Here’s a clue, just because you must take your required minimum distribution (RMD) and can start your Social Security benefits, doesn’t mean you have to spend it all. On the other hand by just taking your RMD, you may be shortchanging yourself according to a MarketWatch article.
But not just retirees spend because they must take access to their money. Parkinson’s law is alive and well and most people set a good example – unfortunately.
“The Way the Law Works
This law says that, no matter how much money people earn, they tend to spend the entire amount and a little bit more besides. Their expenses rise in lockstep with their earnings. Many people are earning today several times what they were earning at their first jobs. But somehow, they seem to need every single penny to maintain their current lifestyles. No matter how much they make, there never seems to be enough.
The Key to Financial Success
The first corollary of Parkinson’s Law says: “Financial independence comes from violating Parkinson’s Law.”
Parkinson’s Law explains the trap that most people fall into. This is the reason for debt, money worries and financial frustration. It is only when you develop sufficient willpower to resist the powerful urge to spend everything you make that you begin to accumulate money and move ahead of the crowd.”
Can you say paycheck to paycheck?
I am fortunate that so far, my pension and SS are sufficient to live on, and add to savings/investment. I roll my RMDs into a taxable investment account and plan to use that money to pay taxes when I convert my IRA to a Roth IRA. Then, if all goes well the heirs will get the money tax free. (Or it will help the survivor with the “widow’s penalty”.)
You guys are talking about the “typical” family again. As in yesterday’s blog, thirty percent of Americans finances are a “horror show”. That would include the lowest quintile of household income and about the lower half of the second quintile. For many (most) of those, it’s not a spending problem. They barely make enough to survive with dignity. Very few of them can “pay themselves first” (savings).*
For the “typical” middle income or higher household, consider for a moment what would happen to the economy if they all suddenly got religion and began to live within their means. It’s called recession, for better or worse. There is a delicate balance here.
*Some very prominent economists say these people –shouldn’t– save for retirement. It would be counterproductive.
Good article. I have always maintained that it’s a good practice to violate Parkinson’s law although I never called it that (never actually heard of it).
Sent from my iPad Richard Schneider
I would say that rather than expenses rising with each pay raise, over extended credit borrowing has put the typical family or person behind well before any pay increases.
Car payments, mortgages, student loan repayments, credit card debt, home improvement loans, etc. The debts can require years of pay raises just to keep treading water.
In effect, the spending has risen before any increase in income.