Even the rich now fear running out of money
by Chuck Jaffe
If you worry about making money on the way up, you worry about losing it on the way down. So it should come as no surprise that wealthy Americans -- according to several different studies -- are now concerned that they will run out of money as the "Great Recession" will put the pinch on their finances for the foreseeable future.
But psychologists say there are two forms of "worry," the one that involves anxiety and fear, and then "productive worry" where individuals use their concern as a motivational tool to solve their problems.
Current worries have produced lower expectations, increased savings and the unlikely emotional feel-good power of "smart shopping" and being thrifty, if only because those solutions are easier and more realistic than trying to play a fast game of catch-up.
The "Survey of Affluence and Wealth in America," released Wednesday by American Express Publishing and Harrison Group, showed that 53% of the nation's wealthy are now worried that they could run out of money, in large measure because many of the respondents fear the country is headed for an economic depression.
Meanwhile, the 10th annual Phoenix Wealth Survey released Monday showed that America's millionaires have been stripped of their confidence and sense of security. The survey, conducted by The Phoenix Cos., which sell insurance and annuities to high-net-worth consumers, showed that roughly one in four people felt their wealth was "extremely" or "very secure" for the long term; nearly half of the surveyed millionaires felt their wealth was safe as recently as two years ago.
"People who are focused on wealth -- who spend much of their time worrying about making it and how they can better their future financially -- have a greater chance of attaining wealth, but they also feel the pain of loss more acutely," said John Nofsinger, a Washington State University professor who studies behavioral finance and investor psychology. "They're better off after this loss of wealth than most people, but emotionally they are hurting more than people with less wealth but different priorities."
Added Meir Statman, a professor at Santa Clara (Calif.) University: "This economy is playing mind games with people's aspirations. If you benchmark yourself against the richest man in town -- and that is frequently what wealthy people do -- you are going to feel mighty poor in the best of conditions. ... Yes, the market is bad, but a lot of wealthy people are making themselves miserable when their finances have merely taken a blow, not some fatal beating."
In short, don't cry for millionaires.
Dreams Down the Drain
But rich or poor, there appears to be a phenomenon at work here that is as much psychological as it is about cash.
Clearly, investors personalize losses more than gains. But for investors who have reached their financial goals, setbacks represent the destruction of a dream.
For a person who believes that a certain amount of net worth -- whether it is $200,000 or $10 million -- makes them set for life, seeing their portfolio shrink is like watching their dreams die. The financial world is full of stories of ordinary folks who amassed enough money to be set for life -- even with a market downturn -- but who then lived as if they had nothing. If $1 million was the goal, for example, $850,000 suddenly feels like failure, even if it means little or no change in standard of living.
"Among wealthy families, 80% feel like they have had substantial hits to their financial security and 88% have become more resourceful in terms of making financial decisions," said Jim Taylor, vice chairman of Harrison Group, a Connecticut-based research-consulting firm. "The savings rate for these families has gone through the roof, up to 12%."
"The irony is that despite the worries and the cutbacks and having to be more resourceful or spend less to make their money go further, the percentage of families reporting themselves to be very happy is up," Taylor added. "Two-thirds of the families say they are very happy, which is up since 2007."
Taylor believes that represents a turn toward optimism. Tuesday's consumer confidence numbers generally showed a big step up in confidence, although the overall numbers remained in negative territory.
Will We Revert?
And if spending less, being a smart shopper and saving more are helping to raise the self-esteem of the wealthy, there's at least a chance that these changes will be permanent, that old spendthrift habits will not return even if the market continues to rebound.
This is where behavioral finance experts disagree. Most believe that current economic woes have been enough to make people take temporary measures, with the hope that happy days will return, allowing the investing public to go back to its old habits. Some, like Taylor, think the new habits feel good enough that they will live beyond this recession.
"The permanence of these lifestyle changes is up for grabs," said Donald MacGregor of MacGregor-Bates, an Oregon-based firm that studies consumer and investor behavior. "The easy thing is to change habits now but to assume this is an aberrant situation and things will get better in the near future, near being the next year. And if things get better, rich or poor will probably go back to what they were doing a few years ago."
"But we may also be looking at a different economic way of life," MacGregor added. "So people are right to be worried, but their anxiety isn't really doing anything other than making them lose sleep. ... If you can take your anxiety and turn it into productive worry and make your situation better -- if you can solve this problem in the best way for yourself, by changing spending or savings habits -- the one thing you can be sure of is that you will be better off no matter when the economy comes around."
