It’s probably too early in the morning to comment on this article from the NY Times (slightly truncated version available from the Houston Chronicle, here), but the cognitive dissonance is too great to ignore:
Could it be possible that you are saving too much for your retirement?
[snip]
[… A] small band of economists from universities, research institutions and the government are clearly expressing the blasphemy that many Americans could be saving less than they are being told to by the financial services industry — and spending more — while they are younger. The negative savings rate, they say, is wildly distorted.
Blasphemy indeed. Count me skeptical.
When I look down the road to my (not-distant-enough) “golden years”, I see a shifting, shadowy nightmare of unknowns: aging parents (at least two of whom have no savings whatsoever), college for AC, reduced (or no) Social Security, and completely unpredictable and fearsome medical costs. Will those parents live five more years? Ten? Twenty? Will AC go to graduate school? Have trouble finding her financial feet? Will DH and/or Polimom live into our 70s? 80s? 90s? And how healthy will we be?
There’s probably no amount of money that would make me feel comfortable in the face of so many unknowns, and I find the article’s suggestions that we are over-targetting retirement extremely disturbing.
Nevertheless, the loose confederation of well-regarded economists, who have not been working in concert, say their research points to the startling conclusion that many Americans are saving too much, not too little. Indeed, their studies of the savings and spending habits of the generation born between 1931 and 1941 revealed that at least 80 percent had accumulated more than enough wealth for retirement. While they have not studied the baby boom generation as closely, they believe that the greater wealth of that generation should also leave those retirees secure.
A study last October by another group of economists, including two working for the Federal Reserve Board, found 88 percent of retirees age 51 and older had adequate wealth.
Obviously, they weren’t looking at the accounts of people I know or care about, the vast majority of whom are wayyyyyy behind this power curve.
This group of economic altruists (ahem) say that we’ve been snookered by the big financial firms, which are padding and over-inflating long-term planning projections because they hope to earn fees managing the vast sums of money we’ve all stashed away in our mattresses.
Maybe they’re right, but it doesn’t really matter in the long run, because if they’re wrong, it’s not they who will suffer. It’s me. Or my daughter. Or my husband. Or my mother.
Nope. I’m not buying this.
From where I sit, there simply isn’t a big enough net for tomorrow. If it turns out that I need less because lightning didn’t strike, great! Because no matter how much I put away, I very much doubt I’ll be taking it with me.
I agree w/ U!
plus it will be so much more fun to spend later when I have the spare time to do more!
Polimom,
There seem to be two arguments in this article:
1) there’s plenty of savings (in the aggregate) to go around for the baby boomer generation to retire, especially if their parents saved “too much”and are therefore leaving a nice inheritance for their boomer children, and
2) the retirement calculators (many available online, often “free”) of the big brokerage / investment management houses are “overly conservative” in how much they recommend be saved and invested during a working career.
The first argument is what might be called “the fallacy of macroeconomics”. If one averages those who have plenty for retirement with those who have nothing, then perhaps the average retirement savings are “sufficient”. That doesn’t make those who have nothing feel better about their prospects, though.
As an example, let’s take Bill Gates. He’s worth ~$50 Billion (with a ‘B’) or so right now. Let’s assume he stopped increasing his wealth today and retired. Surely he would not need all of his wealth to live comfortably? Let’s assume he keeps $1,000,000,000 (just a single Billion) for himself, his wife and children to get by on. That would leave ~$49 Billion available to fund the retirement of less well off couples (assuming Bill decided to donate it for that purpose . . .)
Assuming that $1,000,000 per couple would be sufficient to ensure a comfortable retirement for less well provided for couples, then Bill’s “excess savings” would be enough to provide for 49,000 couples’ retirement. Yippee! That’s 49,001 couples taken care of, macroeconomically speaking . . . .
The second argument is a bit stronger–these calculators do make some very conservative assumptions. Most ignore Social Security as a source of funds, which is probably the right thing to do. Many people who expect Social Security to make a major contribution to their retirement probably don’t know that Social Security payments are “income tested” until the recipient is 72 years old, and payments are reduced by $1 for every $2 earned. There is no reduction after the recipient is 72 no matter how much money the recipient earns, however one must still make it to 72 for that to happen (unless of course, Congress raises the age at which unreduced benefits become available . . . . . )
As to the calculators demanding “excess” savings during the working career, well, it’s arithmetic. If you want an income stream of “x” that doesn’t reduce your initial savings and have an average investment return of “y” then you need a lump sum of “z” when the payments start. The average investment return on these calculators is usually set pretty low (good thing these folks are offering their help in managing the money!), so a higher assumed return can reduce the sum needed at retirement.
Lastly, the assumption that the retirees’ initial pool of savings should not be drawn down is also very conservative. If the retirees can withdraw 3% – 5% of the lump sum and spend it each year, on top of the investment return, then the savings needed are also much lower. The risk of planning to consume part of your savings each year is outliving your savings, thereby losing both the investment return and the 3% – 5% of the principal that the retiree has been living on.
It must be nice to be a macro economist and not to have to worry about “micro” issues such as whether John and Jane Doe are sure they will have enough saved to avoid outliving their means. In the aggregate, everyone should be OK. Really. The arithmetic says so.
The arithmetic of the calculators isn’t looking at the whole economy though. It’s looking at (mostly) the people who haven’t saved enough and/or those who aren’t getting enough of a return on their savings. These folks will no doubt continue to save, and not wait for the call from Bill Gates.
Of course, if one believes some sources, Armageddon is approaching, so perhaps we should all go ahead and just throw a big party.
The problem with all retirement planning is that one can project and predict based off averages and norms and statistics and tables, but nobody has the requisite crystal ball. Individual lives are not averages, and while I’m sure there must be people out there who fit the profile of the “norm”, everybody I’ve ever known appears to be at one point or another along the continuum, on any number of criteria.
Also — (and slightly tangential) — the retirement and investment planners I’ve talked to, while certainly conservative in their projections of total sums for every possible grisly scenario, oddly tend toward over-projection of rate of return for money invested.
Kind of perverse, actually.
There is one statistic that is very deceptive. Tnat 88 percent of retiree’s 51 and older have adequate savings. If you are 50 something and retired, more than likely you have plenty saved. Also, those over 65 have plenty as many of them were covered by institutions not likely to exist for the next generation; defined benefit plans and social security.
This statistic falls into the logical flaw that because current retiree’s are mostly in good shape, future retires must also be in good shape.
The Masted did a wonderful job of analyzing the macro trends.
I saw where during 2005 and 2006, total savings in the United States was negative. The last time that had happened was during the height of the depression (1930’s). This would indicate that while some people are saving more than enough, there are plenty of people who are not saving anything. I am not quite sure how one jumps the gap from negative overall savings to there is no retirement savings problem on the horizon.