, save at a high rate because they’re nervous about the future. And now that they’re retired, they just still have that same personality trait. They’re still nervous about the future. They’re still feeling the same way even though the actual financial reality of their situation is different. So, it’s not really a surprise that people often feel that way.

I think there are a few things you can do if the goal is to work on becoming more comfortable with spending more for yourself. You can take a research-based approach. There’s a considerable amount of research on the topics of what types of spending are most likely to result in an increase in your happiness. Because the point here isn’t just to spend more for the sake of spending more. The point is, if you’re going to increase your spending, it’s to do it in a way that’s going to make you happier and meaningfully improve your quality of life.

And the two biggest things that I’ve seen coming out of research on those topics are that, number one—and you’ve probably encountered this research before—is that spending on experiences rather than spending on physical things tends to result in a greater increase in happiness. And conclusion number two is spending that in some way strengthens existing social connections or helps you develop new social connections also tends to result in a significant increase in happiness. And that’s particularly relevant in retirement scenarios because what really happens, unfortunately often, is that on the date that somebody retires, they lose a lot of social connections that they’ve had with co-workers and so on over many years. We actually see an increase in depression and anxiety coinciding with the early stage of retirement, and that’s a part of the reason why. So, any spending that can help you strengthen social connections is likely to be some of the best spending you can do.

To me, the obvious thing here to do is check off both of those boxes, meaning any spending that you can do that is an experience with loved ones is probably the best spending that you can do in your life really in terms of the likelihood that it will increase your happiness. That could be travel with family, paying for a vacation with the kids or grandkids or whoever it is, a good friend. Or it could be any sort of classes with a friend or guided experiences—architecture tours and things like that—or depending on where you live or what kind of things are into, paying a guide to take you and your partner or a sibling or some other loved one on an adventurous hike or something like that. Experiences with loved ones is really the best spending in terms of spending that you can do on yourself that’s likely to increase your happiness.

As far as learning to give, be more comfortable giving, that’s a trickier one. I would say my usual suggestion to people who are looking—they realize that on an intellectual level they could afford to be giving more to either loved ones or to charity, but they still just feel anxiety around it—I’d just say start with a small amount, start with some amount that doesn’t trigger anxiety and then just see how you feel afterward. See if you felt nervous about it or if it actually made you feel good. Because usually, frankly, that’s what happens. The person felt good about it, because that’s usually what happens when you spend on other people—you feel good about it. It increases your happiness. So, start with an amount that doesn’t trigger anxiety and just go from there.

Giving to Loved Ones

Benz: Mike, I wanted to stick with that topic of giving to loved ones. For people who have maybe progressed through their retirements and they’re looking at their portfolios and it looks like they’ll be more than adequate for their own spending needs, spending on loved ones, children, grandchildren would be an obvious avenue for those funds. You note in the book that a common pattern among high-earning, high-savings households is adults tend to leave a substantial sum to their children when they pass away, and the children themselves are often middle age or even older at that time. And you think that in a lot of cases that’s kind of suboptimal, that people should think about giving to their children or grandchildren at a life stage when those funds might be able to have more of an impact.

Piper: I see that all the time. And I have to imagine most people who work in the financial advice field see this regularly, where somebody inherits a considerable chunk of money from their parents. But at the time that they inherit it, they’re already retired. They already managed to accumulate enough assets to satisfy their desired lifestyle in retirement. So, this new chunk of money that they receive doesn’t really do anything for them in any huge meaningful way. They already have what they need. And I think that’s, by the way, just the normal course of things with the way that life expectancies work in today’s world, where people often live into their 80s, sometimes 90s. So, if you think about how old a person typically is when they are having kids, that means that the kids are often going to be in their 60s. And so, they’re retired or nearing retirement. That’s just kind of the way the math works.

I think, in a lot of cases, it can make sense to work on giving earlier. And of course, it could be scary, for the reasons we talked about earlier. With bequests, of course, there’s no question of can I afford to give this money, because obviously you’re finished using it at that point. But with lifetime giving, it can be scary. But I guess the good news there is that with gifts made earlier on, they can be smaller amounts and still be super impactful. If your kids are in their late 20s, 30s or whatever age they’d be looking to be buying their first home, a gift that helps them make that down payment on that first home is tremendously impactful, and relative to a retiree’s portfolio that’s often not a huge percentage of it. Similar for helping the grandkids or great nieces and nephews, or whoever it is, pay for college. If they come out of school with somewhat smaller student loans, it makes their life so much easier and less stressful and less challenging. So, smaller giving amounts can be really impactful earlier in people’s lives.