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.