Portfolio Countdown

Spending the bonus: Do you deserve to splurge?

Children all across the world have entered the final, terrifying days in which Santa will decide if they have been too naughty this year to deserve any gifts. What about successful adults and their annual bonus checks or bonus equity grants? Have they earned the right to blow the minor windfall on an extravagant item that makes them happy for a fraction of a second?

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More successful Americans seem to think the answer is yes. Less than one-third (28 percent) of experienced investors surveyed by E*Trade Financial said they would use their year-end bonuses to save for retirement. But not all have earned the right to be so generous with themselves—or even to spend it —on their loved ones.

It's guilt-check time for the bonus spenders.

The good news first: Financial advisors say this is no time to "go all Grinch" on those lucky enough to get a little extra.

"The people who would ask me, 'Should I save or spend this?' are usually the ones who would do fine spending it," said Tim Maurer, director of personal finance at the BAM Alliance and a member of the CNBC Financial Advisor Council. He said it's the people who fear they are behind who usually are ahead, and sadly, the reverse often holds true. Since most of us "fall somewhere on a continuum between hopeless spendthrifts and miserly ogres," Maurer said, deciding how to spend a bonus is actually a good year-end exercise, an annual opportunity to examine your financial life and see if its balanced.

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A "balanced" approach to spending the bonus check—when it's not being used for retirement—is what the E*Trade survey details reveal. Among experienced investors, the responses were:

  • 29 percent: Savings or investment account for the future, other than my retirement.
  • 28 percent: My retirement savings or investment account.
  • 22 percent: Paying down debts, loans or bills.
  • 20 percent: Fun things for myself or loved ones today, such as a vacation or a splurge item.

Still, that's not balanced enough, claims E*Trade. According to a spokesperson, you can look at this two ways: glass half full (retirement the second biggest piece of the pie) or glass half empty (72 percent of a bonus going to things other than retirement). E*Trade believes that when taken in context with the other data, the glass is more empty than full.

The other data E*Trade is referring to: The survey found that 2 out of 5 (40 percent) investors (and 58 percent of those under 34) agree that saving for retirement is difficult because they would rather spend on themselves today. Worse yet: Almost half (47 percent) of all young investors have made early withdrawals from their 401(k), and half of this population relies on it as their sole retirement account.

"What's more important to you? Today's short-term happy purchase or knowing you can retire?" asked Lena Haas, senior vice president of retirement at E*Trade.

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E*Trade has also tracked an uptick in Americans who are more inclined to spend on themselves, up from 37 percent in the first quarter of the year to 40 percent. And the percentage of those who have withdrawn money from their 401(k) has increased from 19 percent to 30 percent—but from 26 percent to 47 percent for investors under 34.

"It's always a balance between living for today and preparing for tomorrow, isn't it?" said Mitch Goldberg, president of ClientFirst Strategy. He said any investor should at least think about the consequences of not saving a bonus. Then consider the consequences of spending part of it as a compromise. But Goldberg said of this "first world problem," the decision must be the client's to make. "Potential regret is one of those qualitative factors that has to be considered. You can't just tell a client to save, save, save and live like he or she is living in the Depression. People have other things to live for besides what the [financial] industry wants them to buy."

Maurer's advice for guilt-free bonus splurging:

If you have consumer debt hanging over your head, use most of the bonus to pay off the debt but give yourself a little spending treat.

If you've met your savings goals for this year and are on track for next year, save a little to salve your overactive conscience, then surprise your spouse and kids with a little splurge.

Or surprise your extended family with a paid-for vacation—the memories will be worth a great deal more than the interest you'd have earned (especially these days!).

If you were about to buy a new car on credit, pay with cash and free up the monthly payment.

If you do decide to spend, the satisfaction may not last, and that may be the most compelling reason to sock the bonus away or pay off a bill. "Sometimes the best thing we talk about is to delay the instant gratification, because after a few months, the desire to buy whatever it is he or she wanted disappears," Goldberg said.

Or as Haas argues, "You don't have to give up your holiday splurge, but think about happiness from a one-time splurge vs. happiness over 20 years making smart decisions."

Haas's advice for guilt-free bonus splurging:

Don't think of a bonus paid in equity that goes up in value when it vests as "free" money. That's a psychological illusion common with equity grants and leads to the conclusion that it can and should be spent on anything.

Have a budget: For example, 50 percent toward retirement, 30 percent toward college and 20 percent for the splurge.

Automate savings: It removes your laziness and the guesswork when you set periodic contributions.

Harvest losses: It's tax season, so take advantage of portfolio dogs that can be sold for tax purposes and reinvested in potential winners.

Don't leave money on the table: Many 401(k) plans offer an employer contribution match. For IRA accounts, make sure to contribute the annual maximum ($5,500, and $6,500 for those age 50 or older).

Spend the roughly three minutes it takes to do an online check of whether you are on target to meet retirement goals. Eighty-nine percent of survey respondents told E*Trade they are on track to meet their goals, but Haas thinks there's at least some overconfidence in that response, maybe more than just "some," especially after the extended bull market.

And above all, feel free not to hate yourself for spending. Call it a minor holiday blessing.

"We seem to have given people the mistaken impression that there is a moral imperative to save found money and not to spend it. ... We save for the purpose of spending—in the future. So if you're on track—if you've generated thoughtful spending goals and consistently meet them—then you should be able to spend without guilt," Maurer said, though he did add it's not a bad idea to "invest" a little of the bonus in a charity for the dose of do-gooding euphoria it will generate—and, of course, for the potential tax deduction.