When my latest issue of Registered Rep magazine showed up in my mailbox, I was immediately intrigued by the cover story. It stated that Americans are saving too much for retirement. What? How can this be? We have been told for years that we need to save more, but someone is saying that we’re saving too much? I just had to find out more.
The Man Behind It
Laurence Kotlikoff is an economics professor at Boston University, and he claims that most Americans are saving too much money for retirement while sacrificing spending money today. This is a pretty bold statement that goes against most of what we’ve been taught. In fact, this is even more surprising since he has written that the economic future is bleak for the United States without tax reform, health care reform, and Social Security reform.
With such a bleak outlook on the future of entitlement programs, wouldn’t it make sense to be saving a little more for retirement to err on the side of caution? Apparently not.
It is All About Consumption
Kotlikoff argues that current financial planning doesn’t take into account consumption smoothing. That is, most savings plans revolve around a fixed amount that is put on autopilot and doesn’t change according to what is going on in people’s lives. With major life events such as weddings, college education, career changes, and so on, the amount you need to save will fluctuate and not remain constant.
I can agree with this, and just sticking to the rules of thumb that say you need to save x% of your income or you need to have x amount of dollars by retirement are just that–rules of thumb. He actually goes so far as to call them rules of dumb, although I think they are at least a good starting point for people who aren’t doing any saving or planning yet.
Is There a Motive for This?
You bet there is. Kotlikoff has developed software that will help investors and advisors “smooth out” their consumption so that they can take into account the changes in their lives to more appropriately plan for retirement and figure out how much you should be saving for retirement. The software is called the Economic Security Planner. The software starts at $149.00 and goes as high as $750 for the financial planner version.
It is starting to make sense now. If you make an outrageous claim that goes against everything we’ve been taught, you’ll generate a lot of attention in the media. Then, if you have developed a product that can address the concerns you mention, you can stand to make a lot of money.
My Beef With This
Clearly, Kotlikoff has impeccable credentials given his background and academic qualifications, so I’m certain that many of the ideas surrounding this claim are sound. I agree that the typical retirement advice that is dished out by investment companies and many advisors is too simplistic and cookie cutter to be of much use. But the claim that many or even most Americans are saving too much, I don’t buy that.
Maybe in the wealthy tier of individuals that Kotlikoff deals with, this is true. I can see how those who can afford to save a lot may be dumping a ton of money into retirement while foregoing consuming today, but I simply cannot believe this to be true with the vast majority of your typical working Americans.
I deal with these types of people on a daily basis. Families of four who have a household income of $75,000, individuals who are making $35,000, etc. Most of these people aren’t living beyond their means, but making ends meet and some are saving a little bit for retirement, usually under 5%. I even meet with a lot of people who are approaching 60 and are looking to retire in a few years and they only have $20,000 saved up. Are these people saving too much?
If I had to guess, I’d say that 9 out of 10 people I work with are not saving enough for retirement, let alone saving too much. Only between 60-70% of all employees are saving money at all, and the majority of those are saving virtually nothing. I find it very hard to believe that these working families are sacrificing things in their life today because they are saving $50 a month for retirement.
I do think that the argument about how retirement planning is too general is very true, and this is certainly a wake up call for those who blindly follow these rules of thumb, but the notion that most people are saving too much is a bit much. You should carefully examine your savings and retirement needs before reducing your retirement savings contributions or dropping a few hundred dollars on his software.
You can read a copy of the article I was referring to online at RegisteredRep.com
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
Sounds like an example of an academic egghead living in his statistical theory world instead of the real world. American's already have a negative savings rate, how much lower can it go?
"Smooth out"? What's to smooth?
Once your kids are out of college, if you live within your means your expenses are as smoothed out as they're gunna get.
At three years from retirement, I earn about $20,000 more than the median income in my city. Because I don't carry a tab on the credit cards -- that is, I never charge more than I have in my checking account -- I live very frugally and I STILL spend every penny that comes in, with the exception of about $250 that goes into emergency savings. I have no mortgage. Seven percent of my gross pay goes into a 403b, matched by my employer.
If I retired today (which I surely would like to do), my Social Security would be a little over $800 a month. That is a little less than 1/6 of my current gross pay. If I wait until I'm 66 1/2 (horrors!), my SS benefit will be a munificent $1300 a month, less than 1/3 of my present salary. ALL THE REST OF MY LIVING EXPENSES will have to come from savings!
