You're saving too much for retirement.

[Umbra]

Or so this author writes.

http://www.nytimes.com/2007/01/27/business/27money.html?pagewanted=1&ei=5094&en=d8d920a17d2e1b81&hp&ex=1169960400&partner=homepage

[Chameleon]

“If they are worried about end-of-life medical expenses or they don’t mind leaving money to their heirs,” Mr. Scholz said, “then oversaving is fine.” The dispute revolves around how financial planners determine how much a person should save. That amount will vary depending on age, income and assets. To simplify the calculations, computer programs resort to rules of thumb.
They have a point there since old people getting sick is virtually unheard of.:rolleyes:

Fidelity’s Retirement Quick Check calculator says that a 50-year-old person making $100,000 a year with $700,000 stashed in retirement accounts, saving $15,000 a year, would still fall short of the $2.8 million goal that would provide the necessary monthly retirement income of $7,408 that it sets. Its calculations do not include Social Security payments.

Fidelity actually recommends saving about $1,000 a month more. It also encourages this person to save more even when more than enough has been saved. It recommends putting away up to $9,749 a month on top of the $15,000 a year already being saved, an impossibility since that would more than consume the person’s entire gross income.[/COLOR]

Mr. Kotlikoff’s ESPlanner software, taking real estate holdings and life insurance into account, says the person could cut back on savings by $10,000 a year and still have enough for a monthly income of $6,000 at retirement, the amount his calculations deems adequate to live on given prior consumption patterns.
Does Fidelity recommend $1K a month more or $10K a month over the $15K a year? Don't those two lines seems somewhat inconsistent?

The article starts with a claim that the average person has $62K in their 401K but then uses the example of a 50 year old with $700K in retirement savings. Where the data on the average savings of people in their mid-50s? Is $1.3mil enough and what return on his retirement account will guarantee that he makes it there? I'm also not sure how life insurance helps, is it just supposed to cover your debts when you die? How much of a policy is he assuming that people have on themselves? What's his advice to the 38 year old couple in the first page of the article with only 70K in savings?

Should this man be selling his advice (for $150 no less) to people with a balance of $500K or more in their mid-50s? But only after they've taken Fidelity's advice and saved that much to begin with?

[yankeeyosh]

According to the article, eighty or eighty-eight percent of the Silent generation has enough for retirement and the Boom is even better off. Ummmm...unless their idea of retirement is living in a cardboard box and eating a diet of Ramen noodles, that is highly unlikely.

[AshleyJordan]

According to the article, eighty or eighty-eight percent of the Silent generation has enough for retirement and the Boom is even better off. Ummmm...unless their idea of retirement is living in a cardboard box and eating a diet of Ramen noodles, that is highly unlikely.
I work on a lot of Boomer issues at work, and it's important to note that:

1) I don't think we're going to see the massive retirements when they hit 65 that some are anticipating. None of my boomer colleagues, or my parents, plan to retire anytime soon;
2) The boomers I know seem to be obsessed with their own longevity and are very active and healthy-- I joke that some of them are going to live to be 200.

[yankeeyosh]

I work on a lot of Boomer issues at work, and it's important to note that:

1) I don't think we're going to see the massive retirements when they hit 65 that some are anticipating. None of my boomer colleagues, or my parents, plan to retire anytime soon;

I don't think so either.


2) The boomers I know seem to be obsessed with their own longevity and are very active and healthy-- I joke that some of them are going to live to be 200.

Yes, and while it's awesome that they're living longer, it will possibly put a massive strain on our resources.

[Chameleon]

I work on a lot of Boomer issues at work, and it's important to note that:

1) I don't think we're going to see the massive retirements when they hit 65 that some are anticipating. None of my boomer colleagues, or my parents, plan to retire anytime soon;

Are they not planning to retire because they want to keep working or because they don't have enough saved to comfortably do so?

