I used to belong to the “what’s wrong with you people??” school of personal finance advice.* I found it hard to sympathize with people who carried credit card debt or failed to save for retirement. Surely they knew better. So why didn’t they do better?
Turns out there are a lot of reasons, including the economic forces that have squashed so many households: stagnant incomes, high unemployment and a changing economy that scrapheaps many less-educated workers. Getting ahead is getting harder, with economic mobility in the U.S. now trailing most of Western Europe, including traditionally class-bound Britain.
Scientific research points to a number of other causes. A study of Swedish twins indicates there may be a gene for responsible money management–and most people don’t have it. The way our brains are wired also works against us. The field of behavioral economics tries to explain why we so often do what we shouldn’t, and don’t do what we should.
I wrote about some of these issues, and what you can do about them, in my latest DailyWorth column: “Are biases and beliefs keeping you from getting rich?”
Faulty programming doesn’t give people a pass. If you don’t save and run up debt, you’re going to have a lot of stress now and an impoverished old age later. But knowing about the science and psychology of money mistakes could help you reprogram yourself. And this knowledge should help those who are “good with money” be a little more sympathetic to those who aren’t.
*Okay, on my bad days, with enough provocation, I can still give away to exasperated disbelief. But I’m trying to be kinder.
Liz, I never made more than $50,000/yr and lived in a pretty high cost area (Wash,D.C.) but I managed to retire with about $2Million in savings & investments. HOWEVER, now that I have retired, I cannot even begin to afford to take any money out of those investments because I can’t afford the taxes on them! I never lived in an expensive house or drove a car that cost more than $12,000 brand new. Now I find that scrimping & saving was worth NOTHING and I now have a bigger problem than I ever had getting by. I feel so betrayed by our system of government. I was a huge advocate of the time value of money & dollar-cost averaging. Now I do not see the value of saving for the future. It just isn’t worth it.
You need to meet with a tax pro to work out a strategy for tapping your retirement funds in a sustainable, tax-advantaged way. Capital gains rates are quite low and even drop to 0% for those in the 10% and 15% tax brackets. If you’ve made the mistake of buying annuities, you’re stuck with ordinary income tax rates, but a tax pro could still help you manage an affordable withdrawal plan.
Tena, if you’ve got $2 million in some tax-advantaged retirement savings, just take out 3% each year and pay the taxes on the portion you withdraw. Yes, see a tax pro, but I know a man who retired with zero money and saving $2 million would have been the difference between the Section 8 apartment he’s in now and the nice house he could’t afford to keep.
I’m thinking there has to be a “rest of the story” here, since a typical investment portfolio isn’t going to trigger an outrageous tax bill. Yes, you’ll have to pay some taxes, which might come as a shock if you only owed payroll taxes while you were working and never owed income taxes (which is likely with an income under $50,000). But the tax bill will be a fraction of what you withdraw, so it’s hard to see how you couldn’t afford to make withdrawals.