Is Your Retirement Plan Missing the Key to Real Happiness? | Dr. Michael Finke

By the time you hit your 80s, you're physically less capable of enjoying the money, you may be cognitively less capable of enjoying the money as much as you could when you were in your late 60s. So let's put together a plan that allows you to actually get the most out of every dollar that you save. If you're like many retirees, you're challenged with spending in retirement.

And if that's you, we're going to be focusing on that today. We're going to talk about the psychology of spending in retirement. We're going to talk about the psychology and the challenges of shifting from that accumulation mode to decumulation mode.

We're also going to be talking about life satisfaction in retirement and how your spending in retirement can elevate your happiness and the meaning you experience. Hey, my name is Casey Weade. I am the host of the Retire With Purpose podcast, where it is my mission to deliver clarity and purpose and elevate meaning in your life.

If you're new to the show, I want you to know what I mean by that. You said, I thought this was a financial podcast. Well, this is a retirement podcast.

We take a holistic approach to retirement planning. We're going to be sharing with you content, both financially related and non-financial in nature. We like to bring you a variety of different guests, week in and week out on a variety of different expertises.

And today I'm really excited to bring somebody and welcome them back to the podcast. One of our most downloaded episodes of all time. And really excited to bring him back.

We have Dr. Michael Finca here with us today, who is a professor of wealth management at American College of Financial Services, holds a doctorate in consumer economics. He's a nationally renowned researcher with a focus on retirement income planning, retirement spending, life satisfaction, cognitive aging, and investor behavior. He has published more than 50 peer-reviewed articles of which we have focused and shared many of those here on the podcast with you, both on the podcast and in our weekly email that we send out to all of you.

If you want to get that weekly email, I encourage you to get it. Otherwise you're going to miss out on this amazing content that people like Dr. Finca are putting together for you to help elevate your retirement game. All you have to do to sign up is visit us at howardbailey.com. And I would encourage you to go back and listen to episode number 371.

And if you're like me, you go, I'm not going to go back and listen to that right now. Let me see if this guy's any good right now. Well, after this conversation, go back and listen to 371.

And that was titled examining how risk tolerance and aversion factors into your retirement income plan. During that interview, we briefly touched on Michael's research on how to find true happiness and purpose in retirement. We got to the end of that interview and Michael stopped me and said, Hey Casey, I really want to come back on.

I want to talk more about this happiness and purpose and meaning. These are the things that really matter. So that's what we did with Mike.

We want to reach back out and have him talk to those things and around his latest research when it comes to having a license to spend in retirement, which we all want to have. Dr. Finca, welcome back to the show. Great to be on again, Casey.

Good to see you. Yeah, I'm excited to have a past food consumption researcher here. Now correct me if I'm wrong.

I've been told and my team has told me that your early career focused on food consumption research. I didn't have this little tidbit of information previously. Is this true? It is true.

So I started out studying what motivated people to eat healthy foods. And I was noticing this correlation between healthy eating and saving. So people who ate healthy foods ended up having more money.

Now it was interesting to me because in some cases, people would attribute the fact that they ate healthier foods to the fact that they had more money. But I wanted to know to what extent did the same thing that motivated people to eat healthy foods also motivate people to save money and become more wealthy? And I wanted to learn more about investments theory to be able to understand that. And I took a PhD class in investments back at University of Missouri in 2002.

And at the end of the class, the professor took me aside and said, you know, Michael, you'd make a lot more money if you were a finance professor, the food consumption professor. Maybe you should consider getting a PhD in finance also. So at that point, I ended up getting a second PhD in finance.

And but it's been great because a lot of the research that I do really blends the things that I learned back when I was studying what motivated people to eat healthy diets, you know, and the research that I do in finance, which is all about how do you use financial instruments and investments and money to live better? You know, finance is just a it's a social science. It really is. You know, money is is just green paper dots on a computer screen.

You don't get happiness from money. You get happiness from using the money for something that actually does bring you joy. So, you know, what the interesting thing about finance is that it gives you some insight into human nature, what what things really provide people with joy, or maybe what things could they be doing better to give themselves more joy? Well, you found that typical cadence that all of us go through throughout our lifespan when it comes to our finances, as well as I see this with most financial advisors, too.

They kind of specialize in that area of saving or accumulation. And then we get to this de-accumulation stage and we start thinking less about saving. And now we have to shift to thinking about spending.

And you said there are a lot of parallels between your food consumption research and the way people save. However, what about consuming your wealth? Have you seen some parallels there between food consumption and wealth consumption? Well, let's let's do an example. Let's say that you're the kind of person who works out, you know, three or four times a week.

You stay in good shape. And then in retirement, you sit around and watch TV all day long. So what was the purpose of staying in shape all those years? So that in retirement, you know, instead of going hiking in Switzerland, you're sitting and watching TV.

So essentially, you made an investment and then, you know, it takes sacrifice to stay in shape. You've got to spend time and effort. And sometimes it's not so pleasant to go for a run in the morning if it's cold outside.

And then you get to the point where you want to cash in on that investment. And you don't do it for some reason. A lot of people do that with money.

So they save their whole working life for the purpose of living better in retirement. But by the time they get to retirement, they don't feel comfortable actually spending the money down. I mean, that's the reason why you save the money in the first place is to spend it.

And then when you get to retirement, very often what we see is that people just sit on the money. And in some cases, they're proud of the fact that they sit on the money. And I think there is a psychological issue there that in many ways we're rewarded for being prudent and spending less than our income during our working years.

