CFI Blog

Maximize Your Lifetime Utility

“I think Smithers picked me because of my motivational skills. Everyone says they have to work a lot harder on lifetime Utility when I’m around.”
–Homer Simpson

When we hit PIRE, we plan on doing a lot of world travel rather than seeing places in the United States that we haven’t seen. It’s not that we don’t think that the U.S. is a neat place or that there aren’t tons of sites to see in our own country.

We think we have a more pragmatic reason for choosing international travel.

It doesn’t have to do with cost of living arbitrage, although that’s a nice benefit about some of the places that we want to see.

It’s not because we’re worldly bon vivants.

It’s because, we figure, we’ll still be relatively young and healthy. The toll of long travel and adjusting to new climates and environments won’t be as bad when we’re in our 40s as when we’re in our 70s.

That’s not to say that older people can’t travel. They can. They do. But, it does require more planning and support. When we went to Rome, we walked all over the central section. We only rode public transport to get to and from the airport. After that, we got everywhere on our two-legged people movers. We walked most of Barcelona. We walked all of Reykjavik (not that it’s much of an accomplishment, but it is more difficult in December).

In our 70s, it’s doubtful that we’ll be able to do that. Plus, we can still hop on an overnight flight to Europe, sleep on the plane, and, after a couple of cups of coffee, be ready to go the day that we land. Again, later on, we might not be able to do that.

Thus, while it’s difficult to face and acknowledge our own pending decline and mortality, we have tried to plan for maximizing the time that we have to be active and physically sound and can take in more leisurely activities when we’re older. It’s easy, relatively speaking, to drive through a national park. That’s why Yellowstone, the Grand Canyon, and Arches will be itineraries later in life.

I’m starting to see a pattern with my clients that flips this paradigm on its head.

They’re working until their 60s, retiring, and traveling.

So far, so good.

Except that there’s one problem.

They overshot the mark in accumulating their wealth.

They’re at the point where they have far more money than they can ever spend in their lifetimes. Even accounting for bequest motives, they are likely to die with lots of money.

Meanwhile, in the present, they have a small and shrinking window to do all of the things that they wanted to do. They are running out of time, and will run out of time long, long before they’d run out of money.

The Money Happiness Continuum

In many of these cases, I see situations where people could, hypothetically speaking, double their spending and not significantly impact their ability to maintain that spending pattern for the rest of their lives.

They spent forty to forty-five years on the left hand side of the graph below, and now they’re going to try to live the remainder of their active years on the right hand side of the graph.

I feel like Allie Brosh (#aff).

Although my drawing skills are nearly non-existent, particularly in MS Paint and PowerPoint, there comes a point in your happiness continuum where you start to get less and less joy, utility, or happiness out of each dollar that you spend. If you have a yacht, buying a second yacht won’t make you much happier.

Furthermore, just like the random rewards that we learned about with Pavlov’s dogs or with people who are glued to slot machines, if we continue to get rewards, then in order to achieve the same level of excitement or happiness from getting the reward, the reward has to continually increase. It’s our friend the hedonic treadmill. Thus, you need to spend more and more money to get the same level of happiness or to increase your happiness just a little.

Furthermore, as we saw in “The Life Cycle Saving and Investing Approach”, we really can’t make up for lots of lean years with a few years that are off the hook with excitement. The total sum of happiness over our lives will be lower than if we maintained a steady level of happiness.

So, if we live like paupers for 65 years, we can’t make up for lost time by having wild, frenzied bouts of excitement afterwards.

Furthermore, as we age, our propensity for such wild bouts of extreme excitement declines. We’re physically not up to doing as much as we were when we were younger, and the intellectual appeal of extreme living declines. Senior spending patterns reflect this reality, or as Morningstar’s David Blanchett calls it, the “go go, slow go, no go” years. Retirees over age 75 spend 40% less than those between ages 55-64 and 26% less than those who are 65-74.

There’s no perfect answer for how we balance out utility in our lives, although, to me, the right answer isn’t deferring happiness to the point in our lives where we have a limited window in which to enjoy it, and we simply cannot make up for the years of deprivation. It would require knowing exactly when we’re going to meet our Maker in order to solve that problem.

However, assuming that you’re going to live to a ripe old age, here are a couple of ideas for how to balance it out:

  • Know your retirement income number. In the absence of a target, as we saw in “Will Defining Your Retirement Number Make You Happier?” we will continue to work long past when we can quit. We’ll be unhappier for doing so, because we’ll look back on the overproductive years as lost time and rue our decisions.
  • Know your priorities in life. As we discussed in “What Does Your Retirement Look Like,” if we don’t have a mental image of what we’re aiming for, then we won’t be motivated to achieve it, and we won’t know what finished looks like. Furthermore, we’ll spend our money and our time on things which don’t align with what’s important to us, creating cognitive dissonance and lower happiness.

There’s a balance. There’s no perfect formula for it, either. You don’t want to assume you can or will work forever just to have fun today. But, at the same time, you won’t cram a ton of fun into your retirement because you will slow down, and there isn’t a never-ending linear relationship between what you spend and how much you enjoy it.

Have you achieved the balance? Let’s talk about it in the comments below!

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John Davis
John Davis is a nationally recognized expert on credit reporting, credit scoring, and identity theft. He has written four books about his expertise in the field and has been featured extensively in numerous media outlets such as The Wall Street Journal, The Washington Post, CNN, CBS News, CNBC, Fox Business, and many more. With over 20 years of experience helping consumers understand their credit and identity protection rights, John is passionate about empowering people to take control of their finances. He works with financial institutions to develop consumer-friendly policies that promote financial literacy and responsible borrowing habits.

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