A great way to stretch your retirement savings
(MoneyWatch) How much money do you really need? While this question applies to most of us, it's an especially critical question for older Americans who have meager retirement resources and who'll need to make every dollar count, both before and during retirement.
- The magic formula for retirement security
- The secret formula that will make, or break, your retirement
- The secret to a successful retirement
One answer to the question of "how much is enough" comes from economists who use "utility theory" to measure your satisfaction or happiness with an item you bought against the amount of money you spent on the item. As the theory goes, if you have a significant, unmet need and you buy something that meets your basic needs, your happiness improves. But if you spend much more money to buy something that fulfills much more than your basic needs, your happiness doesn't typically improve by the same amount.
We can see this concept at work by examining survey data regarding a purchase we're all familiar with: buying a car. Through the years, J.D. Powers and Associates has measured the satisfaction customers get from various automobiles. The following chart, which shows drivers' satisfaction with three 2012 Chevrolet models and one Cadillac model, highlights the price/satisfaction relationship predicted by utility theory. (To come up with a single number for each car, I averaged the ratings given to overall quality, overall performance and design, and predicted reliability.)
Note that as people spent more money on car, they did indeed achieve higher customer satisfaction. But as you can see from the chart below showing the costs of each car, buyers paid a high price for modest improvements in satisfaction.
Understanding utility theory led me to develop a strategy I use for all my purchases, whether for large items such as my house, cars, furniture or appliances, or for smaller everyday items such as food and clothing. I buy "just enough" to meet my basic needs and only what truly makes me happy. I don't listen to the ads that tell me to buy my way to happiness. Given the above results from the J.D. Powers survey. "buying your way to happiness" might as well be called "futility theory"!
"Just enough" is a smart spending strategy for people who want or need to make the most of their financial resources, particularly retirees and workers approaching retirement. According to various surveys, the most prevalent strategy that retirees use to make ends meet is to reduce their spending. By contrast, "just enough" is a strategy that you can use to get the most happiness for your hard-earned dollars.
Of course, what's just enough for one person may be completely insufficient for someone else. As a woman attending one of my retirement planning workshops once told me, "Steve, there's no such thing as 'just enough' shoes!"
And while some of you may agree that you can never get "just enough" of what you really love to keep you happy, "just enough" is still a great strategy that will help all of us manage the magic formula for retirement security:
Income > Expenses, or
I > E
What's "just enough" for you?
Steve Vernon
View all articles by Steve Vernon on CBS MoneyWatch»
Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops
and authored Retirement Game-Changers: Strategies for a Healthy, Financially Secure and Fulfilling Long Life and Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck.
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