And then we get our retirement. And if we're going to maintain the same lifestyle that we had, we got to pull money out of our savings accounts. And a lot of people don't like doing that.

We just have a barrier to seeing the amount of our savings get smaller. I had a nutritionist on not long ago. It reminds me of that nutritionist that was sharing with us the typical pattern of those as we age is we consume less, we eat less as we age.

And one of those things we eat even less of is protein. We actually need more protein as we age. We need more and more protein as we get in those upper years.

And then you think about that from a wealth perspective. And we need to consume more of our wealth as we get older and older. We've earned the right.

We've accumulated the wealth. Now it's time to spend it. But it is psychologically challenging.

And that's I feel like the content that we put out or anytime we have conversations around spending and retirement, the psychology of spending and retirement, those end up being some of the most popular episodes. And it's because it's a real challenge. I can't tell you the number of clients that I've worked with over the years and our team have worked with over the years that this is the biggest challenge to get them over the hump.

And you shared on LinkedIn a few weeks ago, just kind of some thoughts of your own around why this might be. And I wanted to read what you said. And you said this, you said, none of us want to admit we're going to die, but recognizing our mortality is an essential part of planning for a life in retirement.

Many retirees don't spend enough because they act as if retirement isn't finite. Science shows, and this is the sentence that got me, science shows that the fear of death often prevents us from making more rational choices. Here was, I had to reread that sentence a half a dozen times.

I had to write it out myself. And I said, if that's the case, if the fear of death prevents us from making more rational choices, then the fear of death inherently encourages us to make more irrational choices. So in that light, it sounds like you're saying that we should make less rational decisions as we age, as we are in retirement, and spending more is one of those less rational or more irrational decisions.

And in my experience, it would seem to me for the average retiree that we're working with, spending, and I think this is what's showing up in a lot of the research, spending more in retirement is the rational decision, not the irrational decision. It is, it's hard to wrap our brains around that. It seems wrong.

It seems wrong to take a chunk of our savings and say it's okay to spend that money down because that's why I saved the money in the first place. But if one of the reasons for the irrationality that we very often see when it comes to spending is that it's very difficult for us to admit that first of all, retirement is not gonna last forever, right? I like to use the example of a lifespan being for a healthy woman, nine rows of 10 dots. So each row represents a year of life.

And if you retire when you're 65, then on average, you get two rows of 10 dots and one row of five dots. And your money that you save for retirement has to fund the lifestyle on average for those two rows of 10 dots and one row of five dots. But what ends up happening is that very often people just think that retirement is gonna last forever.

They think that it's not finite. They forget that there's really only two places your money can go. You can either spend it or you can pass it on to others after you die.

And what I very often see, I did interviews with retirees a few years ago. Often, they were 15 years into retirement and getting older. And I would ask them, how are you spending your money? And they'd be so proud of the fact that they weren't, that they had more money when they were 80 than they did when they were 65.

And so I'd ask them, you must really wanna give that money to your kids. And very often, that's not the case. They're not building it up.

They're not failing to spend the money because they wanna pass it on after they're dead. They just feel like they have this instinct to preserve their wealth. I mean, it's good news for the people who inherit it because it means that they're gonna get more because the person who earned the money had a difficult time spending it down.

But I think my preference is to begin the conversation with a acknowledgement that you have a nest egg and there's only two places your money can go. You can carve out a portion and say, I'm gonna use this as my legacy. It's a way kind of to live forever too, to position the legacy as something that you want your money to do for you 50 years in the future.

And it actually psychologically makes it easier than with the rest of your nest egg to think, all right, the purpose of this is to live better. So I'm gonna be okay with spending down this portion because I've still got this portion of my nest egg that I plan to pass on or use for an emergency. So let's carve out this portion.

I'm gonna grow this portion. I'm gonna carve out this portion. I'm gonna spend this portion and I'm gonna feel okay about doing it because that's my goal.

My goal is lifestyle. But very often what happens is people see it as one unit, a big nest egg and they put their arms around it and they say, I can't see this get smaller because if it does, I'm gonna fear that I might potentially run out. And oftentimes people, their identity is associated with that number.

They've saved their whole working career so that they could meet that number, 500,000, a million dollars, $2 million. And once they reach it, they don't wanna see it get smaller because it was such a major accomplishment to actually get to that threshold. But they don't ask themselves, why did I save the money in the first place? And especially today where people don't have pensions, they're not gonna be able to replace the lifestyle they had before retirement unless they start spending that.

So we've gotta get people to feel more comfortable actually being rational about the fact that they're, you've got two rows of 10 dots and one row of five dots. How do you wanna fund that with their savings? It doesn't last forever. And by the way, that last row of 10 dots, you're probably not gonna be doing all that much.

By the time you hit your 80s, you're physically less capable of enjoying the money. You may be cognitively less capable of enjoying the money as much as you could when you were in your late 60s. So let's put together a plan that allows you to actually get the most out of every dollar that you saved.

The fear of death then, if I could say, the fear of death feels and puts you in such a position that it allows you to make what feels like an irrational decision that's actually the rational decision. At the end of the day. You know, I say that there are ants and grasshoppers in retirement.

The ants are the people like many of us who have been trained essentially to always spend less than our income. It's morally the right thing to do to always spend less than our income. But then when we get to retirement, we've gotta flip that switch and say, it's all of a sudden it's okay to spend down that money.

