The S Curve – The Center of EVERYTHING
In my video, The 6 Secrets to Living Well in Retirement, I discuss something I call the S-Curve. S stands for “Schmidt” because, to the best of my.. knowledge, the act of how to properly spend money in retirement has never been explained this way. The S-Curve is a graphical representation of how people should spend money and interplay between cost and benefit, often called “marginal utility.” The S-Curve demonstrates that, usually the more a person spends the less they enjoy each additional dollar spent. Let me explain…
The S Curve focuses on the spending that will have the most dramatic impact on your life first – your health and safety. You’d be surprised at how many people this is lost on, meaning they’d spend their money to take their entire family on a vacation, only to come home to try to figure out how to buy groceries that week.
Don’t get me wrong, like many people, I have made a lot of sacrifices for family, but if any one of them said they would prefer that I take them on a cruise rather than eat, that would be the last dollar I’d spend on them.
Understanding the win win.
By and large, your family will not want you to go down supporting them. There are always exceptions to this, and I know of one personally, but this is not what most families want. So if you start with the premise that no one wants you to sacrifice to give, you’d be correct most of the time. So, this frees you to focus on taking care of #1 first.
From this point on, I am going to assume that you know that you need to take care of you and your partner first, plus any rare (I mean RARE) special family member situations, with your hard earned funds. If you don’t buy into this, everything else that comes next won’t help you.
More importantly, your “marginal utility” which is a fancy term for how much extra benefit (enjoyment, comfort, etc.) you get for each additional dollar spent, goes way down after a certain minimum spend. Let me explain…
Have you ever met someone who retired early? I’m not talking about 62, I’m talking about 42. I saw this a lot in banking before the Global Financial Crisis of 2008/09. Before the “GFC” there were bankers who made a fortune trading everything from commodities to mortgage-backed securities. These “Masters of the Universe” always followed the same trajectory. They took big positions in the market and if they did well they made a fortune. If they did poorly, they were fired. Many did very well until the GFC, then many were fired. Regulations changed and it became a lot harder for banks to run proprietary trading within the confines of a highly regulated entity (a bank) whose purpose was to serve customers.
So they retired…
You’d speak with them in the first month and they were delighted to be out of the game. Usually phoning in from places like Miami, Colorado, or Scottsdale. They had more money than they needed in a lifetime and started working on their bucket list early.
Two months in they were back from their vacation and back in NYC. They’d call around trying to “catch up,” but they found that all of their friends were active in their jobs and social networks. That’s okay there was always another trip.
Six months in they were thinking about work and within a year they were doing something, usually not trading, but something in business or in many cases charity.
Why?
Because even though they could afford it, the marginal utility of the next trip became less and less impactful for the same money spent. In order to get a higher “thrill” they had to keep upping the ante. Instead of Miami, they went to the South of France. Instead of Colorado, they went to Tibet. Then they started on really expensive vacations to get an even higher thrill, a trip to the Great Barrier Reef, or Africa. Knocking out once in a lifetime trips, one after another.
If a week in Miami in a 5 star hotel in a room with an ocean view might cost $3000, a week in the South of France with the same view might cost $12,000. Did he or she get four times the enjoyment and excitement? I doubt it. My guess it would land somewhere between 1.1 and 1.25 times, if that could even be measured at all! Yes, it would be more, but not 4 times more?
What if they upgraded to the Presidential Suite? $10,000 per day with a beautiful 360-degree view and private butler. The total cost of that water-view room $70,000. Was it 23 times more enjoyable? Well day one might be pretty cool, but by day 7, my money is on the fact that they wouldn’t feel a noticeable difference.
The same holds true for a retirement on the middle side of the curve. Versus far right. The rock and roll lifestyle (presidential suite – South of France) will not be sooooo much better than the adventurous lifestyle (regular suite – South of France) in and the adventurous lifestyle wouldn’t be soooo much better than a lifestyle of simple enjoyment.
So if you are able to adjust your mindset, you can have an fantastic retirement for a very (very!) reasonable cost.
