This week on the Retire With More Show, we were very fortunate to have one of the top personal finance writers in America join us on KKSF Talk 910 — none other than Jonathan Clements, one of my idols in the personal finance business and a person whose perspective is second to none. Jonathan has been writing mostly for the Wall Street Journal but also for Forbes for three decades.
Jonathan has heard it all. In fact, he told me that when he writes a really good article in the Wall Street Journal he’ll get about 500 emails from readers. Doing that for so many years and talking to so many thousands and thousands of readers, Jonathan has developed a unique perspective on what people need to hear, what they want to hear and what they don’t want to hear but ought to hear.
He’s written a number of books, including Jonathan Clements Money Guide 2015, an annual updated personal finance guide — which is a terrific book — but the reason we asked him on the show this week was to hear about some of the big themes that he finds after talking to so many Americans about their retirement.
Five major themes
After three decades of talking and writing about money there are really five major themes that should guide everybody’s management of their personal finances.
Theme #1: Money, unless you’re really, really careful, may not buy you a whole lot of happiness.
“Everybody thinks if I had more money I’d be happy, but the statistics tell a different story. Over the past 40 years real income in America, after inflation on a per capita basis, has increased 108%. So our standard of living has more than doubled and yet the reported happiness of the typical American has not gone up.” — Jonathan Clements
People suffer from what academics call sardonic adaptation, and it’s a cycle we’ve all been through: We want that next promotion, we want that next pay raise, or to buy the bigger house or a better car and we lust after this thing. We lust and we lust and when we finally get it we’re thrilled, but then soon the pay raise is just another paycheck. We adapt to it, we’re back to the level of happiness we were at before and then we’re start hankering after something else.
This process of lusting after something, getting what we want, and then adapting to it, this cycle, this sardonic treadmill, is one of the reasons that money doesn’t buy a whole lot of happiness.
Theme #2: The impact of lengthening life expectancies.
“Suddenly we’re living essentially 50% longer than we were a century ago and that totally changes the money management game. I mean not only do we have a much longer life expectancy, but we also have to think about what it is that we’re going to do with all that time, what is it that’s going to make for a satisfying life? One of the things you should do if you’re in your twenties is to start saving diligently as soon as you enter the workforce so that you can build up a financial cushion and that way, when you get into your 40s and you suffer that midlife crisis and you want to do something different in your life, if you have money, you have options. If you don’t have money, guess what? You’re going back to the office at the job that you hate.” — Jonathan Clements
Theme #3: We are not wired for financial success.
We make many mental mistakes and what we really need is self-discipline, which we very often don’t have. Over the past 30 years, there’s been this emerging field called “behavioral finance” and what it’s done is look at some of the consistent mental mistakes that people make.
For instance, one of the things that behavioral finance has discovered is that we get far more pain from losses than we do pleasure from gain. This is one of the reasons that people panic when the market goes down. It’s one of the reasons we lean toward conservative investments even when we have a long time horizon. Behavioral finance has also found that we spot patterns where they do not exist.
“What really hurts Americans is that we tend to be intensely focused on the short term. We need to be saving for the future and yet Americans do a terrible job of this. And so one of the things you’ve got to do is think of how can you force yourself to save.”— Jonathan Clements
So we’re not wired to do instinctively things that relate to being financially successful. All those instincts that we’ve got burned into our brains have moved us into making the wrong decisions at the wrong time when it comes to investing.
Theme #4: The holistic approach to managing money.
When you think about your finances you really want to take a broad view that cuts across all these different financial products that you get sold. You should be thinking about your insurance, and your real estate, and your retirement portfolio, and your college savings, and your mortgage all in a single financial system, rather than thinking of them in one bucket at a time.
“The key here is rebalancing — that depending upon your age, your income, what your assets are, rebalancing what you are going to have when you retire is absolutely critical. As you look at your overall finances you should be making sure that you’re not overcommitting to one goal and under committing to another. And specifically you shouldn’t being buying ever-bigger homes and stuffing money into a college account if it means you are shortchanging your retirement. One day you will need to retire and when you retire you can’t take out a loan like you can when your kids are going to college or when you’re buying a house.” — Jonathan Clements
Theme #5: Limit the subtractions, instead of focusing on the additions.
When you discuss investing with individuals, they’re focused on performance, but nobody knows which direction the financial markets are going to go. The crystal balls on Wall Street are all cloudy, so forget trying to figure out what’s going to be the next top performer and rather than trying to focus so much on the additions, try to limit the subtractions.
“Don’t focus so much on what you’re going make. Instead, think more about what you could potentially lose. And if you limit those losses good things will happen.” — Jonathan Clements
Be a great saver
Over the years Jonathan has met thousands of ordinary Americans who have amassed seven-figure portfolios. A lot of these people didn’t have high incomes. They weren’t particularly good at investing. But they do all share one attribute and that attribute is that they are all great, great savers.
“If you want to know what the key to financial success is, it’s really, really simple. You’ve got to live within your means and save as much as possible every month. If you do that, really, really good things will happen.” — Jonathan Clements
Make sure you tune in live next week and join me, John Rothmann, and our next guest, Principal Analyst Rick Holland, as we discuss risk and where your cash is safe.