That's why I saved it in the first place. And I do think the fear of death is one of the reasons why we try to convince ourselves that we just need to preserve the money just in case. Have you found in your research that the reason that retirees don't spend is more often a fear of spending or more often a pride of saving? This would have to be speculative because I haven't specifically addressed that.

You know, I did in a survey recently, ask people if they would feel more comfortable spending money on like going on vacation or eating out with friends if they had $10,000 a year as opposed to an extra $140,000 in their savings account. Now, the reason I asked that is because anybody can just trade $140,000 for a $10,000 a year paycheck in retirement through lifetime income. And I wanted to know, would you feel more comfortable spending money on frivolous stuff if it was in the form of savings? And 60% of people said, well, of course I'd feel more comfortable spending the money on frivolous stuff if I knew it wasn't gonna run out, if I knew that I had a stream of income that was going to last a lifetime.

And then the question becomes, well, why didn't you do that? Like, if you feel that you could live better by trading a part of your savings for income, why didn't you do that? And I think a lot of times it's because people never really were given that choice. That very often, you've got this nest egg of investments and not a whole lot of thought is given to how much of that nest egg do I wanna carve out and just create a paycheck for myself that's gonna last forever. And I also think, we talk about the bucket approach to income planning quite a bit.

I mean, everybody, if you're listening to podcasts, you've probably heard us talk about that, right? You wanna create a bucket approach income planning. This is what I'm gonna spend as my first leg of income, my second leg of income, third leg of income. But I think we need to take it further as you stated there previously in creating even greater purposes for each one of those dollars.

As our framework follows, you have funds for liquidity, you have funds for income, you have funds for flexibility, then you have your estate, your legacy dollars. And now you're breaking it out into broader purposes. And when you do that, then you go, well, I don't mind taking this chunk and this chunk will be guaranteed income because I still have this chunk over here that isn't going to be that guaranteed.

There's so much psychology that goes into financial planning and making really good financial decisions. And then having them ultimately benefit you, which at its core is elevating your happiness in retirement. And what kind of research have you seen around spending in retirement or the impact that spending in retirement has on retirees or the fear of spending for that matter? Another side of that coin, the fear of spending in retirement and the impact that has on a retiree's happiness.

So we did a study, David Blanchett and I, David Blanchett is the head of retirement research for PGIM, which is a unit of prudential. And we looked at whether, in the defined contribution era, people have a lot of IRA assets. And in the pension era, people, instead of having say $100,000 or $500,000 in savings, they might have an income of $3,000 a month.

And they're essentially equivalent. Like you can go out and buy $3,000 a month for about $500,000. But what we wanted to know is, today, people who have $500,000 in their savings account, how much do they spend compared to those who might have a legacy pension that pays $3,000 a month? In other words, when you think about retirement wealth, and this is a good way to think about it, that if you have a guaranteed income, that's the equivalent of having a significant amount of money in a savings account.

So the savings account, money is fungible. You can use the money, you could have $500,000 in investments, or you can simply trade it for $3,000 a month or something like that. And so we looked at, of the ones who had $500,000 of wealth in the form of $3,000 a month of income, did they spend significantly more than those who have simply investment assets, $500,000 of investment assets? So in other words, one person has a pension, $3,000 a month, the other one has $500,000 in savings.

Who is going to spend more? Well, the one with the pension should rationally spend more because they don't have to preserve their savings in case they live to the age of 95 or 100. So the lifetime income allows you to spend maybe 25% more mathematically on average, but actually people spend about twice as much, which means that the ones who have investments, there seems to be this psychological barrier where they can't bring themselves to spend as much money out of their $500,000 of investments compared to someone that was getting a pension that paid $3,000 a month. And that has important implications.

What that means is that the retiree that has most of their wealth in investments is very often not spending anywhere near as much as they could. A few years ago, I did a paper called the Retirement Consumption Puzzle, which is all about why do these people who don't say they have a very strong desire to pass on their wealth, why don't they actually spend it in a way that would allow them to gradually spend their money down over time? You can preserve enough money for a legacy and emergencies and things like that, but we shouldn't see that people end up accumulating more wealth in retirement. But in fact, that's very often what happens is that people, when they have investments, they just want to see it get larger without giving thought to the fact that by growing those assets, essentially they're passing on more money after they're gone to their beneficiaries.

They're essentially living for their beneficiaries. And that's okay if that's what you want to do. But a lot of people don't necessarily want to do that.

It's just the natural way we respond to wealth. It's what's known as framing. So we frame income as money that we can spend.

We frame our wealth as money that we're supposed to preserve. We don't want to lose. We want to grow that money.

When we focus on our wealth, we have a different set of objectives than when we focus on our income. But the reality is that, again, there's only two things you can do with your wealth. You can either spend it or pass it on.

I think most would get that. And, okay, yeah, if I had more guaranteed income coming in, if I had more paychecks coming in every single month, then, yeah, I'm going to spend more. But then that goes back to the age-old question, is that going to make me happier? And Jim had that question, what impact does guaranteed sources of income actually have on my happiness and fulfillment in retirement? And that brings me to the assessment, well, after $75,000, $150,000, somewhere in that range, depending on what research you're looking at, you're not going to see increasing levels of happiness in your life beyond that level of income, which I think equates itself to how much you're actually going to be able to spend as well.

