You Can Check a Bag: When Is It Okay to Spend the Money?

As financial advisors, we spend a lot of time encouraging people to save. Save for retirement, save for college, build an emergency fund, invest consistently, and, of course, don’t let the dreaded “lifestyle creep” get the best of you. Phew! While all of those things are important, saving is only one side of the financial planning equation. The other side, spending the money you have worked so hard to accumulate, can be surprisingly difficult.

Not surprisingly, the best savers aren’t always natural spenders. After spending 30 or 40 years living within your means and consistently putting money away for the future, those habits don’t magically disappear when you retire. Sometimes the harder conversation isn’t encouraging clients to save more, but rather helping them feel comfortable giving themselves permission to spend.

I was reminded of this recently during a meeting with clients who are naturally frugal people, the kind of people who have spent decades making thoughtful financial decisions, living within their means and diligently saving for their future.

As we were reviewing their portfolio and talking about how well positioned they were financially, the conversation somehow turned to travel and they mentioned that they never check a bag when they fly because they don’t want to pay the extra fee. After looking at their financial situation and the growth they had experienced in their portfolio, I jokingly told them, “You can check a bag.”

We laughed about it and moved on, and quite honestly, I didn’t think much more about it.

At a later meeting, however, my client told me that the phrase had stuck with her. Now, whenever she and her husband find themselves being overly frugal about something they can comfortably afford, they’ll remind each other, “We can check a bag.”

I love that.

When Good Financial Habits Become Hard to Turn Off

People who successfully accumulate wealth usually don’t get there by accident or pure luck. They plan, save, live within their means and learn to delay gratification today in exchange for greater financial security tomorrow. However, those same habits can be surprisingly difficult to turn off once they’ve reached the point where they can begin enjoying what they’ve accumulated.

And for good reason! One of the biggest adjustments in retirement is moving away from a regular paycheck and instead relying on Social Security, pensions (for those lucky enough to have one), and the savings you’ve spent decades accumulating. After spending your entire working life being told not to touch those retirement accounts, suddenly being told it’s okay to withdraw from them can feel a little unnatural.

Add in the uncertainty of markets, healthcare costs and not knowing whether retirement will last 20 years or 40, and it’s understandable why even financially secure retirees can be reluctant to spend.

What a good financial plan can do, however, is help answer a much more useful question:

“What can I reasonably afford to spend while still protecting the things that are most important to me?”

Your Portfolio Has a Purpose

The goal of investing isn’t simply to make the number on your investment statement as large as possible. Ultimately, your portfolio has a purpose, to support the life you’ve worked so hard to build.

Ironically, the years when retirees are healthiest and most able to enjoy their money may also be the years when they’re most reluctant to spend it. As the chart below illustrates, real spending often declines through much of retirement before increasing later in life as healthcare and other needs become more significant.

The opportunity to take the big trip, bring the entire family on vacation, help your children or grandchildren, or finally buy the car you’ve always wanted may not be equally available at every stage of retirement.

Or, yes, you can simply pay to check the bag.

None of this means spending recklessly. There is an enormous difference between spending that jeopardizes your financial security and spending that your financial plan can comfortably support.

Sometimes the Financial Plan Gives You Permission

One of the things I enjoy most about financial planning is our ability to take some of these “what if” questions that clients have and actually put numbers behind them.

What happens if we spend an additional $10,000 each year on travel? Can we afford to help our children now rather than leaving them a larger inheritance someday? What happens if we finally buy the new car? Could we retire a year earlier than planned?

Rather than guessing, we can model those decisions and see how they affect the bigger picture, not just this year or next year, but over the course of someone’s retirement.

Sometimes the answer really is, “We probably shouldn’t do that yet.” A purchase may require too large of a withdrawal, create an unnecessary tax consequence, or reduce the margin of safety we want to maintain for the future.

But there are also plenty of times when the answer is, “You’re going to be fine. Spend the money.”

For lifelong savers, hearing that can be surprisingly powerful.

The J.P. Morgan chart above shows the likelihood of a portfolio still having money after 35 years, based on different withdrawal rates and investment allocations. What stands out is how much the amount you withdraw matters. At withdrawal rates of 3% or less, the likelihood of success remains very high across all of the allocations shown.

Of course, there isn’t one “right” withdrawal rate for everyone, but there is a difference between being appropriately cautious and being unnecessarily cautious. If your financial plan supports your ability to currently afford the trip, the new car, or simply spending a little more on the things you enjoy without limiting the success of future goals, it is worth integrating it into the plan as a planned expense.

What’s Your Version of Checking a Bag?

There will always be a balance between enjoying today and preparing for tomorrow, and finding that balance is one of the reasons financial planning matters. You shouldn’t spend money simply because it’s there, but you also shouldn’t deny yourself things you value simply because you’ve spent a lifetime being careful.

Taking steps such as ongoing review of the financial plan, goals, maintaining a diversified portfolio aligned with timelines should provide some peace of mind knowing you can afford something that will genuinely improve your life. After all, the goal wasn’t simply to save the money, it was to build enough financial security that you would eventually have choices about how to use it.

For my clients, that reminder became “We can check a bag.”

Yours may be the nicer hotel room, taking the kids and grandkids on vacation, replacing the 15-year-old car that technically still runs, or finally doing the home project you’ve talked about for years.

Whatever it is, sometimes the financial plan isn’t telling you to save another dollar.

Sometimes, you can check the bag.