For the week of October 24, 2012
► Step one: set your goals, says David Christianson
► Economic update: Dispelling global uncertainty
► Evelyn Jacks: New relationship? Beware of tax consequences
► Poll Question: Should governments increase taxes on investment income dividends and capital gains to increase revenues and meet their responsibilities?
► DISTINGUISHED PRACTICES: Tips for Real Wealth Managers™: Broader interpretation of transfer pricing
► Did You Know? Legislation in both official languages
► Tax Tips: How the CRA is helping small business
► Featured Book: Master Your Money Management
► Featured Web Tools: Featured Program: EverGreen Explanatory Notes
Advisor Think Tank
Douglas Nelson asks: “Are you oriented to the present or future?”
I have just read a great book entitled Wait: The Art and Science of Delay in which lawyer and professor Frank Portnoy discusses people who are oriented toward the present vs. those who are oriented toward the future. The distance between the two positions is the difference between financial success and failure — and these distinctions may give you some insights into your clients.
A present-oriented person, Portnoy explains, is one who places significantly greater value on "doing things for today.” A future-oriented person is one who would typically give greater value to "delaying into the future.” The difference between a present-oriented and a future-oriented individual has everything to do with the "discount rate” — a concept economists use to determine the true value of something today vs. in the future — that each person applies to every-day decisions in his or her life.
For example, let's say you have a great interest in camping and there is a shiny, new fifth-wheel and pick-up truck available for the ridiculously low price of $40,000. A present-oriented individual would decide that acquiring the trailer and pick-up is significantly more important than maximizing his or her RRSP contribution or paying down the mortgage. "Investing” the $40,000 in the trailer and pick-up truck would bring the present-oriented individual great personal enjoyment, even if the value of the "investment” depreciated to half over a five- to 10-year period.
The future-oriented individual, by comparison, would put that $40,000 into his or her RRSP where, in five to 10 years, it would grow to $60,000 or more. As well, this individual would enjoy a tax refund on the contribution that could be as much as $16,000. He or she could then use the refund to purchase a smaller trailer that could be towed by the vehicle he or she already owns.
In other words, the present-oriented person and the future-oriented person may share an interest in camping but they go about achieving their goals very differently.
The key here is the discount rate applied. Future-oriented people do not necessarily place a greater emphasis on the future than they do on the present. Rather, they apply a smaller discount rate to the future than to the present, whereas a more present-oriented individual would greatly discount the value of "delaying to the future” and would thus have a much larger discount rate. Interestingly enough, this is one of the main theme's of the Elements of Real Wealth Management course available through the Knowledge Bureau.
I liked Portnoy's research in this area because it emphasizes the difference between generations. The values of the generation born out of the Great Depression of the 1930s emphasized saving first and spending later. They rarely spent money they didn't have and debt was anathema to them. Later generations defied those rules. They wanted to live their lives more fully than their parents. Ironically, those born in the 1930s aren't the retirees who are short on retirement funds; it is the generation entering retirement today that has greater concerns about outliving their savings.
As my grandfather said to me many years ago, the key to a successful life is "everything in moderation.” To me, this means that the discount rate I apply should be small when comparing today's wants and tomorrow's needs. As Portnoy discusses throughout Wait, there is an art and science to the concept of "delay” and "delayed gratification.” As a giver of financial advice, I always try to quantify for my clients the true cost of all of life's major decisions. When you truly understand the cost, then often the best choice of action becomes clear.
My book, Master Your Retirement, identifies five key killers of wealth. These are the future-oriented, long-term costs incurred during your lifetime. If you reduce or avoid these costs, you can build wealth in a predictable, systematic manner. Ignore these costs and you have a much higher probability of financial mediocrity. This is why finding the right balance between a present and future orientation is so incredibly important.
CFP, CLU, MFA, is the author of
Master Your Retirement: How to fulfill your dreams with peace of mind. A financial planner in Winnipeg, Nelson specializes in Real Wealth Management™ in the areas of retirement income planning, business succession and portfolio construction.
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