Whether that's $75,000, $150,000, after that point, well, I'm not going to get any more happiness anyways. Just because I have more money to spend, or just because, more importantly, that I'm spending more in retirement, if now I'm spending $15,000 a month and I was spending $6,000 a month, am I actually happier though? Great, I spent more money, but am I happier? And actually the authors of that original article have an updated version of the article where they find that you do actually get happier by spending more money. So that original idea has been debunked in the literature by the people who did the original article.

It's actually a really fun example of how academics works. So just as an aside, the original author of that article, Nobel Prize winning economist, this very famous guy, Angus Deaton is his name. And somebody else later on said, oh, wait a minute, maybe it is the case that there was, and I can't remember exactly what the problem was with the original analysis, and went back to Angus Deaton and I think maybe you did it wrong.

And so Angus Deaton said, you're right. So they all published an article together that debunked his original article. And what it did say is that, yes, you are happier, in fact, as you spend more money.

You know, it's not, you don't get twice as much happiness from spending between $75,000 and $150,000 as you did between spending zero and $75,000. So your happiness is not as great the more money you spend, but generally speaking, you do get greater happiness. Now I have a new article written with a researcher named Tao Guo, he's at Morningstar, that looks at fun spending, fun money spending is what we call it.

So this is going on vacations, going out to eat with friends, going to shows, going to sporting events. And we lump all this together as fun money spending, because we know from the research that those are the categories, that kind of leisure spending that provides the biggest impact on happiness. And we look at that spending throughout retirement.

We look to see whether people who have more money and more income spend more on the fun stuff. And as it turns out, people who have more income spend more money on the fun stuff. And wealth, yes, but to a lesser extent.

So income actually does give you the license to spend money on the things like going on vacation that you really enjoy. But another thing happens that is interesting, that people who have a lot of income spend more money on the fun stuff in their 60s and 70s. But by the time they hit their mid 80s, they're really not spending much more money on the fun stuff, they're much lower income.

So there is an interaction between health and physical abilities and cognitive abilities and money, where when you're 85, you're not gonna get as much happiness from that dollar of spending as you did when you were in your mid 60s or mid 70s. So this also is part of, I think the retirement spending plan, is how can I give myself the license, the comfort to be able to spend the money in this period of retirement, which is my most active period of retirement, when I can get the most out of my savings. To me, that's really interesting.

I mean, it's like going to a casino and betting on the spaces that are gonna give you the biggest return. And if I'm gonna put my bets on retirement, bets on age 65 and age 70 and age 75, and I may take a little bit of money away from age 95, because I'm probably not gonna be able to enjoy it as much. That's part of this, the calculus of getting the most joy from your money.

And very often what happens is that people end up leaving the table because they were maybe conserving in their late 60s and early 70s, and then they end up with all this money. And by the time they realize they're in their mid to late 80s, they're not really capable of spending the money anymore. So on anything other than long-term care.

So it's a little bit depressing to think about it, but it is, you gotta look at the data, you gotta look at reality and say, all right, how can I get the most out of this period of my life? When people wanna look at this rationally, they wanna go, well, how much of my money should I turn into guaranteed income? How much should I have of my expenses be guaranteed? And I think that's the whole rational and irrational discussion all over again, potentially. And we have a question from one of our subscribers, Mike. And if you are going, where did these questions come from? Well, if you're a Weekend Reading subscriber, then we reach out to you prior to these interviews and you help me co-architect them.

And so Mike asked a question that was, I'm wondering what percentage of expenses Michael recommends to be covered by guaranteed income. He says, so total expenses minus social security income, no pension available equals X. What percentage of X should be covered by annuities? So this is actually something I've done some research on. For those who earned more than $100,000 a year in their working life, about 65% of their expenses are on inflexible categories, things like healthcare and property tax and basic utilities, things like that.

65% of their expenses in retirement are fixed. So to me, the minimum that you should be funding with guaranteed income sources is 65% of your pre-retirement expenses, not your income, your expenses. So if you wanna map it out, on average, people who make over $100,000 a year spend about 55 to 60% of their gross income.

What that means is that if you made a $200,000, on average, you're spending about 110 to $120,000 per year. And you ask, how can that be? Well, it's because during your working years, you're also saving for retirement. You might be saving 15% of your income for retirement.

That's not money you're spending. You're paying payroll taxes like social security. That's not money that you're spending.

And then you're not spending every single dollar of your paycheck. So it's about 55 to 60%. That's the lifestyle you need to replace.

And then percent of that is on those inflexible expenses. So maybe $70,000 a year is on inflexible expenses. If you're gonna be getting $35,000 from social security, $40,000 from social security, that means you need to come up with a $30,000 lifetime income gap.

And so you take enough money from savings to be able to cover whatever that gap is that represents all of your inflexible spending. And then for the rest of the money, you can decide what to do with it. You may decide to also buy some guaranteed income as part of your more flexible part of your budget.

And a lot of this has to do with how flexible are you willing to be with your spending? So maybe golf is something that you're gonna be spending your money on. If you're taking a lot of investment risk and longevity risk, then you might have to be flexible about the amount of money you wanna spend on golf. How flexible do you wanna be? That's up to you.

Then you design your investment and lifetime income strategy around the amount of flexibility that you're willing to accept. And you find that people overestimate the degree of flexibility that they think they have. Yeah, well, I'd cut back on the club membership.

