Monday, January 29, 2007

Are You Saving TOO MUCH for Retirement?

There was an interesting article in the Times this weekend: Damon Darlin looks at whether you can Save Less and Still Retire with Enough.
This was something I started to think about when I read "Retire on Less than You Think." The idea is that the financial services industry wants to scare you into saving too much money for retirement, so they can get their hands on your money and charge you lots of fees to manage it. And I'm sure this is the case. But the article cites a study that claims that, despite what you read about Americans having this scary negative savings rate, "88% of retirees age 51 and older had adequate wealth." I don't know how they arrived at that number, but my thinking is that they are surveying people who are "retirees." I.e., people who have already retired, presumably because they could afford to do so rather than needing to continue to work. If they looked at what percentage of all people age 51 and older had adequate savings for retirement, I suspect the number would be much lower.
But in any case, should most people be given any reason to think they should save less for retirement? Probably not! I think it depends on how old you are and how much you already have, how much you make, and how much you plan to spend-- that's a nice definitive statement, isn't it? But that is how everyone needs to look at their retirement planning, rather than just being told that you need to save enough to produce X% of your current income when you retire.
The article is accompanied by a chart showing a hypothetical family's savings over time, as they almost empty their savings to send kids to college but then find themselves able to save at a faster rate once those kids have left home, and then sell their house and move into a cheaper apartment. For me, that example isn't too relevant as I don't plan to have kids and already live in as cheap an apartment as I'm ever likely to get. But I started saving for retirement as soon as I started working, and now that I'm in my late 30s (i.e. clinging desperately to what little is left of my 30s) I'm wondering if in a few years, maybe I can cut back on those savings a wee bit. My retirement calculator in Quicken tells me that I can live from retirement at 70 to age 99 on the equivalent of about $80,000 in today's dollars, given what I am projecting to save this coming year and assuming a fairly conservative rate of return of 6.5% (along with some other assumptions about inflation, future tax rate, etc). So I'm starting to think that as my income increases in my 40s (which I like to remind myself are the new 30s), hopefully I'll be able to spend a little more money on fun stuff and still be saving enough to retire comfortably and maybe even leave a little something to my niece and nephew and some charities. As I pointed out in my "Now or Later" rule, there are some things in life where it's best to spend money on them sooner rather than later, if you can. In other words, have a little fun before you drop dead! But first, just make sure you're considering all the factors that will affect your retirement:
-- how many years do you have until when you'd like to retire?
-- how long might you live, based on your health and family history?
-- what do you actually need to spend money on when you're retired?
-- how much are you saving?
-- how is it invested? Are your investments too conservative or too risky?
-- what other major expenses do you need to consider, such as children going to college?
These are questions that aren't easy to answer, but you need to try to wrap your head around them. And in my opinion, it's probably a good thing if you assume your situation is dire and that you need to save every penny you possibly can, until at least sometime in your 30s. At that point you can take stock of your position and maybe make some adjustments to your strategy... and if you're lucky, blow a few bucks on something you've always wanted! But if you instead take the view that things will all work out fine and that retirement is something you can just deal with later, you'll have a rude awakening at some point!

9 comments:

Tiredbuthappy said...

"assume your situation is dire and that you need to save every penny you possibly can, until at least sometime in your 30s. At that point you can take stock of your position and maybe make some adjustments to your strategy"

Well said. This is my thinking, exactly. Yes, I'm freaked out about saving enough. I feel that I should be saving more. But I figure if I'm hyper-diligent about it now and continue to ramp up my savings, at a certain point those calculators will stop saying "I hope you like catfood" and will start saying "where do you want your beach house to be located?" Okay, maybe they'll be somewhere in between those two extremes. :) Then I can take a deep breath and take that trip to Buenes Aires I've always wanted.

But I started saving for retirement at age 20. My partner started at age 38. So I guess it's going to be a concern for a while longer.

Anonymous said...

I noticed in the original article that they say you should save as much as the investment houses tell you if you're planning for end of life medical bills. I think that alone is reason enough to keep saving - old people tend not to die in skydiving accidents, they linger with chronic diseases. I don't want to make my family go into debt to pay for my care in a hospital, and I don't want them to pull the plug because I'm out of cash either!

Anonymous said...

Figured I was on the right track and saving a comfortable amount and had the proper amount saved for someone in the not so late 30's. Now I'm facing a divorce and half of those savings are getting instantly wiped out. It's gonna take me years to get back to where I am now.

optioned unarmed said...

It's hard to imagine being old and stressing over having saved *too* much money. The future is always uncertain and it's better to have more than you need than not enough...

The article does make a good point though that the investment houses benefit when people follow their advice to save more.

iportion said...

I think it depends on what people want when they become retirees.

Anonymous said...

really depends on the peson and what they want out of their life

Brian Urie said...

Savings too much? New retirement planning tools are revealing that 20th Century financial calculators may give a false sense of security. Most old-fashioned calculators use "straight line" modeling which assumes a fixed rate of return (6,7,8,9,10%?) over your retirement lifespan. Those who have been following the market over the past 10 years recognize that when investing in equities (which most should consider in order to not outlive their money) doesn't produce steady returns year after year. This nuance makes little relatively difference over time when saving for retirement. But, when selling shares to produce a retirement paycheck, this fact (variability of returns) can be the difference between leaving something to heirs and going broke in your 70s. An analysis model known as Monte Carlo analysis performs a series of trials, given an investor's investments to illustrate a best and worst case scenario.

Living Almost Large said...

Most people might have saved too much previously because they have something a 20 or 30 year old doesn't, a pension. Those are history and even some older people will have a lowered pension than they thought.

So how can you compare a 65 year old now collecting a pension and SS with a 25 year old who will have neither? That 25 year old better be saving a bundle more.

Living Almost Large said...

Most people might have saved too much previously because they have something a 20 or 30 year old doesn't, a pension. Those are history and even some older people will have a lowered pension than they thought.

So how can you compare a 65 year old now collecting a pension and SS with a 25 year old who will have neither? That 25 year old better be saving a bundle more.