(Posted in Money Mondays)
Several years ago, I got hit in the head with a hockey puck at the San Jose Sharks game. Maybe it was kind of a Karma thing. My friend had done some legal work for the arena, and she scored some excellent tickets for us in row seven, right on the blue line. And maybe I sort of bragged about it all day long to my friends, and especially to my husband. I was very excited to get to enjoy such a great vantage point to all the action. Well it turns out, a kind of dangerous vantage point, the protective glass stopped at row six. I enjoyed five minutes of the game before I was taken to the emergency room to get the gash in my forehead stitched up.
So it seems appropriate that the National Hockey League was the one to knock me upside the head again today, this time about the dangers of the wealth effect.
It’s taken five years, but my retirement nest egg has finally surpassed the balance it held on the day that I retired. It may seem strange that simply catching up to and squeaking past where I was five years ago would make me feel wealthy. This is not how I thought things would shake out back when I retired in early 2008. I figured five years later those accounts would be higher, I mean a lot higher.
But you all know what happened in 2008. By the end of that first year, The Very Big Recession had knocked my retirement accounts down more than 20%. The wealth effect means that when you’re not feeling very wealthy, you make cutbacks. That part of the wealth effect was very good for my retirement actually. That first year, we spent a lot less than I had budgeted for, only about three-quarters of what we spent the year before I retired.
Even as the years marched on, and the stock market crept up, the post-traumatic stress effect of having experienced that very big market decline kept us from feeling like we were out of the woods. In fact, each of the first three years of my retirement, we kept spending less than the year before. Even the year I picked up my little part-time retirement gig I didn’t loosen the purse strings at all.
But fast forward to 2012. We started to feel more comfortable. The combination of a climbing stock market, the extra cushion that the part-time job provided, and the fact that our first four years of retirement spending had come in way under budget led us to experience the wealth effect the other way. Even though we had only gotten back to where we started in 2008. We took a couple extra vacations, splurged on a few nights at a fancy resort, and even bought a new car.
Just getting back to where we started may seem like a move backward, but the fact is, now we have five fewer years to cover (or put another way, we are five years closer to the end of our retirement, if you know what I mean.) So that actually means we’re in better shape than we were when I first retired. And that’s why I feel the wealth effect working in the other direction, the dangerous direction.
That’s where the NHL comes in.
Last month, when I thought the hockey season was cancelled, I took my newfound wealth, the savings from this season’s tickets, to buy a new couch. But then yesterday they settled the strike, so there really was no newfound wealth. Which I suppose is better than an actual puck in the head, but it reminded me that maybe I should rein the spending a bit, and perhaps move behind the protective glass.
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