How Do You Feel About Money? 

Thirty years may seem like a long time-and it is. But it's just about the average joint life expectancy of today's average retiring couple: a 62-year-old man and woman who don't smoke. (Those two nice people were born in 1948, but we'll get to that in a minute.) In plain English, that means that one of those two people will need to be drawing an income from her investments thirty years from now...after thirty years of living the reality that every year, just about everything you need to buy will cost more.

Another look at our two imaginary stamps will tell you what the problem is. It's that, although erosion of purchasing power may be both slow and mild over any year, or even any few years, over decades its compound effects may be very significant. That's why your financial advisor may be telling you that the central problem in modern retirement income planning is the creation of an income that rises through the years at something like the rate your cost of living is rising, so that increased living costs may be largely offset, over time, by rising income.

This is a very important point-indeed, there are those of us who think it's the one critical question-but it begs a couple of more important questions. Namely: what do you think money is, and how do you feel about money?

These may appear to be two ways of asking the same question, but they're not. How we define money and how we feel about it are two different issues. But they do have one very important thing in common, and that's that for most of us, the answers are unconscious. They were laid down so long ago, and it's been so long since we re-examined them, that they form the basis for our essential money attitudes. But what if, through no fault of our own, those old answers have become wrong, or were never right in the first place?

Let's start with our definition of money. For most of us, our money is the number of units of the currency we own. Our idea of money, therefore, is that it is fixed and unchanging. A dollar is a dollar is a dollar. Many or most people are quite capable of maintaining this attitude, without a flicker of anxiety, even as they look at the two stamps.

But if you drag your definition of money out into the light, while looking intently at the two stamps, you may suddenly not be so sure. Indeed, you may say, "A dollar is a dollar is a dollar until a year from now, at which point (historically) it's down to about 97 cents. And the next year it's down to about 94 cents. And so on..."

Once you have this epiphany, you are a pickle, and you can never go back to being a cucumber again. Because what you have intuitively stumbled upon is the realization that, in the long run, "money" is better defined in terms of purchasing power rather than in terms of how many units of the currency you have. In other words, "money" turns out, over time, to be not a number of green pieces of paper, but what they will buy...or not buy.

Where, then, did we get the idea that money and currency were interchangeable concepts? For that answer, return with me now to those thrilling days of yesteryear: 1948, the year our now-retiring baby boom couple was born. And ask yourself: to whom were they born?

The answer is that they were in all probability the first or second children of a young couple, still just starting out in life after he returned from the war, who were born between, let's say, 1920 and 1925. And what do we know about those young people? We know that, being between the ages of about five and ten, they were terribly and painfully aware as the Depression enveloped them and their families. It hung on all through their adolescence, and didn't really loosen its grip until war came.

These were people who knew the value of a dollar. (Indeed, between 1930 and 1932, the value of a dollar would actually rise, in the only three consecutive years of deflation in the twentieth century.) When, in time, their children came along, they were taught the lessons of the Depression: you don't borrow, you don't buy stocks, and above all you keep your money "safe" in guaranteed places like FDIC-insured savings accounts, because-just as it did last time-the Depression could come back without warning.

That is, today's retiring couple was acculturated, from earliest life, to two ideas: (1) a dollar is a dollar is a dollar: money as currency, fixed, immutable and of constant value; and (b) fear-nay, stark, nameless terror-where money was concerned.

Those answers, like all our essentially unconscious fundamental ideas received in childhood, may still be there. If they are, and we leave them unexamined, modern retirement may turn into a world of hurt.

That's because, given the definition of money as currency and the terrible fear of loss of principal as we grow older, we will instinctively tie up most or all of our retirement capital in the "safest," most credibly guaranteed fixed-income investments. We will make sure, in 2010, that we will always have enough income to buy a forty-four cent postage stamp-and everything else we need to buy, at 2010 prices.

Then, next year, if the Post Office has its way, stamps will cost forty-six cents. And we may very well find that the prices of most everything we need to buy will have gone up as well. Then, in 2012, this will most likely happen again. And then again. And so on, as we try to cope with rising living costs on a fixed income.

Trying to fight off thirty years of rising living costs with an essentially fixed income isn't rational. Indeed, that's the whole point of this little essay. Given the earliest acculturation of today's retiring baby boomers-equating money with currency, and seeking to protect not our purchasing power but the number of currency units we have (and the essentially fixed income therefrom)-we may set ourselves on a financial downward spiral. And that downward spiral may go on not for years but for decades.

Had our parents not lived through (and indeed been formed by) that most searing episode of deflation, and if they'd had even an inkling that we might need retirement income for anything like three decades, they surely would have advised us differently. But they couldn't, because they didn't. That's why it's critically important that today's retiring boomers revisit these two issues.

That's what your financial advisor is there for: not to guess which way the market will zig or zag next, but to empathetically (and even therapeutically, if you will) help you reframe these two critically important questions: how are you defining money, and how do you feel about it?

© 2010 Nick Murray. All rights reserved. Reprinted by permission.