Is the Pursuit of the American Dream Derailing Your Retirement?

Photo portraying the American dream with a new home and new car in driveway under clear blue skies

It seems everywhere we turn these days we hear about pursuing the American Dream.

It's what Wall Street, Madison Avenue and anyone selling any high-value item, thinks we should pursue.

We get bombarded with images of the “dream” home, the fancy car, and all the trimmings.

The idea is that having a lot of stuff to show for our work defines success – the American dream.

But is the pursuit of this elusive, ill-defined dream bringing unwanted problems into our lives?

Does it create unrealistic expectations that are impossible to meet? Can it keep us from having the kind of retirement we want?

In my experience both personally and through observation, the answer is yes.

In this post, we will explore how this can happen and the steps you can take to avoid it.

The American dream defined

Here are a couple of definitions:

The first comes from the Merriam-Webster dictionary- a happy way of living that is thought of by many Americans as something that can be achieved by anyone in the U.S. primarily by working hard and becoming successful. With good jobs, a nice house, two children, and plenty of money, they believed they were living the American dream.

Investopedia's article, American Dream, says this: The American Dream is the belief that anyone, regardless of where they were born or what class they were born into, can attain their version of success in a society where upward mobility is possible for everyone. The American Dream is achieved through sacrifice, risk-taking, and hard work, not by chance.

The last sentence of the Webster definition caught my attention, “With good jobs, a nice house, two children, and plenty of money, they believed they were living the American dream.”

You see the problem here? How do we define good jobs, a beautiful house, and plenty of money?

The advertising and real estate industry would say you need a big house in the suburbs. Nowadays, HGTV further defines how that should look.

In talking with a couple of realtor friends, they tell me that when they show a house, everyone is looking for the “HGTV” look.

You know that look, right?

It has lots of natural light, a gourmet kitchen with state of the art stainless steel appliances, hardwood floors, a large master bedroom with a separate soaking tub, and walk-in closets that have square footage bigger than my first apartment.

It's crazy.

Homeownership – the heart of the problem

Nothing defines the American dream like owning a beautiful home.Click to Tweet

This craze got out of hand when politicians promoted the idea that everyone should own a home. Couple that with the easing of financing rules, and excessive risk-taking from those on Wall Street packaging and selling the mortgages to back these homes, and you had a recipe for disaster.

People got caught up in homeownership dream and heard of friends and neighbors buying homes with little to no money down. They were getting mortgages where they previously couldn't.

FOMO began to take over many families buying decisions. FOMO, the fear of missing out, can cause us to make some terrible choices. These are emotional decisions often void of critical thought and attention to the costs.

Many just wanted to get in on the action. And the players involved during this time were more than happy to accommodate those desires.

You know the results of this exercise.

The financial crisis of  2007-early 2009

Now, I don't want to rehash the causes of the crisis. There are lots of factors involved.

It is, however, an inarguable fact that thousands of people lost their homes during the crisis. And that's the point of this discussion.

Seeing and reading about people owning homes who, in the past, were unable to buy them caused many to get into houses they could ill afford.

Many got lulled into this by unscrupulous mortgage brokers selling them no money down, adjustable rate mortgages (ARMs).

These ARMs started with very low-interest rates that adjusted every few years (1-year, 2-year, etc.).

Often, these mortgages had introductory rates lower than the market.

When interest rates rose, the payments increased with them. Many homeowners, already extended beyond what they should have been, couldn't make the higher monthly payments.

Many lost their homes or sold them for less than what they paid for them (called a short-sale).

Not everyone should own a home

I know, I know. That goes against everything we've learned from an early age.

Homeownership defines success in American. Nothing says we've “arrived” more than a new home. And the new car in the driveway further drives home the picture of success.

As we illustrated earlier, this pursuit brought many to financial ruin.

I'm certainly not suggesting you or anyone else not own a home. Homes can be an excellent long-term investment. That's if we buy within the means we can afford.

Living beyond our means (spending more than we make) brings stress in a family. When parents stress over money, arguments become more frequent. In many homes, this anger gets directed toward the kids.

Stress over money is one of the leading causes of marital problems. This CNBC article, Fighting with your spouse? It's probably about this, and 5 Financial Mistakes That Ruin Your Marriage from Forbes drive home this point.

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The problem of too much home

Having too much house can be a huge stressor. Click to Tweet

Why?

Owning a home is expensive!

It starts with the down payment. Most people skimp on this nowadays. It used to be standard to pay twenty percent of the purchase price as a down payment.

