The Theory of (Financial) Relativity

Two older adults drive toward the sun and mountains in an open convertible.

(Image credit: Getty Images)

published 4 September 2023

While the title makes this sound very science-based, this is still a financial planning article. Don’t worry if you haven’t heard of the theory of financial relativity, as it was made up while I was taking a shower this morning, after my morning run. You see, recently I read Bill Bryson’s A Short History of Nearly Everything, which is likely the first science book I’ve ever read (including in grade school). About 99% of the book was over my head, although I do feel like a real scientist now.

The theory of relativity

One of the themes in the book included Albert Einstein. It mentioned many of his theories. However, the one I kept thinking about is the theory of relativity. My favorite example of this theory is the one in which people are playing Ping-Pong on a train. It states that the train is going 60 mph, and you’re hitting the ball at 5 mph. On the train, the ball appears to be going 5 mph back and forth.

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Now that I’ve set the groundwork, let’s talk about the 21st century’s huge breakthrough of the theory of financial relativity. You see, finances are extraordinarily relative. I’ve been let into the details of the personal finances of more people than you can imagine. I get the pleasure and honor of hearing them discuss their deepest, darkest wishes and desires. I’ve also had more people than you can imagine ask for a magic number or question how they are seemingly doing well, but their friend/neighbor/colleague is living a better life.

Now let me try to explain. For starters, the number one question people ask me, when they know what I do, is how much they need to retire comfortably. Seemingly, they want me to reach into my hat and pull out a number — say, $4 million — and send them on their merry way. However, financial planning doesn’t work like that. Your retirement number is completely relative to you. It is contingent on many factors, most importantly, what we anticipate the cost of the rest of your non-working life to be.

Now I’ll see many people saying, “Well, my pal and his spouse retired at 55, and they didn’t have nearly saved what you are suggesting I need.” The answer goes back to the old faithful theory of financial relativity. What this person is neglecting to point out is that their friends were a police officer and a schoolteacher for 25 years. They now have two pensions that pay 75% of their working salaries. Plus, they have retiree medical insurance, a million dollars saved, and two Social Security benefits yet to claim. You see, everything is relative when it comes to finances.

Now listen carefully: I have both of these types of people as clients. There is a really good chance the couple spending like crazy is in terrible personal financial shape. They likely will be working until they are 70, compared to the more prudent spender/saver. Or maybe they inherited a bunch of money from an uncle. Or perhaps they make substantially more money than you think. Or maybe their parents bought them that vacation home and gift them $60,000 a year. Or maybe they are spending so insanely to try to fix their marriage. Or maybe they won that billion-dollar Mega Millions jackpot.

The point is, finances are relative, and if you attempt to judge your financial situation by looking through a train window at someone else playing Ping-Pong, it will totally distort your own relativity. Now, I know I say this all pretty matter-of-factly, although it is likely harder to do now than ever before. We live in a social media-glorified era like none we have ever seen. I have Facebook friends who are always on vacation or always doing crazy-expensive things. I have people bragging in my face daily about how wonderfully blessed they are to have such an amazing life.

That all said, remember, in a sense, I am also the executioner. I have a vantage point no one else really does. These same people come into my office, complaining about finances or how they are seeking something in their lives. I’ve heard them complain about marital woes and how he/she won’t stop spending. I even heard these same people have the same complaints you or I have that their friends are seemingly spending at an unimaginable clip, and how can they afford to do so?

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Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

In March 2010, Andrew Rosen joined Diversified, bringing with him nine years of financial industry experience. As a financial planner, Andrew forges lifelong relationships with clients, coaching them through all stages of life. He has obtained his Series 6, 7 and 63, along with property/casualty and health/life insurance licenses.