A Feast you can Eat
Almost all people value the utility which their children will get from consumption higher than they value their own. –Milton Friedman
Some people want the last check they ever write in their life to bounce. Spend all your money while you’re alive. Otherwise, it will be too late. It is hard to find fault with that concept, but the execution is tricky. If we live only for today, then eventually tomorrow catches up with us. On the other hand, if we only accumulate for its own sake then we risk missing out on life’s opportunities.
Wealthy people tend to be accumulators. Some are probably over-accumulators. The question of how much accumulation is optimal is a complex one.
I heard a folktale about a criminal convicted of theft. As punishment, the villagers sent him up a mountain alone for the night, strictly prohibited from building a fire. Because the mountain always became very cold at night, the prohibition against fire meant that the village had effectively handed him a death sentence.
On the appointed night, the man’s brother went to the top of an adjacent mountain and built his own fire there. The guilty man, shivering, looked into the distance at his brother’s roaring fire and imagined himself sitting next to it. The thought sustained him through the night. Against the odds, he survived and returned to the village the next morning.
The villagers were outraged because they considered his brother’s distant fire a form of cheating. They wanted to put the criminal to death. To change their minds, the brother invited the whole village to feast in his house. He roasted all kinds of meats and vegetables in his kitchen, and in the center of the dining room he boiled an aromatic soup. Hours passed, but no food was served. The guests became increasingly restless. Finally, the brother told all the guests to go home because the feast was over. They became riotous, screaming, “We haven’t eaten anything yet!”
“Ah,” said the host, “if I have not given you a feast tonight, then neither did I give my brother any fire. Food you cannot eat is the same as warmth you cannot feel.”
The criminal was forgiven, and they all ate the feast. Happy ending.
Like the fire on the distant mountain, wealth can sometimes sustain us even though we aren’t actively using it. The value of money goes beyond simply buying things. There is value in having it as well. Money imparts confidence. Our thoughts and actions become more certain when we trust we can use money to dispatch little inconveniences. Money assists us in making plans and also in following them through.
For better or worse, money can also impart feelings of power and self-importance. These are perhaps not the most elevated human emotions, but they can be powerful. Hollywood lazily uses love of money and power as off-the-shelf motivation to make any villain do anything. This is a trope The Dark Knight played with by having Heath Ledger’s Joker set fire to an enormous pile of money simply to make people mad. He’s not your typical villain. He has different motives. He’s—the Joker!
Returning to the realm of goodness and light, perhaps the greatest motivator behind wealth accumulation is that you can pass it down to your kids and grandkids. Milton Friedman said he was somewhat puzzled why people often care so much less about spending money on themselves than they care about setting their kids up to spend abundantly in the future. Economists tend to view human behavior as utilitarian, with a strong bias toward self-interest. Viewed through that lens, piling up money for the kids’ sake does not seem rational.
Hedge fund manager Bill Perkins wrote a provocative book called Die with Zero, which argues for spending your money joyfully while you’re alive. The argument is a bit hedonistic but is often clever and amusing. One criticism he anticipates and tries to address is that his somewhat hedonistic worldview does not come across as especially family oriented.
He points out that wealthy people often use their kids as an excuse for their own desire to hoard. They claim to be accumulating money for their family’s sake, yet they wind up hanging on to every dollar until the day they die. Why would your dying day be the optimal time to give away the money? You certainly need to retain enough to meet your own uncertain future needs, but as for giving away the “extra”, your instinct is probably to wait longer than is really optimal for the beneficiaries.
Money can be a tool of control. In a sense, that is how the entire economy functions. You may have heard the twist on the golden rule that “he with the gold makes the rules.” In a family setting, using the promise of money as a tool of control is a dicey proposition. You have to be careful what you promise–implicitly and explicitly–and you need to fulfill your promises on a reasonable schedule. When wealthy parents and their children butt heads over money, it is natural to blame the spoiled, greedy little brats. It isn’t their money unless or until their parents graciously decide so.
There can be blame on both sides, however. We are tempted to demand that our beneficiaries treat their inheritance like the fire on the mountain. We want them to draw strength from it but also for it to stay on the distant mountain. They might interpret it more like the feast that never seems to come out of the kitchen. Your wealth should be a feast you can eat.
Gifting and inheritance laws might tighten up in the foreseeable future. If the 2017 tax changes are allowed to expire after 2025, the amount shielded from gift and estate taxes could fall in half from the current $14 million per person. If this comes to pass—a big unknown—it could become necessary to make some quick decisions about how much money you want to keep for yourself versus how much you want to pass along to future generations. Delaying might cause your estate to be taxed at a much higher level. You won’t want to get caught flat footed. Today is a good time to start thinking seriously about the question.
I’ll end on a joke that many people find painful but that I really like:
One of Pharaoh’s subjects asks him, “Pharaoh, is it true that a thousand years to me is like one brief second in your eternal kingdom?”
“Yes,” says Pharaoh, “that is true.”
The man asks, “Pharaoh, is it also true that a thousand gold coins to me is like one little piece of copper in your limitless treasury?”
“Yes,” says Pharaoh, “that is also true.”
“Pharaoh, buddy,” says the man, “could you spare one little piece of copper for your faithful subject?”
“Sure thing,” says Pharaoh, “My pleasure. Hang on one second.”
Miles Putnam, CFA