Are You Saving Too Much for Retirement?

As a CRPC and having spent time in the retirement planning industry I have seen a lot of trends emerge. Most notable is the huge disparity between what people have actually saved for retirement versus what they need to have saved. Do you know what the 2013 maximum 401k contribution is?  This is nothing new, and if you turn to any financial news outlet you’ll see shocking statistics reporting just how little the average person has saved by the time they retire.

In a real practice dealing with real people, the results are even more shocking and really hit home. I’ve worked with people, affluent people such as doctors and lawyers who are nearing age 65 and are looking to retire. When we begin to dig into their investments and retirement plans it was typical to find out that these individuals earning sometimes upwards of $200,000 a year had as little as $50,000 saved up and expected to retire inside three years. On top of that, they still had mortgages, auto loans on luxury cars, and vacation homes, yet they said they couldn’t afford to max out their 401k.

And these are people you’d think would have it easy and built up a nice nest egg. When you work with the typical middle-class employee the situation wasn’t much better. The real problem is most of these people weren’t saving at all. The good news is that those who were saving typically put a larger percentage of their paycheck away than those who made far more money.

So, the evidence is out there, and for the majority of people they simply aren’t saving nearly enough. But, that hasn’t stopped one man from proclaiming we are actually saving too much for retirement. Too much, too little.

The Man Behind the Claim

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. But this idea isn’t new. The first time I came across it was in a 2007 Registered Rep article. “The rules of thumb are the rules of dumb,” scoffs Laurence Kotlikoff. Kotlikoff is one of the leading members of what could be termed a school of retirement heretics who question much of the conventional retirement financial-wisdom, and even received truths about the retirement period itself.

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 percent of your income or you need to have X amount of dollars by retirement are just that–rules of thumb. Sure, rules of thumb aren’t supposed to be perfect and exact for everyone, but people need to start somewhere. Especially those who may not have much of a financial background as it can be intimidating to even fathom what kind of numbers should be considered.

To quote Kotlikoff again: “You don’t want to be putting your savings on autopilot, because if you put your saving on autopilot it means that your consumption is going to be disrupted.” And to that I have to say, “so what?” Making retirement savings automatic is the number one thing most people should be doing. The average person isn’t in a position to constantly adjust their savings amount year to year based on every little detail that’s going on in their lives so the best course of action is to set it up and let it happen automatically. So what if consuming (spending money) is affected? I’d argue that it’s better if somebody isn’t blowing a little extra money on Starbucks or a new car and instead keep putting money aside for retirement, which is probably still far short of what needs to be saved anyway.

Striking a Balance

All that being said, there is a hint of truth to this, but I don’t think people saving too much is hardly the problem as he suggests. The key takeaway is that you need to strike a balance between spending money today and planning for the future. Clearly, you don’t want live a life of poverty for 40 years just so you can retire and finally enjoy the fruits of your labor. On the other hand, you don’t want to spend like there’s no tomorrow only to realize you’re going to retire in poverty.

The fact is, most people are not saving enough, and not saving too much as Kotlikoff suggests. Just because people are using rules of thumb as a starting point for retirement savings doesn’t mean they are saving too much. Most people get a late start when it comes to saving, so even using the rules of thumb it may mean too little too late. Either way, people need to save for retirement, and it’s true they also need to be sure to enjoy life today. But I can guarantee you, the typical person making $50,000 a year and who’s putting 10% of their paycheck away (a common rule of thumb) is not going to have enough put aside by the time they retire to have the retirement they want.

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. 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. You’ve just created your own market for your new product. While that’s excellent marketing, I’m not so sure it’s good economics.

My Problem 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 on an individual level. 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.

If I had to guess, I’d say that 9 out of 10 people I work with are not saving enough for retirement, by a long shot, let alone saving too much. Only between 60-70% of all employees are saving money at all, and the majority of those are saving a couple percent their pay. Virtually nothing. I find it very hard to believe that these working families are sacrificing things in their life today because they are saving $200 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. Instead, start by sitting down and spending some time carefully thinking about your own situation and find out how much you need to save for retirement.

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.

