Smart personal finance is all about balance.

You work while you’re young to provide for the day when you may not be able (or willing) to work any longer. If you don’t save enough, you may find yourself unable to lead the life you want in retirement.

But if you save too much when you’re young, you risk sacrificing years of youth and vigor for an uncertain future. In a worst case scenario, you may not even live long enough to enjoy the money you’ve saved.

The key is to find some sort of balance: to save enough for retirement, but to also use money to enjoy life while you can.

Die Broke
In his 1997 bestseller Die Broke, Stephen Pollan offered a controversial approach to retirement. Instead of focusing on the future, he encouraged readers to put as much emphasis on today as tomorrow. He offered a four step prescription for making the most of your money:

  • Quit today. Use your job to generate income to pursue your personal goals rather than using the job itself to fulfill those goals.
  • Pay cash. Live frugally. Wait to buy things until you can pay with cash.
  • Don’t retire. Plan to be productive all your life. You’ll earn more money and be more satisfied.
  • Die broke. Forget about leaving an estate. Use the money you’ve saved. Make the most of what you’ve earned.

“By choosing to die broke,” writes Pollan, “you turn the future from something to fear to something to embrace and rejoice over. Dying broke offers a way out of your current misery and into a place of joy and happiness.” His message is to enjoy tomorrow and today.

Spend ’til the End
In the newly-published Spend ’til the End, Scott Burns and Larry Kotlikoff offer similar advice, but they place more emphasis to the details. Burns and Kotlikoff analyze dozens of hypothetical scenarios as they seek to discover which choices provide the greatest “lifetime living standard per adult”.

The authors believe that in order to obtain a balance between today and tomorrow, you must:

  • Maximize your spending power.
  • Smooth your standard of living.
  • Price your passion.

Burns and Kotlikoff draw on research into economics and behavioral finance. They cover big concepts and small, all while keeping the information accessible to the average reader. Most of all, they stress that you are just as capable as a financial professional to research and choose the best course for your life.

Maximize your spending power
To maximize your spending power, you must make the most of big life choices. Where will you live? What will you do for work? How much will you spend on a mortgage? How will you invest for retirement?

The authors suggest that it’s okay to choose a job that you love, but that you should be realistic about how much income you can generate. They also note that where you live can make a huge difference to your standard of living. Whether you should buy or rent is a complicated question, but if you do buy a home, Burns and Kotlikoff urge readers to prepay the mortgage. “Paying off your mortgage is one of the smartest and safest investments you can make,” they write.

Finally, the authors believe that the best way to maximize investment returns is to fire your broker and to invest the money yourself in low-cost index funds. (Their philosophy is very similar to that found in The Four Pillars of Investing, which I reviewed two weeks ago.)

Smooth your standard of living
It may not make sense for everyone to save for retirement. If your financial situation leaves you pinched, you should find a way to make your present circumstances more comfortable and then worry about the future. In fact, the authors note, for young people it sometimes makes sense to borrow. If done sensibly, borrowing money can help smooth your standard of living:

Consumption smoothing is a balancing act. It’s about balancing future and current spending, but it’s also about balancing safety with opportunity.

In economics-speak, consumption smoothing means maintaining a balanced standard of living over the course of your entire life.

  • Rather than oversaving today to live rich tomorrow, consumption smoothing means giving yourself permission to enjoy today, as well.
  • But it also means that instead of overspending today and being broke tomorrow, you recognize when it makes sense to save.

This is difficult to do, of course. There are many variables: income, life expectancy, unexpected emergencies. Much of Spend ’til the End is devoted to exploring specific techniques for consumption smoothing.

For example, the authors stress that diversification — not just of investments, but of all your economic resources — is crucial to maintaining a balanced lifetime standard of living. This is why it’s critical to not invest in your employer’s stock. It’s foolish to draw your paycheck and your investment income from the same source. It’s also the reason that many financial planners believe it’s good to have both a Roth IRA and a traditional IRA — it diversifies your retirement resources.

Consumption smoothing is all about providing a constant lifestyle.

Price your passions
Life is about more than money. Money helps ease the way, but it does not give us meaning. Instead, we derive pleasure from our passions: our relationships, our hobbies, our beliefs. But each of our passions carries a financial consequence.

In some cases — such as living with a partner — doing what we love can actually increase our standard of living. Because a couple can share expenses, living together is a financial net gain. It’s more difficult to evaluate our leisure activities:

We’re constantly trying to figure which is worth more: money or leisure. And guess what? Most people choose leisure. Even as the financial services industry puts out warning after warning tell us that we’re all going to be eating cat food unless we save and invest more money while working more years, any examination of the choices people age fifty-five and over make leads to only one conclusion: we like leisure more than we like money.

But, the authors argue, this isn’t necessarily a bad thing. If we’re able to pursue the things we love at a price we can afford, it’s worth it.

Conclusion
Spend ’til the End is primarily about little tweaks you can make to the way you manage your money in order to improve your lifetime standard of living. It’s about consumption smoothing. For example, there’s a short chapter on tax-efficient investing. This may seem like an esoteric topic, but optimizations like this make a difference to your future comfort. Much of the book’s advice is geared toward those nearing retirement, but there’s still plenty for readers of every age.

Spend ’til the End was the perfect book for me to read at this place in my life. Still, it’s not a great book. In fact, I had several problems with it:

  • Some examples are too detailed, too specific.
  • The book seems to lack cohesiveness. (Perhaps because there are two authors?)
  • The writing style can be simultaneously glib and dry (no mean feat).
  • Though I can’t say this about many books, this one seems poorly edited. The copy-editing is particularly poor.

The real problem is that many of the choices this book asks readers to make require intricate knowledge of tax code and an understanding of myriad variables. There’s no way for the average person to calculate these numbers by hand. Indeed, the authors rely heavily on a piece of software developed by Kotlikoff. ESPlanner can analyze these variables, and it’s used for many of the examples in the book. Because of this, Spend ’til the End occasionally reads like an advertisement for a piece of $150 retirement planning software.

I don’t want to sound too harsh. I like Spend ’til the End. It’s thought-provoking. And any personal finance book that name-drops Scrooge McDuck and The Big Lebowski is a winner with me.

I recently had a chance to spend a couple hours on the phone with Scott Burns, one of the authors of Spend ’til the End. Look for highlights from our conversation next Thursday.

This article is about Books, Choices, Planning