If you worry about making money on the way up, you worry about losing it on the way down. So it should come as no surprise that wealthy Americans -- according to several different studies -- are now concerned that they will run out of money as the "Great Recession" will put the pinch on their finances for the foreseeable future.
But psychologists say there are two forms of "worry," the one that involves anxiety and fear, and then "productive worry" where individuals use their concern as a motivational tool to solve their problems.
Current worries have produced lower expectations, increased savings and the unlikely emotional feel-good power of "smart shopping" and being thrifty, if only because those solutions are easier and more realistic than trying to play a fast game of catch-up.
The "Survey of Affluence and Wealth in America," released Wednesday by American Express Publishing and Harrison Group, showed that 53% of the nation's wealthy are now worried that they could run out of money, in large measure because many of the respondents fear the country is headed for an economic depression.
Meanwhile, the 10th annual Phoenix Wealth Survey released Monday showed that America's millionaires have been stripped of their confidence and sense of security. The survey, conducted by The Phoenix Cos., which sell insurance and annuities to high-net-worth consumers, showed that roughly one in four people felt their wealth was "extremely" or "very secure" for the long term; nearly half of the surveyed millionaires felt their wealth was safe as recently as two years ago.
"People who are focused on wealth -- who spend much of their time worrying about making it and how they can better their future financially -- have a greater chance of attaining wealth, but they also feel the pain of loss more acutely," said John Nofsinger, a Washington State University professor who studies behavioral finance and investor psychology. "They're better off after this loss of wealth than most people, but emotionally they are hurting more than people with less wealth but different priorities."
Added Meir Statman, a professor at Santa Clara (Calif.) University: "This economy is playing mind games with people's aspirations. If you benchmark yourself against the richest man in town -- and that is frequently what wealthy people do -- you are going to feel mighty poor in the best of conditions. ... Yes, the market is bad, but a lot of wealthy people are making themselves miserable when their finances have merely taken a blow, not some fatal beating."
In short, don't cry for millionaires.
Dreams Down the Drain
But rich or poor, there appears to be a phenomenon at work here that is as much psychological as it is about cash.
Clearly, investors personalize losses more than gains. But for investors who have reached their financial goals, setbacks represent the destruction of a dream.
For a person who believes that a certain amount of net worth -- whether it is $200,000 or $10 million -- makes them set for life, seeing their portfolio shrink is like watching their dreams die. The financial world is full of stories of ordinary folks who amassed enough money to be set for life -- even with a market downturn -- but who then lived as if they had nothing. If $1 million was the goal, for example, $850,000 suddenly feels like failure, even if it means little or no change in standard of living.
"Among wealthy families, 80% feel like they have had substantial hits to their financial security and 88% have become more resourceful in terms of making financial decisions," said Jim Taylor, vice chairman of Harrison Group, a Connecticut-based research-consulting firm. "The savings rate for these families has gone through the roof, up to 12%."
"The irony is that despite the worries and the cutbacks and having to be more resourceful or spend less to make their money go further, the percentage of families reporting themselves to be very happy is up," Taylor added. "Two-thirds of the families say they are very happy, which is up since 2007."
Taylor believes that represents a turn toward optimism. Tuesday's consumer confidence numbers generally showed a big step up in confidence, although the overall numbers remained in negative territory.
Will We Revert?
And if spending less, being a smart shopper and saving more are helping to raise the self-esteem of the wealthy, there's at least a chance that these changes will be permanent, that old spendthrift habits will not return even if the market continues to rebound.
This is where behavioral finance experts disagree. Most believe that current economic woes have been enough to make people take temporary measures, with the hope that happy days will return, allowing the investing public to go back to its old habits. Some, like Taylor, think the new habits feel good enough that they will live beyond this recession.
"The permanence of these lifestyle changes is up for grabs," said Donald MacGregor of MacGregor-Bates, an Oregon-based firm that studies consumer and investor behavior. "The easy thing is to change habits now but to assume this is an aberrant situation and things will get better in the near future, near being the next year. And if things get better, rich or poor will probably go back to what they were doing a few years ago."
"But we may also be looking at a different economic way of life," MacGregor added. "So people are right to be worried, but their anxiety isn't really doing anything other than making them lose sleep. ... If you can take your anxiety and turn it into productive worry and make your situation better -- if you can solve this problem in the best way for yourself, by changing spending or savings habits -- the one thing you can be sure of is that you will be better off no matter when the economy comes around."
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