29 comments
Car Insurance Cupertino
Car Insurance Cupertino

Both sides have a point that I can agree to. In the end though, I do believe in finding that balance between saving up and spending. There is truly no cut and dried standard formula for everyone; it's different for every individual. 

PGA National Retirement
PGA National Retirement

Nice post..But i think it depend upon person to person. As my parents would believe in spending today rather than to save for tomorrow .

RockHead
RockHead

I save 24.14% into 401k and health savings plan.  I feel that I am neurotic about saving, to the point of self-denial.  I have nearly over 1/2 mil net worth, house will be paid in 5 years... and I drive a beater truck with 182K miles, no A/C and live in a very hot area.  I hate myself for not being able to buy myself a decent fun car.  I need a shrink.

BarbaraWSimms
BarbaraWSimms

Nothing is too much when it comes to retirement. After all those long years of working hard, you deserve every cent of your savings. Although, there are still a lot of people who are not putting much effort into their retirement plans and regret it in the end.

nathanieltoney
nathanieltoney

Well, some people are anxious about their later years but they are not doing anything about it. I agree with you when you said that we all have to start somewhere. If people feel like they are sacrificing too much for retirement, they should know how to handle their money carefully. Take it a step at a time until they have adjusted to taking a percentage from their salary and keep it at the bank.

Sofia2543
Sofia2543

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J @ Your Own Retirement
J @ Your Own Retirement

I don't think it matters what type of profession you are in the more money you make the more people typically spend. I think it is just human nature to always want more.

ShouldBeFine
ShouldBeFine

I'm on the team that says "put it on auto-pilot". But I don't think that saving for retirement should hurt you. I am 28 years old now and started saving for retirement as soon as I started my first "real job" at 21. I don't put away a lot into my 401k, just enough to get max benefit from the company match. It's a couple 100 a month really, but because I started early, I'm on track to reach about a $million at retirement. I think that will give me a firm foothold for retirement. I think autopilot is definitely the way to go. There's no not saving for retirement. The process is invisible to me. It's become another bill just like rent, utilities, car, or food. It's an ingrained habit now that I have no intention of breaking.

All that said, I don't think you need to save 20% of your income. I think it's more important that you start early. You'll be surprised how quickly 4%, 5%, or 6% grows (not to mention the FREE company match). My $million dollar retirement money won't replace my income. I don't need it to replace my income. I won't be needing granite counters or luxury cars or exotic vacations when I'm retired. What I'll be needing is a good quality of life, a stable modest home, and a few interesting vacations / excursions here and there. I don't need a six-figure salary to do that.
It is possible to over-save for retirement and I won't be coerced by financial advisors into doing so. I plan to use the majority of my money for living in the now and put a little bit away, small enough not to hurt and to keep it on auto-pilot, big enough to matter.

Justin
Justin

It's alarming to hear just how many people are so ill-prepared for retirement. I've heard the baby-boomers coming into retirement compared to a train wreck in slow motion. We are hit with over 180 selling messages every day, which apparently are working more effectively than our common sense and we piddle away our money during our earning years and leave ourselves in a bad spot coming into our non-working years. I can see this 'train wreck' causing a major strain on our nation. Hopefully the next generation will learn from this and make better decisions now. We are passionate about this and trying to make it easier and more enjoyable to save: http://wealthhabit.com/

Mark
Mark

I made the decision 2 years ago to be debt-free and will never again go into debt. I'm 49 turning 50 this year, have maxed out a Roth the past 3 years and look forward to maxing it out this year for 6 grand. I'm in a situation where expenses are low for me now. I have 125,000 in a 401 and only contribute 7% with a 3% match. I have an old/style pension with the same co. that will pay 20,000/year in retirement. I make 65 grand/year, have an emergency fund, and dollar cost average into Vanguard MF's monthly. I'm currently saving approx. $2100.00 monthly all combined. The future is guaranteed to no one but I don't want to sweat if I get let go by the man or when I retire. So save till it hurts, reward yourself once in awhile and be grateful for what you have and help others. Having "stuff" is over-rated. Being free to do what you want is what matters. So diversify and save!

getagrip
getagrip

"the typical person making $50,000 a year and who’s putting 10% of their paycheck away (a common rule of thumb) is not going to have enough put aside by the time they retire to have the retirement they want."

