August 23, 2017
Planning for retirement can be a relatively objective process. A certain amount of money is required to sustain a person in their retirement until their date of passing. The use of that money, however, can vary widely from person to person. A person’s interests, vacation plans, diet choices, and many other factors all determine how someone spends their money. Let’s take a brief look at one type of spending decision everyone will make during retirement.
Imagine this scenario (if it’s not already the case) – You are now retired, and thanks to proper planning, you have a steady flow of money to spend on leisure activities. Before you retired, you either didn’t have time to do all the leisure activities that you wanted to do, or you had a stricter budget that you were following to ensure a successful retirement. But now, you have extra money each month above your spending needs and more time than you had before. What should you decide to do with this extra spending money?
There are two main spending categories for you to consider. You can either purchase things or you can purchase experiences. Looking at it from a financial perspective, if you choose to spend your money on things, you will gain tangible assets that will either appreciate or depreciate in value. This may or may not have an effect on your net worth. If you spend your money on experiences, you will never see that money again. Your net worth will decrease by the amount that you spent on that experience. Looking at a cash flow statement from an objective standpoint, it is pretty obvious that spending your money on tangible assets will provide for a better financial outcome - but is that the best thing to do?
A series of studies done by Cornell University psychology professor, Thomas Gilovich, found that people gain more happiness from experiences than they do from things. One of his studies that he conducted in 2011 that I found interesting compared the feeling of regret surrounding purchases. Gilovich found in his study that people often regretted many of their material purchases; they underwent the process of buyer’s remorse, a feeling of regret after making a big purchase. On the other hand, when it came to experiences, their regrets stemmed from inaction. They regretted missing out on experiences rather than making the experiential purchase.** When you buy a thing, such as an expensive purse, you will be using it every day, but will it really make you any happier than if you did not have it? With an experience, such as a vacation, there is that feeling of anticipation leading up to the date of the vacation. When you are finally on the vacation, you may be having a good time or you may be having a bad time, but if it is something that you don’t usually do, you’ll remember it and have memories. You may have fond memories of a great vacation, or they may be memories of a trip where everything went wrong that you can joke about with others. Either way, you’ll have memories that you wouldn’t get from buying that 70 inch 4k TV.
So what’s the takeaway? While purchasing things may lead to a better looking financial statement at the end of life, you can’t take your possessions with you in the afterlife. When considering whether to make that next big purchase on a vacation to Hawaii or on the newest Mercedes, consider that the vacation is likely to make you feel happier and leave longer lasting memories than the Mercedes.
**Rosenzweig, E., & Gilovich, T. (2012). Buyer's remorse or missed opportunity? Differential regrets for material and experiential purchases. Journal Of Personality And Social Psychology, 102(2), 215-223. doi:10.1037/a0024999
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