If the market goes down, yeah, we're gonna fund those discretionary expenses with market dollars. And I know I need to cut back if the market gets bad and maybe I need to cut back for a year or two and I'll take a pause in the golf membership. But when push comes to shove, they aren't willing to give up those luxuries.

No, I mean, who's gonna give up the gym membership or the pet grooming and all the other stuff that people start getting accustomed to? It's just part of life. And nobody really wants to have to cut back if they get unlucky. But the reality is that if you take investment risk and longevity risk and you get unlucky, then you're gonna have to cut back on that stuff.

So recently over the last 15 years, we've pretty much consistently gotten lucky. Markets have continued to go up. There's been a couple of blips along the way, but that's probably not gonna be the case over the next 15 years.

And people are gonna have to be reasonable about the reality that cutting back is the downside of taking significant investment risk. A lot of people like to think, I'm not gonna be able to keep up with inflation unless I take an adequate amount of investment risk. Well, that's true and especially true historically.

But the reality is that if you get unlucky, especially during the early parts of retirement, you might have to cut back and your spending might not be able to keep up with inflation. Retirees, again, they have two rows of 10 dots and one row of five dots. And if in the first row of five dots, they get unlucky with their investments, that's gonna affect their ability to spend throughout the second row of 10 dots and the third row of 10 dots.

So the reality is that risk is real. And when you take risk, you have to be able to acknowledge the possibility that you might have to cut back. Yeah, some retirees have a predisposition against annuities and Jen would be one of those fans.

Jen asks, for those of us that have trouble spending, how can we use funded asset levels to help guide and inform comfort in spending levels? She says, any help for us folks with spending, but also not interested in annuities would be greatly appreciated. I think the question I would ask is, why not? Why are you not interested in an annuity? I mean, there are designs of annuities that give you all the benefits of providing lifetime income, but don't require that you get rid of all your money at once to pass it over to an insurance company. So, let's say that you have $200,000.

$200,000 is gonna buy you about a thousand of income. You can either hand it over to an insurance company and get a guarantee of $1,000 a month for life, or you can put it into some kind of annuity that has a lifetime withdrawal benefit, in which case it lets you pull money out of that $200,000. The $200,000 balance goes down just as it would with any other type of investment account.

And then if it depletes, if it runs out, the insurance company will continue to make those payments. So, first of all, ask yourself why it is that you don't like annuities. Is it something that you've read online? Educate yourself about how the experts think about annuities.

There's a great article by Richard Thaler, who was a Nobel Prize winning economist, called the annuity puzzle in the New York Times. It's a very easy read. He may be a Nobel Prize winning economist, but he explains concepts very simply.

It's called the annuity puzzle by Richard Thaler. It gives you an idea of why economists think it's a puzzle that people don't buy annuities. And most economists that I know that do research in the area of retirement income planning own annuities, because that's how we want to live our life.

We understand the efficiency of doing that yourself. The alternative is that you have to put the money in investments, and then you have to pull the money out of your investments. And when you don't know how long you're going to live, naturally, you're going to have to be a little bit more conservative.

You're going to have to pull out a little bit less, which means it takes more investment assets to fund the same amount of income, probably about 25 to 30% more. So instead of spending $1,000 from a $200,000 annuity, you might have to set aside $250,000 or more to pull out $1,000 a month and not be at a very large risk of running out of money if you live to the age of 95. Well, what happens if you live to the age of 100? Well, you could still run out of money.

And this is why when you use the annuity, you can spend more from that money, and you can worry less. That's why it's called the annuity puzzle. Why wouldn't anybody do that? But when you put together a plan of funding, safe spending from investments, you have to acknowledge the reality that if you live a long time, you could potentially run out.

That affects how much you can spend. You can always be very conservative and reduce the risk of running out. But again, the risk is that you leave a lot of joy on the table and money that you could have used for lifestyle ends up getting passed on after you're gone.

You know, one of the things that I find fairly ironic is that it seems that a lot of the families that we work with, those that don't have children or don't have any legacy goals, tend to be the ones that spend the least and have the most trouble spending. And it does make sense. I mean, you have kids.

Well, you're going to have expenses that come with those kids. It doesn't matter how old those kids are. Even if they don't need help, you want to travel to go see them.

You want to take them on vacation. And those that don't have these legacy goals are quite often struggling with spending more than others. And we had two questions that came in from individuals that were kind of in that position where they don't spend much, they don't have big spending goals, they don't spend a lot month to month, they don't have charitable goals, and they don't have children that they want to leave those assets to.

When you sit down with someone like that that doesn't spend very much, they don't have charitable goals, they don't have children, and they're quite obviously going to be leaving a ton of money behind, what do you say to them? What's your advice? You know, first of all, I'm going to take a step back and say, I think for those people, I'm going to talk about the pre-retirees first and say, if you have enough, if you have a lot, if you're doing well, if you're saving a decent amount for the future, you don't have a very strong legacy goal, be realistic about the trade-offs that you're making to earn more money. I was, when I was at Texas Tech University, we could take sabbaticals. And what is a sabbatical? It's an opportunity for a professor after they've been there for 10 years to either take a semester off at full pay or take a year off at half pay.

And the idea is that you can work on reading, focus on catching up on aspects of your life as a academic that you weren't able to catch up on when you were teaching. And I went ahead and I took the one semester off at full pay because that just seemed to make sense rather than taking the full year off and getting half pay. And when I was explaining this to a friend of mine who was actually a, he teaches graphic design at another university.