Maybe the problem is that people always seem to want more than they can afford or have thought about affording.
The general rule of thumb I like to consider is if you save 10% of your salary for retirement over your working years you'll likely get by but be hard pressed to golf daily and take lots of exotic vacations. If you save 15% you'll more than likely maintain the standard of living you had before you retired, which hopefully included a number of enjoyable activities and hobbies. If you save 20% or more, you'll be likely to live it up a little over your current lifestyle.

Assuming you include some Social Security (say 50%), a reasonable rate of return over inflation (say 5-7%), and you keep in mind if you save 10% of your salary that's 10% you aren't living off of, the above rules of thumb actually hold up pretty well for the typical person, especially if they project they'll be dead in 35 or 40 years after retiring and aren't worried about leaving anything to their 60+ year old kids (as if they should need it). Of course, if you're making over $150K a year, are seriously in debt, and/or haven't put anything away until you're 45, you're in a whole other boat.

Michael
Michael

I'm probably in that category of over-savers. I save around 60% of my net salary, and more than half of the rest is just to pay my rent. I never really bothered paying attention to retirement plans or budgets or anything like that for years and years until I realized I had more than a couple year's salary in my savings account, and it really would be better to invest a bit.

I suppose it's not really a bad thing, I certainly never worry about money or day to day expenses, but I often find myself worrying that I'm missing out on the finer things. That I could be buying more stuff and that would be fun or make me happier. But then I contemplate like buying a new computer or a big screen tv or something and start freaking out at the idea of putting out more money than I make in a month on an impulse and that I'll feel far more guilty about indulging in such extravagance than I'd enjoy consuming it. Shrug, is probably a bit of a snobby complaint. Ah well.

retirebyforty
retirebyforty

I don't know anyone who is saving too much for retirement. I only know people who don't have any saving.
It's silly to say anyone is saving too much for retirement. When the time comes, it's better to have extra money than to run out. If you have extra, you can give your kids a leg up or get the library named after you or something like that.

Mike
Mike

Okay, so I post a comment and now I can see. Stupid computers

Mike
Mike

I have no idea if there's anything worth reading here or not. This is impossible to read. Black on Black?? really?

DonB
DonB

For a contrasting opinion, I'd suggest Jim Otar's book, "The Retirement Myth Unveiled," which I read recently as an e-book.

His outlook is that your baseline should be minimizing the chances of dying poor if you happen to live to a comfortably old age (of 95). William Bernstein takes a similar view in "The Investor's Manifesto." As I recall, he says, "It's not about retiring rich. It's about not dying poor."

There is an inherent conflict of interest in brokers/advisors to get you to save because their compensation is often tied to the size of your portfolio. But as a non-professional (with a strong interest in the subject and a lot of self-study) looking around at my peers suggests to me that people really should save more---and they should pay more attention to fees. I've watched otherwise intelligent people save too little in investments that had fees so high that their probability of doing well is quite small.

Jen
Jen

(I'm a different Jen than the other Jen....)

I plan to be mortgage free by retirement. I don't plan on this because I view my home as an asset per se. Instead, I simply don't want to enter retirement with the burden of a monthly mortgage payment. However, I may be oversaving for retirement... maybe. I'm currently saving close to 20% for retirement, so when I use a retirement calculator I enter that I want 80% of my current income in retirement. Then the calculator spits out that I need to save 30-40% of my income. I'm using the Ballpark Estimator, so it isn't a case of Vanguard or Fidelity trying to increasing their assets under management. The Ballpark Estimator's result is really disheartening. (I also assume no Social Security or other income.)

Now, I could enter in that I need only 60% of my current income, simply subtracting my current 401(k) contributions [20%] and my mortgage payments [~20-25%] from my current income. I'm sure I'd get a result that's less distressing. However, I am taking a pessimistic view on healthcase costs and assuming that what I pay in mortgage payments now will be redirected to health costs in the future. Or maybe I'm not being pessimistic enough ;)

Either way, I am just maxing out my savings and hoping for the best.

Big-D
Big-D

I take this as the right kind of thinking. I have always hated retirement vehicles for two reasons. 1) there is limited access to your funds if you need them. 2) They assume you are 59.5 or older to retire.

