Mina Kim's Education
Managing finances alone wasn’t part of the plan.
Imagine how fun it would be to live in vibrant L.A., taking over the parent’s legacy home on Cahuenga Boulevard, not far from K-Town, with an upper-middle-class income and a shared love for golf, good food, and nightlife. Up until a year ago, that was the life of Mina and Sung Kim—work a bit, golf at Wilshire CC, hiking at Griffith Park, and some damn good Korean BBQ. Long ago, the Kims left their disappointment children would not be in their future, and they had twenty years of striking marriage. They had moved on from the middle-of-the-night self-doubts, benefiting from their child-rearing friends who had become empty-nesters. The Kims had much in common with their peers again, counting six couples they saw at least every other week. Social partnerships linked by a shared necessity for recrafting the latter half of life.
Golf was a special bond between Mina, Sung, and three couples. Guys’ foursome, girls’ foursome, golf played in style wearing GFore and Malbon. The eight had different levels of golf seriousness, but all were on a shared trip to be fitted for a custom set of clubs for the new year. At a post-round lunch on the veranda with the “Hollywood” sign in the nearby hills, the group discussed January dates to navigate I-5 to the “Kingdom” in Carlsbad for a golf fitting at the headquarters of TaylorMade. A half-day event of grips, shafts, and heads, with the promise a custom set of clubs would increase swing speed and decrease the index by a few clicks. “Maybe we will see Rory,” said Paula on the 13th tee, the Kim’s playing partner earlier in the day when the idea was first hatched. Sung said: “I don’t think so. Rory is spending his time bashing LIV because he is pissed off he didn’t take their offer.” Jon Rahm’s decision was a brief topic of debate as Paula and Sung walked down the 14th fairway with their caddies. Their match was in the balance, however, and neither cared that much about the conflicts among LIV, Phil, Rory, and the PGA Tour. Self-fulfillment was enjoying being together, which was affirmed when the road trip idea was brought to the others. The spouses loved each other, and when does that ever happen?
The January target moved to an agreed mid-week February date when the group, without Sung, met at the Kim’s home to carpool south toward San Diego. Mina hitched a ride with the Todds, Paula, and her husband Greg, sharing the back seat of their Escalade with a Yeti, Tumi luggage, and three sets of clubs tucked away in their Club Glove containers. Sung remained in the home office, needing a couple of extra hours at work before joining the friends at the Four Seasons the night before entering the Kingdom. Sung hit the road at 4 p.m., reaching the San Clemente area on the San Diego Freeway at about 5:30 p.m. Sung tried and failed to make the Camino de Estrella exit, presumably for a break. There were no witnesses to his single-car crash. Sung skirted a tree. His car flipped, and he died at the scene. It took a few hours for the CHP officers to locate Mina. At about 10:30 p.m., Mina learned Sung had entered another Kingdom.
Mina On Her Own
Financial tragedies often seem to follow premature deaths. The Kims were serious consumers, probably too much, if you asked a financial planner to “Monday Morning” their spending. Sung’s $150,000 income was adequate for central L.A. because the Kim’s home had been inherited, and the only way to know if they had done their financial planning best was to run the numbers with economics-based planning techniques. But, an ex post analysis would not be helpful to Mina now because death has no replay. “Only if” are two words that can turn your mind into a punching bag. Mina’s future prospects were not helped when she learned the life insurance on Sung’s life was limited to a $50,000 policy through his employer and a $10,000 death benefit from part B of their auto insurance policy. Sung died without any personal life insurance, a mistake at his age, given his disproportionate support of their living standard.
What was Mina’s current situation? Not great for L.A. living, but not bleak. Financial assets available were their shared $100,000 of cash and stocks in a Schwab brokerage account and $400,000 of inherited 401(k) assets currently invested in Vanguard’s S&P 500 ETF, VOO. Still, Mina could not maintain her lifestyle on the $50,000 per year part-time job she had held for most of their marriage.
Savings for Savings Sake
Sung had always managed the household finances, and Mina needed a plan and a higher-paying job. A financial plan would take time. A new job was easy. Mina was working part-time for a large national insurance broker in their Financial and Professional Liability Practice in downtown L.A., having gained experience in commercial insurance out of college before meeting Sung. Once married, Mina traded off full-time work against more time with Sung and a better home life. After Sung’s death, Mina reached out to a senior director at the broker and quickly solved the labor income piece of her financial puzzle, returning to full-time work with increasing responsibilities that would triple her income.
The financial plan? “I need to save,” was the thought guiding Mina’s direction. Mina knew she wanted to retire, but while the expenses of maintaining her home and property tax were light because of outright ownership of a legacy property, her discretionary expenses were high. A couple of thousand a month in Club dues would keep her socially connected, but caddy fees, the locker room, food, and entertainment would add another thousand each month. “Normal” shopping for Mina and new professional wardrobe costs added a couple more thousand per month. Mina knew she spent a lot of money and knew she could control it. She came up with a plan guided by the amount of her net take-home pay on her direct deposit draft receipt. She thought: “Deposit received. A new 30-day spending clock begins. Spend as normal until a week from the next paycheck. Then, live frugally those last seven days to guarantee some savings.” Huh? What a way to live. Mina needed a plan. Savings must be determined from an intended outcome that she needed to quantify.
