Lifetime Allowances

In a recent article originally posted in the Wall Street Journal, new research indicates that you may be able to save significantly more for your retirement by simply looking at your older-smiling avatar. Combine that with some new science (see this New York Times article) indicating that you can occasionally take distributions greater than 4% in retirement, and you just may have a winning combination.

Do you remember when you were the recipient of your first allowance? Were you excited by the "windfall" of money, and the dreams of everything you might be able to purchase? Or, on the other hand, perhaps you were woefully disappointed with the pittance and the things you couldn't purchase?

Now think about your current stage in life. If you are a teen, you may be collecting a stipend from your parents to cover gas, and incidentals. Or, perhaps you have a monthly amount that cannot be exceeded, including money for clothes, entertainment, gas, and any other incidentals. Typically, an allowance is determined by various needs and may even include a few wants.

Then, after college — if not before — your "allowance" comes in the form of a paycheck. Hopefully, the paycheck covers basic needs as well as a few creature comforts. At this stage in life, one of the basic needs should include a savings plan and basic insurance coverage. If the means allow, savings can be accelerated, and more insurance can be added, if required. A question that one may ask at this stage of life is: "how much is that Rolex watch or Leboutin shoes really going to cost?" Calculate the cost of the watch or shoes and multiply this by the average market return for say, thirty years, and you may find that those shoes or that watch is more than you bargained for.

Next, you may be in the family forming stage of life. You get married and spend lots of your hard earned income buying a house, purchasing furniture, decorating the house, and filling all of your cupboards, cabinets and your garage. Mission accomplished! Or is it? Do you really need sixteen place settings for when your family comes to visit once a year? Have you continued to provide a reasonalble spending plan-or burn rate-that will also enable you to fund your future self''s allowance? If not you, then who? Your future you may be starting to get annoyed with your decisions and your thoughtlessness about saving.

Your two kids are the light of your life, and they require all of the love and attention — and money — that you have. Their needs somehow grow in direct proportion to your income. With increased income comes more lessons, more travel and more opportunities. After all, the little ones "deserve" it all. Your future self is quite annoyed and perhaps starting to become angry.

Nothing but the best for your older teens, they're college bound to the Ivy League! You and your spouse rejoice at the "opportunity" to spend about a quarter-of-a-million dollars per child, for the education. Perhaps you are not able to contribute to your future allowance at all. Your future-self is now livid.

But you aren't going to be the one who has to worry. Actually, while you were tempted to spend money on the Rolex and the Leboutins, you elected to forego the purchases altogether. You decided not to by the extra furniture, the extra place settings and the annual trip to Europe, after all. You taught your children that everything has a cost, and that they needed to learn the value of making good decisions — which included making savings a part of their every day life — at a young age. And, yes, maybe you did send them to the best college you could afford, because you value a great education.

However, you'll feel confident in knowing you have saved over twenty percent of your income for decades and this little temporary gap will hardly make a dent in your future allowance. You know that the older you will likely need to use the same skills when you are in retirement that you used while you were saving. Sometimes you may be able to spend more than 4% of your portfolio, and sometimes you may need to reduce your spending.  But, you know you'll be okay. Thanks, in part, to being thoughtful to your future-self.