Will 'Financial Neurosis' Destroy Your Retirement Dreams?

Published in Forbes, February 2017

I’m a wealth manager, not a psychologist (although I did some grad work in the field). Very simplistically, the term “neurosis” relates to an inability to adjust aspects of behavior to one’s current reality. In my practice I use the term “financial neurosis” to describe current financial decisions that are mired in the lifestyle of a prior stage of life.

A recent example from an uber-wealthy client comes to mind. He’s an older gentleman who has a small dish on his desk with scraps of paper. Upon closer examination I noticed the scraps were postage stamps that were not cancelled, cut from envelopes. Reacting to my obviously not-so-subtle look of surprise, he responded with a half grin: “my parents were children of the Depression; I never know when I might need to steam off those stamps. I know it’s crazy and even though I know I’ll never use them, I find them comforting.” No further discussion was necessary. It’s great when self-awareness allows us to enjoy our own quirkiness!

While witnessing this client’s self-imposed frugality makes me smile and scratch my head, the downside is fairly limited.

The devastating downside to financial neurosis is when one’s anticipated financial circumstances declines, without a planned corresponding restructuring of expenses and lifestyle. Sadly, most of us know of such examples. Once one becomes accustomed to an upscale lifestyle it can be difficult to alter behavior. Private jets may need to become first class, which may need to become economy, which may mean traveling less. Maintaining a lifestyle commensurate with one’s peak earning years, perhaps augmented with corporate perks, may become impossible to maintain -- even after accumulating what once was viewed as a hefty portfolio, perhaps supplemented by a healthy pension. Long-believed adages aside, one's retirement lifestyle generally is at least as expensive as that of pre-retirement. Spending patterns for the later stages of life often are greatly underestimated. It’s disheartening to continually meet people after they already are on the wrong side of the retirement curve.

Here’s my advice: Spend time calculating your current cash outflows, lifestyle changes during retirement, and add a hefty cushion for the unanticipated. Then list the anticipate sources of cash required to fund your retirement, apply a hefty haircut to your anticipated portfolio return, and evaluate your alternatives -- currently save more, plan to retire more modestly or simply resign yourself to working longer. The alternative is often the disappointment of unfulfilled expectations or worse, the disaster of losses engendered by reaching for unrealistic market returns.  It’s really not very complicated.

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