To earn the amount I now spend on ordinary living expenses (no travel, no eating out, no car payments, no house payments, no expensive clothes, no days at the spa, no elaborate hobbies, and when the dog dies I quit financing the vet's Jaguar) without drawing down principal, I would need almost $800,000 in savings, assuming an 8% return on investments (the amount you really should figure is 4%). SS would reduce that figure by $10,000 or $15,000, an almost negligible amount in the large scheme of things.
The only way I can see to "smooth out" expenses would be to sell my home, which is not exactly a McMansion and is not in the best neighborhood in town, and move someplace cheaper. That means moving to Sun City (ech!), into a condo (I loath apartment living), or to a part of town that is unsafe for an elderly single woman.
If you're a young person, start saving now and don't stop!
I actually have a notepad that I keep of article ideas for my own blog.
One of the lines says "You can save too much might be full of crap" so you know what I think of all this!!!
I would love to know how much Kotlikoff himself has saved for retirement. I would rather have too much than too little. If I had to sacrifice a few years of Nintendos and iPods to save a little extra - so be it.
If a doctor told us Americans weren't getting enough fatty foods he'd be laughed at. If an economics professor says Americans are saving too much he's quoted in the media. Too bad he doesn't have a license he can lose - it's just irresponsible. I've heard of this guy before and I give him credit for making an outrageous claim and profiting off of it. How he sleeps at night, I don't know.
I think if you are already paying yourself first or other forms of investments (401(k), real estate, stock purchase plans, investing in personal business), then it's ok to spend. Don't mortgage the house to buy a plasma, but sometimes it's nice to go on a nice trip with friends and family or spending a little more at a bar;)
There clearly needs to be a balance between saving and your other financial needs - I think that the key is long term lifesytle improvements. If you are able to increase your spending today and yet continue to maintain that spending level indeffinately - you are in good shape. Bad spending is spending that is not sustainable from your own financial resources (such as borrowing to spend).
I'm sure there are people saving too much for retirement, shooting for multi-million dollar nest eggs when their ideal retirement consists of simple and inexpensive pleasures.
I'm also sure there aren't many of those people.
Kotilkoff uses the exaggeration of "scrimping to splurge when you're 80", when in reality a 60 year old retiree today might have 30 years ahead of them. What good is it to "smooth out" your consumption based on a 75 or 80 year actuarial table if you really live to be 90. Or get a debilitating illness and find you undersaved?
And he doesn't seem to notice than retirees can be in pretty good physical shape too, so they aren't exactly limited in what they can do. Unless your goal is climbing El Capitan and running ultra-marathons, I would say that you probably aren't going to be disappointed in the options you "put off" until retirement.
Finally, as the "Counterpoint" mentions, uncertainties about future circumstances are plentiful. It's risky to factor Medicare or Social Security into your planning. It's at least as risky to assume anything about inflation or taxes. Our current 3% inflation could move back into double digits like in the 70's.
"Tax free" or "tax advantaged" investments are only that way at the whim of Congress.
With so many possible expenses and so many ways for your investments to drop in value and buying power, I think it is foolish to advocate saving less for basically anyone. Better by far to put off that cruise until retirement and have $1million in your estate than to "live for today" and wind up broke for the last 10 years of your life.
BeyondtheConsumer, that is because many currently retired folks are receiving a pension, cheap retiree healthcare from their employer in addition to Medicaid, and are receiving Social Security.
With very few companies currently offering pension plans, providing affordable healthcare, and the unknown status of Social Security and Medicaid, will the people who have very little saved for retirement in 30 years be the same as those who can currently get by in retirement with little or no personal savings?
Not sure why this is bad. I know quite a good many retired folks, and none of them have complained about having too much money.
I agree with a lot of the ideas he writes - people's needs change as their life situation changes, and that some investment advice is generic (or cookie cutter, as you mentioned). But, I would be willing to wager that most people in the lower and middle classes are NOT saving enough for retirement. I know people who do not even invest in their 401(k) to take advantage of the matching money, and who think IRA is someone's name.
I think his point of view is correct for a certain (select) market, and is a great headline grabber, but it doesn't apply to Americans as a whole.