Mirroring Mina - Savings Without a Purpose
My experience is that many people share Mina’s haphazard care for putting money aside. I have been reading savings without a purpose responses from clients of my students. The clients are real people, and the students engage in real planning as part of my life-cycle economics class at SMU. In many ways, the clients mirror the general population in knowledge about their spending and savings. A few clients are spot on in knowing their monthly spending and savings, but most have only vague knowledge about the size of their monthly expenses. To say the latter’s knowledge about their finances is intuitive is to give them too much credit. How do we know? I tee up the project for the students with the following statement,
Before you have your client gather their current spending, I’d like you to assess their knowledge of their total monthly numbers. Ask your client, “Approximately how much do you spend each month on discretionary items?” “Approximately how much do you spend each month on non-discretionary items?” Define these terms for them.
After the client’s response, the student follows up with a structured spreadsheet that queues their client’s mind about their spending. There is a lot of variance between the dollar amount of perceived expenses and actual tabulations. The variance can be attributable to how the question and definition were conveyed to the client, the client’s age, life experience, and how much the client cares about the planning process. But, it is safe to say many clients are not captaining their boats. Assembling the data is important, and the process is often illuminating for the client, but to be clear, there has been no financial planning up to this stage.
Economic science is brought to bear in the final stage when a student produces the client’s financial plan, a spending/savings plan that pinpoints a client’s highest, sustainable living standard. The plan is immediately “actionable,” using consultant vernacular. This means the client’s magic number is the target level of consumption and saving in the first year of sustainable long-term financial planning.
How do individuals feel about their magic number?
When the magic number prescribes spending should be cut back, they often cop to it with a phrase like, “Yeah, I know I spend too much.” When the magic number prescribes more spending, the common response is something akin to, “I am shocked. It appears I can spend more each month, but would rather save. You never know what will happen.”
Classroom clients who, like Mina, want to save without a specific objective are being cautious. In effect, they are tamping down their near-term living standard to guarantee future living standards. It is a behavior consistent with leveling a prospective living standard over a lifetime because one never knows what will happen.
How do we understand this save-without-an-objective response? It is human. Economists would call it precautionary saving, one without a specific purpose.1 Gaining comfort from some living standard in the future by lowering today’s living standard. People are risk-averse with uncertain lifespans, investing outcomes are risky, and future labor income is never guaranteed. Knowable today but not well known is a measure of the trade-off between foregoing peak living today for some minimal living standard in the future. Historically, financial advisors had savings products to sell in their hip pocket. Then, like now, there isn’t a lot of incentive for a product-compensated advisor to say, “You should back off investing in our mutual fund for when you are in your eighties so that you can have a higher living standard over the next five years.”
Just saving without knowing the cost does not have to be a 21st century phenomenon.
What an opportunity, though. A financial advisor could raise their stature with clients by offering investing/spending alternatives because it leads to estate planning discussions. If a client socks away a bunch of money today into a fund and lowers their near-term living standard by 20% to leave a large nest egg to some ungrateful daughter-in-law, how does the client feel about it? An example of a fruitful discussion triggered by tallying benefits and costs.
Savings Needs a Purpose
For Mina, who wants her best financial life, or an advisor who wants to pick up their advising game, forcing the savings question is secondary to the initial baseline plan that tethers the best living standard to a client’s resources and prospects. The baseline plan is the benchmark plan that may or may not prescribe more savings initially. The baseline plan is guaranteed to force a conversation about savings for a purpose, for example, living in retirement. In-mourning-Mina needs to work today to support her style of living, but if she has an inkling of retiring in ten years, how should she save? Her thoughts become: “Get a baseline plan. Use the most lucrative tax-efficient retirement planning vehicle. Determine my preferred asset allocation. Measure how higher contribution levels affect my living standard in the near-term, and judge the prospective outcomes.”
Slip on Mina’s shoes. Imagine getting guidance about spending and saving to achieve your highest living standard after knowing nothing about typical monthly expenses. It is pretty cool.
What specific reasons do you or others save? Leave a comment.
Browning and Lusardi (1996) listed precautionary savings among eight motives for saving attributable to Keynes. One of my favorites listed is “To satisfy pure miserliness.” Browning, Martin, and Annamaria Lusardi. “Household Saving: Micro Theories and Micro Facts.” Journal of Economic Literature 34, no. 4 (1996): 1797–1855. http://www.jstor.org/stable/2729595. In the context of the life-cycle hypothesis, see Modigliani, Franco. Chapter 1, p. 6 of the “The Collected Papers of Franco Modigliani, Volume 6.” MIT Press Books 6 (2005).