Monday, October 16, 2006

Other People's Money

I've been on the road for a few days, and had an interesting conversation with someone along the way. First of all, I don't know this person very well, so I was kind of surprised she was as frank as she was, given that most people find it hard to discuss money even with those they are close to.
"Mary" is within 20 years of retirement. She's worked for the same company for over 20 years, making a moderate income, I guess-- I don't know for sure, but I'd estimate somewhere between $60-70k a year, plus a bonus. For a long time, she lived in a very expensive part of the country, but when an opportunity to relocate came along, she and her husband decided to move. They figured it would be easier to get ahead in an area with a lower cost of living. Mary's company paid for the move. Mary's husband, who probably makes less money than she does, started looking for jobs in their new area.
6 or 7 years later, they aren't doing that well. They aren't crazy about the area where they live, feeling it lacks the kind of cultural benefits they were used to. Mary's husband has had trouble getting a good job, and has had to settle for part time work. And this was the revelation that shocked me: when he left his old job, Mary's husband had almost $200,000 saved in a 401k, but now, they've had to withdraw and spend almost all of it.
I couldn't figure out how this could be the case. They don't have kids, they have good health insurance, and Mary has a company car. Mary didn't have to take a pay cut to relocate, so her paycheck should go further. I don't think they're the kind of people who have to have lots of new clothes and the latest TVs, etc., so how have they managed to blow all that money? They bought a house, and financed 100% of the cost-- was their house really that expensive? I know they like to cook at home so I don't think they're constantly eating in expensive restaurants, if any even exist where they live!
I was surprised that Mary told me all these things-- I think she was just venting a little. She's had some health issues and would probably like to retire early, but she recently found out that her company's pension plan is being terminated, and no one has yet told her what will happen to make up for it-- she had already been transitioning into a 401k plan, but as a long-time employee, she has a lot to lose, and she is already on shaky ground.
The whole conversation was really disturbing to me. It's easy to assume certain things about who gets by and who doesn't in this country-- such as that dual-income, no-kid couples are better off, or that moving to a cheap part of the country will make you rich, or that having a steady, white-collar job with health insurance and retirement benefits means you'll be okay.
But I guess sometimes you can have all the pieces and still not be able to put the puzzle together.


Tiredbuthappy said...

I don't think we have enough info to really tell what went wrong. Did she have to support a parent for many years? Did they buy the nicest house in town in their new inexpensive area? Did they immediately do a $100K renovation?

Without knowing more about Mary, I would say she's not taking responsibility for f***ing up. Altho that disappearing pension thing is scary. She couldn't have predicted that.

Anonymous said...

It sounds like Mary may be suffering from what I call “psychological inflation”. This usually occurs when you experience a big spike in your income (say from a new job or a really big promotion), but I guess it could also happen if you see a significant decrease in your expenses. Essentially, psychological inflation is when you start being less vigilant with your discretionary spending because you assume the new “wiggle room” in your budget will cover it. Start acting too cavalier with your wealth and before you know it you’ve developed a lifestyle you can’t actually afford, one that becomes very difficult to give up. Mary may have gone through something similar to this shortly after they moved. Compound that with how difficult it has been for her husband to find good work, and it doesn’t take long for that extra wiggle room to vanish. The solution? It’s the same one you use every time you feel the financial squeeze: swallow your pride and live more frugally until you get you head above water.

Madame X said...

It's true, I really don't know enough about the situation. Mary seems like someone who would probably be quite frugal, and shows no outward signs of being materialistic and spendthrifty, but who knows. Maybe she's one of these aging former hippies who only recently stopped spending a lot of money on drugs!

Anonymous said...

Mary may have also found out time passed too quickly. I would imagine that when she and her husband made the decision to raid his 401(k) dollars they assumed they would be able to rebuild that savings.

It is amazing how people forget how long it takes to save given how quickly we can spend.

Anonymous said...

this seems to be common with many Americans. perhaps they though they could rely on home equity or future savings. did you offer her any advice?