He said, Michael, you're an idiot. Why would you not take vacation when you're in your forties? Why would you instead take your retirement vacation when you're in your seventies? When in fact you could essentially, you can move back retirement by a year, take a year of retirement when you're younger and you're gonna be happier. Now, one of the points that I think I got from that is that when we're working, we very often don't prioritize taking the equivalent of retirement time during our working years because it seems wrong.

We don't allow ourselves to use every day of available vacation time, but you're young and you have physical capabilities and you have cognitive capabilities. You can really enjoy it. And very often stepping away from work for a while will make you more productive in the long run.

Don't hesitate to do that. And part of balancing life means that opportunity to enjoy life earlier on before we retire. Oftentimes as Americans, it just feels bad to do that, but sometimes it can be an enjoyable thing.

You can get the most out of the experience that you have on this earth by maybe not quite saving as much, especially if you don't have that strong of a legacy goal. Now, if you get to retirement and you're overfunded, then, and you don't have a very strong legacy goal, you don't have a very strong charitable goal, then you really have to take a step back and say, all right, what is it that money can buy that really buys, that really creates joy for me? Is it that I can travel? Is it that I can, to me, the most important thing is to recognize that it is the social types of activities that give us the greatest amount of happiness. And give yourself the license to be able to engage in more social activities in retirement, even if it costs you money, if that's gonna be the thing that provides you with the most enjoyment, which the research shows that it is.

Otherwise, you're either gonna have a charitable or legacy goal de facto, when you die, the money's gotta go somewhere. Or you can start thinking about what that charitable goal will look like while you're still alive. And most people, maybe they haven't given a lot of money away during their lifetime, but they recognize that they'd rather give it away while they're alive than when they're dead.

Then they can start, that can be a new hobby. And the hobby is giving the money to causes that they believe in, that align with their values or the people that they feel are worthy. The charitable conversation has to happen if you know that there's going to be money left over at the end.

And then the question becomes, would you rather give the money in a deliberate fashion, or would you rather it just go to whoever it goes to after you're gone? As my grandmother used to say, it's always better to give money with a warm hand than a cold one. And I think there is some truth to that. You might as well get some enjoyment if you're not gonna spend it.

Yeah, yeah, yeah. And to go into a couple of the questions from these individuals, one was from Debbie. And really, Debbie, I'm gonna slim your question down just a little bit.

Thank you for your question. Debbie's really asking kind of a unique question. And if I were to kind of summarize it, she's really asking, could I get the same type of benefits of having confidence in my spending and getting happiness out of that spending if I just spend my RMDs as it would be if I annuitized my assets? And I don't know if there's been any research around that that, hey, once the RMDs kick on, then you're getting those automatic paychecks.

And those people are just as likely to spend with confidence and elevate their happiness as those that would have annuitized. So this is a great question. And it gets to the heart of how do we frame our savings? So the government actually steps in after a certain point and with our IRA money, they say, all right, you gotta spend down part of it.

So not spend down. You have to pull it out of your IRA. Now you can do whatever you want to with it.

You can reinvest it if you want to. But all of a sudden, people start seeing it as a license to be able to spend part of their savings, which is odd when you think about it because the people generally don't like the government telling them what to do. But now they're allowing the government to tell them how to spend their money.

Now the problem with this strategy is twofold. One is it's a weird spending path. It starts out at age 73 being really low.

And then your spending goes up when you're in your 80s and late 80s, early 90s, it starts cutting back again. And then by the time you hit your late 90s, spending goes way down. It's because it's basically spending down that account.

So there's not a whole lot of protection against running out. Now, if you bought an annuity, what that would allow you to do compared to an RMD is spend way more early on in retirement without the fear that you're going to run out if you live into your 90s. So to me, if you compare the two paths of spending, one with an RMD, one with an annuity, with the annuity, let's say you buy it at retirement, your spending is going to be much higher at the very beginning.

First of all, because you're not taking any money out of RMDs until you hit 73. And even when you start at the age of 73, it's not a lot of money. So you might be able to spend 40% more money even at the age of 73 with the annuity.

But as the RMDs will start kicking in, you're going to be spending a lot more money in your 80s. Is that the income path that you want? And I think most people would look at that income path and say, no, that's kind of crazy. And it also bounces around a lot because it uses only two pieces of information, your current balance and your expected remaining longevity.

And if your balance goes down by 20%, then your spending goes down by 20%. And that's not something that most people can live with. As opposed to an annuity, the market goes down by 20%.

You still spend exactly the same amount of money every year. That's a great answer. And I think we already know how you're going to answer this one, but I'm going to go ahead and throw it out there for you.

We've got Don that said, hey, we were able to cover all of our living expenses, travel fund with our social security and pension. Then they have their emergency fund to cover any major expenses. They have about $700,000 left over.

He said, some people are advising him that he needs to be more aggressive, 90, 100% equities with that 700,000. He said, William Bernstein says to eliminate the equities and go conservative because you already won the game. Why keep playing? Any thoughts? Oh, I love that question.

So the question becomes, you know, there's, I don't know how well, you know, a guy named Larry Sweadrow. Larry- He's been on the podcast. A lot of articles on financial planning websites and a very smart guy.

He has a story of a couple who, this was during the tech bubble. They had $10 million saved and they took a lot of risk on these investments in like the NASDAQ back in 1999. And their $10 million turned into $3 million.

