Yesterday, as I finished writing on managing the fear of loss, I realized that the topic could easily be a much much longer blog post. One of the problems with this 100-day blog challenge is that don’t have the time to write longer posts. So here is an addition to yesterdays post.
This post is on a particularly insidious type of loss aversion: the fear of future loss. The main example I have here is dealing with money and retirement, but there may be other examples.
As a guy that has quit his job and burned into his savings for the past 18 months, I am often in a strange position when I interact with most of my friends and acquaintances. My financial situation isn’t particularly enviable. I don’t have the money to live like a 30+ year old with a well-paying Silicon Valley job. Yet, my work is somewhat enviable. I will occasionally hear:
Man, what you are doing is great. I have a few ideas and would love to try them, but don’t think I can step away from my paycheck. The pay is too high, and I’m not sure I can eat into my savings and my retirement.
Basically, people occasionally envy that I am able to burn money that they can’t, or won’t. Strange, but I hear it fairly often.
So why won’t they do it? My take on it is that it is the problem of dealing with future loss. And it can be a big psychological problem; especially with money.
Let’s do the math here.
Let us say that a 30-year old is thinking about the value of a dollar for retirement and estimates a 10% growth in investments per year. This would mean that each dollar this 30-year old has will be worth over $28 at age 65, and over $72 at age 75! That is quite a multiplier, huh?
This 30 year old looks at their savings, does the math. If they stop taking a salary, they will lose out on a lot of retirement money. And it is worse than that. They will need to burn money, and they will lose out on the growth from that money also.
When looking at the numbers this way, it is a no brainer that this 30-year old should save their money and keep in the job. In fact, you can get as extreme as you would like. Why spend $1,000 on a vacation when it will be over $28,000 for retirement? Why buy a $1 Coke now, when you could have $28 in the future?
A person who is sufficiently afraid of this future loss will skimp on everything right now in order to reap the benefits in the future.
And in doing so, IMHO, they will have done themselves a great disservice.
Why? We only live once. At each age, there are things that we can do that will maximize our life experience. Vacations and trips may seem frivolous, but can turn out to be life-changing and eye-opening. Some vacations are best done when you are young. Others are best when you have a family. Quitting a job to start a business is requires energy. You must start relatively young. At the very least, you can’t wait until retirement age.
It is possible to push off some experiences for months or years. But thinking about retirement is insidious because it requires pushing things off for decades. At this point, it isn’t even pushing them off — it is ignoring them. It may mean ignoring experiences that will greatly add to your life. It may mean ignoring your hopes and ignoring your dreams. By the time you retire, you will be too old for many of these things.
Of course, planning for retirement is important. These days, we can’t count of pension plans or social security for retirement. But, be careful with how you think about these things.
Valuable life experiences are invaluable — you simply can’t put a price on them. It is tough to reconcile these experiences with the loss of future money, but it is tradeoff everyone needs to figure out at some point. When you decide, just make sure that you understand the price you have decided to pay, and that this price doesn’t lead to large life regrets. Because if does, you won’t realize it until it is far too late.
P.S. This is post number #61 in a 100 day blogging challenge. See you tomorrow!
P.P.S. I realize that this blog post is useless for the starving artists of the world. They clearly don’t have this fear of future loss. However, there are many people I know who aren’t these starving artists, but sometimes wish they could let go and try something. This post is for those people.
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The fear of immediate loss | Alex Shye