The New Couch, the Empty Nest, and the Expanding Budget: Understanding the Diderot Effect on Retirement

Retirement. The golden years. What you have been blindly working toward for decades. A time for relaxation, pursuing passions, and finally enjoying the fruits of your labor, which most often involves pickleball. For some couples, it also marks a significant shift in lifestyle and, consequently, spending habits. While historically most couples correctly anticipate a decrease in expenses with fewer work-related costs and perhaps a downsized home, a subtle yet powerful psychological phenomenon known as the Diderot effect can often lead to the opposite: an unexpected and gradual increase in spending.

The Diderot effect, named after the 18th-century French philosopher Denis Diderot, describes the tendency for a new possession to create a desire for complementary goods. Diderot famously wrote about the cascade of purchases triggered by a beautiful new dressing gown – a new rug was needed to match, then new furniture, and so on.

While Diderot’s experience involved a single individual, the effect can be amplified in a couple navigating the changes of retirement. The empty nest, the newfound freedom, and the desire to create a comfortable and fulfilling post-work life can inadvertently set off a chain reaction of spending that stretches the retirement budget.

For those of you who are curious about Diderot and his new robe that caused all the trouble, here is a quick article: https://www.psychologytoday.com/us/blog/the-tools-for-thriving/202504/the-cautionary-tale-of-diderot-and-how-he-spent-his-dough​

The Retirement Trigger: A New Beginning, a New Purchase?

Think about it. The kids have moved out, leaving a spare room. “Wouldn’t a cozy guest bedroom be nice?” one spouse suggests. A new bed is purchased. Suddenly, the old nightstands look dated. New lamps and artwork follow. Before you know it, a simple desire for a welcoming guest space has blossomed into a mini home makeover.

Or perhaps the newfound time allows for more travel. A well-deserved cruise is booked. But the old luggage feels inadequate. New, high-end suitcases are acquired. Then, travel-friendly gadgets, better cameras to capture the memories, and maybe even an upgrade to premium economy for extra comfort. This domino effect is intensified by social media, when the couple down the block are on Instagram showing off their upper-level suite with a balcony, and you are lower level and inside on the same cruise.

The Subtle “Creep” in Shared Spending:

The Diderot effect in retirement often manifests as a series of seemingly small, justifiable upgrades, which is why it is so dangerous. As a couple, these decisions can reinforce each other:

• “We’re home more, let’s get a more comfortable couch.” This leads to new throw pillows, a matching coffee table, and perhaps even a larger entertainment unit. And for one couple, a new hot tub and a $50,000 basement remodel!
• “We have time for a garden now, let’s invest in quality tools.” This can snowball into new planters, outdoor furniture, and maybe even a small greenhouse.
• "We inherited my parents' cabin." This leads to a new boat, which leads to new water skis, new fishing gear, and so on and so on. (Those in MN know what I mean!)
• “We want to stay active, let’s get into pickleball.” The Target paddle leads to a $200 paddle that has to be changed every 6 months. A Lifetime Pickleball membership for $350 per month, along with lessons and clinics, all with a separate fee. A dinking board for the basement. That's right, there are home training tools for pickleball!

Individually, these purchases might seem reasonable rewards for a lifetime of work. However, collectively, they can significantly erode retirement savings, especially if not carefully planned for. This planning is not just a budget but also a withdrawal strategy that maximizes market-friendly spending.

Why Is This Happening?

Historically, spending drops in retirement. The cost of work and kids goes away, and while we might spend more initially in retirement compared to the end, the Retirement Smile we talk about so often, there is usually a baseline decline to start. Habits are tough to break at 60+ years old. So why do I hear from so many advisors that some clients are having these spending contagions?

While this is not scientific, I think it is due to:

The kids are gone. Gen Xers and younger Boomers have arguably been too involved in their kids' lives. Being a helicopter or Zamboni parent takes a lot of time and energy. What is left to fill the void?

We are living longer. As a result, we are healthier at retirement, able to do much more than previous generations.

Social media & technology. Young people aren't the only ones susceptible to the social media envy brought about by Insta Reels. Now, all those goods, games, concert tickets, and travel tickets can be purchased in minutes from our phones.

Our work lives are more stressful. I know older Boomers and the Silent Generation had their challenges, too, but younger Boomers and older Gen Xers were the first to do without pensions and company loyalty. The days of a "job for life" are gone. And what made it tougher for those now in their mid-60s+ is that they were the transition group. No wonder they might be more susceptible to lifestyle creep! My teen boys know the rules of the road from a very early age. And it may be no different for Gen Xers like me. We are not only dealing with no pensions, although most of us knew it early on, but technology changes over the last 20-30 years have meant that entire industries have been upended. Think retail and Amazon, as well as social media and creatives in advertising. Even things like the CFA don't hold the same value as they did 25 years ago.

Avoiding the Diderot Trap in Your Golden Years:

The good news is that awareness is the first step in mitigating the Diderot effect. Here are some strategies for couples to navigate their changing spending habits in retirement without jeopardizing their financial security:

1. Watch Triggers And Make Mindful Joyful Purchases: Before making a non-essential purchase, especially a significant one, discuss it as a couple. Consider not just the immediate cost but also the potential for it to trigger further related expenses. Ask yourselves, “Does this truly enhance our lives, or are we just filling a void with more stuff?” Much like the women who would talk to items and thank them as she threw them out, make sure the purchase is bringing you joy, and ask yourself what the chances are that the purchase is a dangerous gateway.
2. Quality Over Quantity: The reason I got into financial planning and wealth management was not so clients could live "as frugally as possible." It was so that they could make the best-informed decisions to reach their goals and live their best lives. Prioritizing and focusing on experience and product optimization.
3. Revisit Your Retirement Budget Regularly: Your spending priorities and needs may evolve in retirement. Regularly review your budget together to ensure it still aligns with your financial goals and that any new spending habits are sustainable. Don't judge, simply tracking and reviewing together can often solve or prevent the problem before it starts.
4. Review Your Withdrawal Strategy: Our spending usually depends on the size of our portfolio, the type of investments, and the risk we take. Withdrawal strategies like Guardrails almost always allow for higher initial withdrawal rates, since spending is based on portfolio performance. Since a severe bad sequence of returns right before retirement is so unlikely, it allows for a more comfortable lifestyle and still accounts for longevity risk.
5. Practice Gratitude And Embrace Imperfection. Be thankful for what you already have. Retirement can be a wonderful time to declutter and simplify, focusing on the essentials and the things that truly bring you joy, rather than constantly seeking the next upgrade or acquisition.

Retirement should be a time of enjoyment and security, not one of unexpected financial strain. By understanding the Diderot effect and consciously managing your spending habits as a couple, you can savor your golden years without letting a new couch lead to an empty nest egg.

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To health and wealth!

Mark Struthers, CFA, CFP®, CRC®, RMA®

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This commentary is provided for general information purposes only, should not be construed as investment, tax, or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable, but is not guaranteed.