Are you renting your life-style? – the debate over need versus want

Posted on September 15, 2009 by Bill Faiferlick

These days there is more and more discussion in the media about debt and the difference between “needs” and “wants” both as a nation and as individuals. Business owners and professionals are often as culpable as the next person when it comes to having the necessary resources to see them through an extended retirement of 30 to 40 years.

The other day on the TV show Til Debt Do Us Part, there was a couple earning over $300,000 per year.  That’s a monthly income exceeding $25,000; yet the couple’s monthly cash-flow showed they were still going into debt each month $8,000 due to interest charges, miscellaneous expenses, back taxes etc. The husband was a professional (a doctor) and the wife a business owner. When questioned about this unsustainable negative predicament, he stated he felt entitled to his toys and the main reasons were #1 because of his high income, #2 his professional status, and #3 the long hours of work his practice routinely demanded. On the other hand, his wife’s business wasn’t always providing her with an income after paying salaries and other business expenses. As if that wasn’t bad enough they had no savings for their sons’ college, had a house full of every toy you could imagine, updated kitchen, furniture, sea-doos etc. and until the show they were oblivious to how quickly they were headed for bankruptcy. The sad truth is that this is not an uncommon situation in America today.

At all income levels, there is a sense of entitlement. Individuals work hard for their money and as a result “needs” become confused with “wants”.  Americans have become accustomed to immediate gratification and impatient concerning the implementation of long- term financial goals especially when funding is necessary over many years.  Committing money for retirement admittedly isn’t sexy and the commitment for funding does compete for capital on a day-to-day basis.  The amount required to provide a sustainable, comfortable retirement is well into the millions. If a sustainable lifestyle is desired then “needs” need to come before purchases or acquisitions in the “want” category.

Failing to take advantage of newer strategies which convert tax liabilities into new investment retirement capital which over time may account for close to 50 percent of your investment/savings account values isn’t only prudent, it’s an outright necessity.

Success requires that you properly understand true needs from wants.  We seem to have lost or forgotten the basics like paying with cash and until we start reshaping our spending habits and our thinking about how we spend, many will continue to only rent their lifestyle.  Let me give you a perfect example of current desires blinding this particular individual to the future financial repercussions of life-style renting.

A couple of years ago, I was working with a doctor in California and we were going to set up a pension where his allowable contributions were going to be between $120,000 to $240,000 per year in a hybrid plan. He had limited savings, was leasing his car and had a sizeable mortgage. In the end, the reason he chose not to proceed was because he would have to tell his wife that she couldn’t spend $120,000 a year on her Mercedes lease, club membership, lunches with friends, nails, hair and clothing etc. He admitted he couldn’t present his wife with this scenario. When this doctor retires, whom the community has looked up to because of his apparent affluence, his retirement reality will be that he will either work until he practically drops, or be on social security with no substantial savings, no medical insurance and living a subsistence life-style because he won’t have the investment income to pay the property taxes, medical insurance or any other luxury. Instead he can continue to work; however, this is predicated on his health and ability to maintain a practice later in life to try to undo his poor savings habits at the height of his income earning years.

On the national level, there was an interesting commentary this past week from the Peter Peterson Foundation on the proposed Obama health care reform plan. (This is the organization which hired David Walker, the former comptroller general of the U.S.) They reviewed the proposal and looked at the plan’s long-term financial viability and concluded that the health care reform being proposed would be sustainable for the first decade only. The plan is short-sighted and does not address the long-term needs of the American public. Click here to see the study.

There is an urgent need for individuals and public officials to examine the distinction between a “want” and a “need” and then to analyze the long-term financial implications and viability of capital projects or purchases against future financial goals, needs and objectives.

Strategies that provide business owners and professionals with tax deductible savings of $80,000 up to $350,000 annually need to be seriously considered as part of a long-term financial security plan especially when those strategies provide asset protection under federal legislation (ERISA) along with other benefits not available in other deferral formats.  Failing to act and have sufficient assets means you are merely renting your lifestyle since it will not be sustainable in the long run without meaningful investments and other assets.