Looking at each of these individually. I am a smart adult. I choose to do a lot of different things, however my retirement funds wont let me touch them unless I am actually retiring or minor things that I already saved for. I think it is ridiculous that my money has to sit, tax differed in an account, and I cannot do anything with it. I know 70% of people would take that money and spend it on bad crap, however I want to spend it on different things that will enhance my life. I can replace it as my income comes in. I want to buy a new car since my 10 year old one died. Guess what - I have to take a loan instead of using money I have saved, and then put more money back into it as I get it over the next few years.
Secondly, there is such a stupid, arbitrary age on retirement. Lets say I am 30, have a bum ticker, worked like a dog, and saved a million dollars in my retirement accounts. I want to retire by 40. By that point I will have a few million in my accounts, however I cannot touch it for another 20 years. Why? The government says so. So I don't invest in tax sheltered accounts (largely) since I cannot gain access to my funds when I need them. I want to retire early .. maybe 45 and am on pace to do that. But I cannot invest in my traditional retirement accounts if I want to see that money before government mandated retirement age (without stupid stipulations like government listed "life expectancy charts" for distributions, etc.)

So save the minimum 6% in my 401k the company matches to, and if I am less than the limit (which I have not been for years) put in my Roth. Otherwise it is in a traditional investment account, screw the tax consequences as at the end of the day, our money will be taken by the government no matter what we do.

JoeTaxpayer
JoeTaxpayer

I know Kotlikoff is a bright guy, but from the articles I've read by him, I'm not too impressed.
The concept of consumption smoothing strikes me as theory applicable to large populations. But each of us is an individual. Which is why the rules of thumb are a start, but not the end-all. I've read Kotlikoff's writing and came to the same conclusion, that he was implying there were a significant number of people saving too much. I'm sure someone is, I just haven't met him. The averages suggest savings is woefully low as does any anecdotal evidence. If your doctor client has $50K, what do the average blue collar guys have saved? And remember, the average is well above the median. An average $100K (of whatever) likely means half are below $30K as enough have well above $200K. So for these discussions, I'd prefer to talk median or percentiles.
At retirement, what percentile do you think have actually replaced their income 80% with SS, Pension, and Retirement accounts?

Jen
Jen

One financial adviser put it to me this way: Don't just count your 401K or your Roth as your retirement. Count ALL of your assets as a retirement asset. Which means, if you have a house you plan to have paid off by then, you have an asset (an no $ going towards a mortgage). If you have a regular savings account for emergencies, like an ING, that is an asset. If you have other non-retirement stocks or investments, that is an investment. Plus SSI, if it exists.

She basically meant: Your entire financial outlook, upon retirement, counts as your retirement savings, not just the 401K/Roth. Online Retirement calculators only take your 401K savings into account, not all the rest.

This makes sense to me. Every household has different goals, assets, and spending habits, so a simple calculator cannot give you the whole picture. Those factors are also fluid, and change over time considerably (just as retirement spending changes over time). There is no stock answer for every one, for every year of their life.

Matthew Amster-Burton
Matthew Amster-Burton

Thanks for the reply, Jeremy. I totally hear what you're saying, and one of the problems with an overly aggressive retirement savings calculator is that people go through the calculation, see a painfully high number, and just say, "Screw it." An approach focused on spending in retirement rather than income replacement makes retirement look like it's within reach for most working people--as long as they don't get started too late, like you said.

BTW, I found about your blog from Tess Vigeland's link on Twitter, and I look forward to reading some of your other posts.

Best,
Matthew

Matthew Amster-Burton
Matthew Amster-Burton

I spoke with Kotlikoff recently, and I think you're misinterpreting what he said. Kotlikoff says that most *retirement calculators* tell you to save too much, not that most *people* are saving too much. (In my conversation with him, he said he finds about 20% of people are oversaving.)

Having used a ton of these retirement calculators, I think Kotlikoff is right: it's very, very hard to convince an investment-company calculator that you're saving enough. That doesn't mean Americans are saving enough, or oversaving, just that you should be skeptical when an investment company tells you you need to invest much, much more.