So he asked him, you know, why did you take that risk? Sure, your $10 million could have grown to $20 million, but what else could you have bought if you had $20 million that would have made a difference in your life? And what happens if your $10 million goes to the $3 million? That's gonna have a big difference on your life. So the upside is not gonna make any sort of a difference. The downside is gonna make you far less happy.

That's the question you need to ask yourself. So if you've got, if you're already got everything covered, but you've got an $800,000 cushion, then how are you gonna feel if you get unlucky, the market tanks, the $800,000 falls to $500,000. Now that's the risk that you take if you go really heavy into equities.

I love this phraseology, you've won the game, step away from the table. And that's all about, is it worth gambling to get the $800,000 up to $1.5 million? Is that gonna change your life? Or is $800,000 enough and you just wanna be able to preserve those assets to keep up with inflation or whatever? In which case you put it in a more conservative type of portfolio and the worst case scenario is nowhere near as bad. Maybe the worst case scenario, the $800,000 falls to $700,000.

Not gonna make much of a difference, but that's what risk means. Risk means, am I willing to accept the possibility of the downside in order to get the upside? But if the upside is not gonna make any sort of a difference, then why risk the downside? I love how everything always comes back to purpose and impact. Asking yourself that question, what is the purpose? What's going to be the impact of X or Z happening? And you kind of phrase some of these things often as life satisfaction.

You talk about the three pillars of life satisfaction. So let's jump into life satisfaction. What are your three pillars of life satisfaction? Let's talk about those.

Well, when you run... So there's a wonderful dataset that was created by the University of Michigan called the Health and Retirement Study, which tracks retirees, started in 1994. We can follow them over time and it's got a battery of questions related to how well they're enjoying retirement. That's retirement satisfaction, life satisfaction in general.

And so we can see the things that predict retirement satisfaction. And when you run what's known as a multivariate analysis, it sounds very complicated, but basically you're throwing in all the characteristics of the retirement and you're seeing which ones consistently and reliably predict greater happiness. And when you throw in everything, what you see is that they cluster into three different categories.

So money is in fact a category. How much income do you have? How much wealth do you have? That makes you happier. Relationships.

The quality of the relationships that you have with your spouse and your friends are the ones that have the biggest impact on life satisfaction. And by the way, the quality of the relationship you have with your kids has no statistical impact on the amount of satisfaction that you get in retirement. So just a word of warning to anybody that's expecting to get a lot of happiness from moving close to their kids or interacting with their kids after retirement, this is 20,000 retirees, so it's a big data set.

No statistical evidence that that makes any difference. What really matters is the relationship you have with your primary partner and with your friends. That's what you really draw from to get the most satisfaction after you retire.

And the other one is health. It's the quality of, the level of, would you say that you're in good health? There's also measures in the HRS of grip strength and physical capabilities. Those are a strong predictor of life satisfaction.

All three of those are investments. What is an investment? An investment is any sacrifice you make today in order to live better in the future. So relationships require a certain amount of time and effort to maintain during your working years so that you can draw from those relationships in retirement.

You've gotta be able to exercise on a regular basis to be able to draw the value of your better health in retirement. So in other words, I wanna go hiking in retirement. I'm not gonna be able to go hiking if I don't maintain a VO2 max or my ability to process oxygen that is above a certain threshold.

If I get to retirement and I have plenty of money, but I can't go hiking, then what's the purpose of saving the money for that goal anyway? I've gotta be able to maintain different aspects of my life through investments in order to draw from each of those three pillars. And I think in many cases, those three pillars work together. So if you have good health and you have good relationships, but you don't have money, that limits your ability to get the most out of retirement.

If you have a lot of money, but you don't have health and you don't have good relationships, it's almost like what's the purpose of the money in the first place? It's not really providing you that much more satisfaction. If you have money and you have relationships, but you have poor health, then you're not able to enjoy the relationships that you have as much. So it's really a combination of the three pillars that results in the greatest amount of satisfaction.

Is there equal weighting then? Do I hear you saying there's equal weighting between these three and we need to maintain a balance? No, health and relationships are consistently more important than money. So, and particularly health, it's probably one of the more underestimated investments that we can make in our happiness. But I would say among relationships, the relationship that you have with your primary partner or with your spouse, that's going to have the biggest impact among all of your relationships.

So if you're in a good physical health, you have a good relationship with your spouse and you have an adequate amount of money, you're in good shape. There's gonna be some that are cheering that they don't need to worry about their relationship with their children in retirement and others that are gonna say, I don't know about that. And it takes me, there was a study that I read long ago and I wonder if this applies to retirement as well, where the study found, I think it was a headline, children don't make you happy.

And it was research that would explain that they actually found that parents are less happy than those that don't have kids. But they also found that those that had children experienced more meaning or rated the meaning they experienced in their lives at a higher rate, even though they said they weren't as happy as those that didn't have kids. Is there kind of an application there in retirement as well, instead of just dismissing our children altogether? I would think about it a different way.

Relationships are a resource and you derive a flow from interacting with that person of happiness. Now with your kids, there was a great, I lurk on some of these retirement social media groups. And there was one post about, should I move close to my kid? And there was something like 150 responses.

I don't think any of them were positive, but each was a reason why moving close to their kids was not what they expected. So first of all, it's a couple that moves close to the kids. And with the kids, one of them is going to, those are going to be the in-laws.