Now, you can finance up to 100 percent of the home price. 100 percent financing encourages us to buy more house than we can afford. If you focus on the monthly payment, you miss the overall costs.

For starters, you pay property taxes, home insurance, and private mortgage insurance (for those putting less than 20 percent down). You have closing costs, including loan fees, title insurance, and many others.

You have to furnish the house, and you'll likely have higher utility costs.

And then there's upkeep.

Many first-time home buyers ignore the ongoing expense of ownership.

If you've overfinanced, it will take much longer to build up equity in the house.

If buying a house causes you to wipe out your emergency fund, forces you to stop putting money away for retirement, kids education and other financial goals, it's better not to buy.

Or at the very least, to wait until you're in a better position.

For further reading:

Your Values and Your Money – Do They Align?
3 Proven Strategies to Achieve Financial Freedom
The 4 Percent Withdrawal Rule – Is It Still Safe?

A smarter way to live

Pursuing the American dream based on someone else's definition is a recipe for disaster.

You need to define that dream for yourself. Don't let any outside influence cause you to deviate from your goal.

Keeping up with the Joneses is not a strategy that works.

Steve, a fellow blogger at ThinkSaveRetire, is an excellent example of putting values ahead of stuff.

He had a great corporate job with a high salary and used that salary to build his collection of stuff. Then a light bulb came on for him, and he changed his ways.

He retired at age 35. You can read his story in this 2015 Business Insider article, I'm 34 years old, and I'm planning to retire next year.

Steve got his priorities right and changed his life completely.

Start with your values

So many times when doing planning, either DIY style or while working with an advisor, it's all about the numbers.

To me, that's backward. Not that numbers aren't necessary. They are.

However, if the numbers don't match what's important to you in life, they are just numbers. I talk extensively about this in a recent article, Your Values and Your Money – Do They Align?

If they don't, then you will be more susceptible to outside influences telling you what's important. You'll hear investment ideas of people making more than you and be tempted to jump on board.

You may get lured into chasing the latest shiny object.

It's precisely this attitude that causes people to spend more than they make, save less than they should, and take on debt that eventually catches up with them.

A simple formula to follow

No matter what's important to you, what you value, following this simple financial formula will get you there quicker than anything else.

  1. Spend less than you make
  2. Save and invest the difference
  3. Eliminate or reduce debt

Any client I work with or any person I know living in financial freedom follows some version of this formula.

It doesn't matter how much you make. This formula is not dependent on income.

With that said, the difficulty in implementing this strategy is that you will have to make difficult choices in spending along the way.

Not getting a new car every few years, and avoiding buying the big house with the big mortgage are two parts of this.

Avoiding spending on credit cards with high-interest rates or, better yet, paying off credit cards every month are also smart decisions you must make along the way.

Using this formula will allow you to build up an emergency fund (minimum of six to twelve months of monthly expenses). It will also give you the means to save money for funding kids education, retirement, travel and any other goals you set for yourself.

It introduces discipline into your finances and helps form good money habits.

Final thoughts

We live in a country that offers an excellent opportunity to build a comfortable life.

Along with that opportunity comes the temptation to let others define what that means.

Don't let that happen to you!

Let your values, and the things most important to you define how you live your life and what you do with your money.

Looks can be deceiving

Comparing what you're doing to anyone else is an exercise in futility. It will only bring frustration and heartache.

There will always be someone who seemingly has more than you do. That might be a better job. Or a bigger promotion. Maybe it's a bigger house, drive fancier cars, and wear designer clothes.

But are they happy? That's a question you may never be able to answer. What appears like success on the outside, may cover up turmoil on the inside.

I've seen several reader questions on both Investopedia and Quora.com asking whether those living on a substantial income (often $1 million) are happy or living comfortably.

It's fascinating to me how often some version of this question gets asked.

My answer is always the same. It depends on spending. Though an income of $1 million is significant income, people often spend every dollar of that income to acquire beautiful things. They appear, outwardly, as wildly successful.

But if they're living outside their means, they can be just as miserable and unhappy as anyone else. In fact, probably more.

The embarrassment of mismanaging finances with that kind of income can be miserable.

Final thought

Make sure how you spend, save, and invest your money lines up with your values. Or, as this blog's tagline suggests, seek knowledge to help align your money with your life.

What do you think? Have you been caught up in chasing the elusive American dream? Are your values in line with the way you live?

Let me know in the comments below.

This post contains some affiliate links. Please see my disclosure for more info.

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