And so there's going to be a certain amount of friction. There's expectations, especially among retirees, that the kids are going to spend a significant amount of time with the retirees. And the kids have their own life.

They've got to take the kids to sports and they've got to do the things that they need to do during the week and on the weekends. And if they can pass off the kids to the parents as babysitters and maybe, but then the parents start getting, the grandparents start getting resentful because they are basically cheap babysitters in retirement. Is that really what they wanted to do in retirement? So think about how you're going to draw a flow of happiness from those kids.

Oftentimes, when the kids come over for the holidays or occasionally, it's awesome. The relationship is wonderful. And none of these cracks start showing up until you move closer to them and you start trying to interact on a more regular basis.

And it's, you know, what ends up happening very often is if you move close to your kids is that you also move away from your friends. And it's those friendships that consistently have the biggest impact on life satisfaction, not necessarily the single relationship that you have with your kid. And it seems to me, if I were to look at everything that you've said about money in general, it doesn't, it seems like every decision we make about money should come out of a question of happiness.

We should never be making a financial decision until we're considering the impact that that financial decision will make on our happiness. Well, that's the purpose of life, isn't it? I mean, the money is just an input. If we have everything we need- At some point in life, we forget about that.

And I think too, one of the things that you had stated is long-term care insurance is one of the things. So you said you conducted a study, found that retirees who had long-term care insurance had a level of life satisfaction that was equivalent to having nearly an additional $250,000 of wealth. And in general, long-term care insurance is, it's hard to make financial sense out of long-term care insurance quite often.

It's not a real good investment, but it is making people feel happier, even if it was a poor financial decision. And I'm not saying necessarily it is or it isn't here, but I think you can do the same thing with, well, should I buy a home in Florida and rent it when I'm not using it? Or should I just Airbnb and rent a vacation home instead of owning it? Even though that's going to be an expense, it's not as good of an investment decision, it's not a good financial decision. Rent, which one's going to make you happier? Do you want more headaches in retirement? I mean, you accumulated the wealth to drive yourself some happiness.

So spend it to generate happiness. It's a license to make bad decisions in retirement. It's a license to actually make decisions that aren't financially sound anymore.

Yes. So I couldn't agree more with you that oftentimes when people buy things like a vacation home, they don't ask themselves some hard questions. Like when you get the phone call that a tree has fallen on your garage, how are you going to feel about that? Is that going to make up for all the extra happiness you get from having your own vacation spot? This constant drain on cognitive resources from owning a second place.

Is it worth it? And you can invite your family over to different vacation homes. I mean, why not rent out one place in Hilton Head one year and then California the next year and then in Colorado the next year, a different spot, invite all your family, rent a really nice place. It'll probably be less expensive than owning a single bit more modest vacation home.

You might rent a bigger place and have more variety and invite your family. It's one of those things where I had a friend of mine who decided that he had enough money and he was going to invite his entire family to fly first class to Europe and they were all going to have a European vacation together. He was going to treat them on everything.

And I thought to myself, well, that's brilliant. It's expensive, but what else is he going to use the money for? And if you really want to have those stronger bonds with your family, why not do it in an environment that is really conducive to having positive interactions? Let's all experience something new together. Let's not cheap out.

Let's get the most out of this experience. But to me, that's getting the most out of every dollar. But I think oftentimes people think about investing in things rather than investing in experiences.

Well, as we wrap things up here, I want to ask about your life and the impact that a lot of your research and all the work you've done around happiness and retirement, the impact that it's made in your life. And I could say, what's the biggest impact? Sometimes that's hard to define. Maybe offer one or two ways that you live your life differently today based on what you've learned throughout your career.

First of all, one of the things I've done is I've already set aside enough money to have a basic lifestyle in retirement. So I never have to worry that I'm not going to be able to spend this amount of money. So it's a combination of decisions that I've made over the years, one of which relatively early on in my working life, I had the opportunity to buy seven years of credit towards my pension using basically all of my retirement savings.

I went ahead and did it. And then what it did is it gave me the peace of mind to know that no matter what happens, I'm always going to have that base of income, that base lifestyle. And the first time when I put the money into it, it was just disappeared.

And that created a lot of dissatisfaction. But every day since then, knowing that I'm going to have this income, it's given me a certain amount of satisfaction. The other thing I've done is made a more conscious effort to maintain friendships.

I understand that those long-term friendships are things I'm going to have to withdraw from the bank after retirement. So I need to make a conscious effort to travel and spend time and communicate on a regular basis to maintain those friendships. That's great.

And if I were to ask you the question, what does retire with purpose mean to you? How would you respond? First of all, it means autonomy and it means taking the time to be deliberate about what you're actually going to do and being honest about what's going to make you the happiest. So to me, purpose means creating a plan for what I'm actually going to do, how I'm going to spend my time after I retire, rather than just simply seeing retirement as a math problem where I have to have enough money saved to be able to withdraw a certain amount of money safely every year. A lot of people have thought a lot about that, but they haven't thought about how they're actually going to spend their time.

That's great. And if you want to link to anything that we discussed here in the conversation, check it out in the show notes. And I encourage you to get yourself signed up so that you can help me co-architect these interviews.

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You can go to howardbayley.com. You can check it out in the show notes or just shoot us a text with the key letters WR to 888-599-4491. Dr. Finca, thank you so much for this conversation. My pleasure.

Always great talking to you. Thanks, Michael.