[AshleyJordan]

Are they not planning to retire because they want to keep working or because they don't have enough saved to comfortably do so?
Well,
*my dad owns his own firm and loves what he does, and no one else in the family has enough engineering experience to really take it over and I doubt he'd want to pass it on to strangers, and probably has financial reasons for wanting to continue to work;
*my mom has a pretty low-key part-time job, and if she leaves it would be for health reasons, but she has the resources to retire whenever she wants;
*my stepfather loves his job (editor at a newspaper) and has flexible hours, he'd probably be happy working up until the end;
*my colleagues profess that it's because they love working where we do (it is seriously a really good org,) but many have two homes, and kids in school, it might be financial, too (although I also have to say that we have an incredible pension program,) and almost all are in dual-income families. . . . lol I sound like such a cheerleader for my employer, anyhoo;

to answer your question, a little from column a, a little from column b ;)

[wordsmith]

Are they not planning to retire because they want to keep working or because they don't have enough saved to comfortably do so?

My parents won't retire because they can't afford to. My mom is vested in the school system she works for, but the pension isn't enough to live off of, and my dad's self employed, so no employer 401k or anything. He had a small retirement account set up, but a serious work injury kind of dug them into a hole and there wasn't money for that.

[redav]

The info in the article is similar to a series by Scott Burns on a 'new' personal finance model called "consumption smoothing." I'll slam that in a moment.

I do believe many of the rule of thumb estimates for required income in retirement are currently higher than the actual cost of living in retirement. There is an argument (I don't really believe, though) that there is a conflict of interest when investment companies are telling you how much you need for retirement. If they overstate it, then you give them more money, which makes more money for them.

The idea of consumption smoothing is that currently most people's standard of living (what they consume) increases throughout their life as they make more money. Then in retirement, they decrease their consumption due to their decreased earnings. The argument is that it is better to have a steady rate of consumption over your entire life. To do this, you perform an average of all your earnings, factor in inflation, maximize the value of lifetime consumption, and that tells you what to spend to maximize your lifetime consumption. (The author touts it as being extremely complex and cutting edge, but it is really a very standard calculus problem.) The results are that most young people spend too little and save too much (in part due to the data on costs of retirement mentioned in the article).

I do agree that having a stable standard of living and using calculus techniques to find the right amount is a noble goal. However, it doesn't properly look at all the risks. We really have no idea what our future earnings will be. We don't know if SS will implode. We don't know if the US$ will be supplanted as the international currency standard. We don't know what effects emerging markets will have on the US. However, I feel confident that the downside probabilities far outweigh the upside probabilities.

When you figure what you will need, you have to understand that it is a probability. Of all possible scenarios, you will have enough saved for x percentage of them. Ideally, we want the value of x to be 100%, but that's not going to happen. Shooting right at the expected value puts x at 50% (assuming a normal distribution, but may be less for other distributions), which isn't good enough for me. The consumption smoothing technique also leaves no room for error. Since you are spending a much higher percentage of your earnings while young (which will be compensated for by future earnings), it opens you up to a severe risk when something bad happens in your career. For myself, I would rather have a monotonically increasing standard of living and die with too much money in the bank that I never got to spend than run the risk of starving & sweating in the dark when I'm old b/c there was something the calculations/estimations missed.

[analogman]

I agree with redav. I'd rather save too much than not enough. If I have too much money, I am sure I can find some ways to spend it. I have several favorite charities :)

[cheshrcarol]

I'm also not sure how life insurance helps, is it just supposed to cover your debts when you die?There are two types of life insurance - term and whole. Whole life insurance is kind of like an investment. You pay into it and eventually you receive a payout amount after a certain amt of years. However, it is pretty expensive. Term life is much cheaper, and you pay for say 20 years, and if your spouse dies, you receive the benefit amount you elected for.

So if you have a lot of debts and you have a spouse that's counting on your income you'd probably want more coverage. But every policy is different, kind of like car insurance. Some policies you pay a lot of for a lot of coverage, some policy's you pay the bare minimum. And you are actually better off buying term life and investing the difference in something else.

[SpaceMonkey]

I think it's definitely possible to short-change some of your medium-term goals if you are "saving too much" for retirement. But I think that's only an issue if you are already putting aside a large percentage of your income for retirement (say, more than 15%). Most people I know have enough trouble just getting to that point, so I would fundamentally disagree with the idea that there are tons of people out there "saving too much."

[Sanman111]

I'm curious as to how this formula accounts ofr possible inflation or the need for increased consumption due to technology/societal standard of living. It is easy to say that you only need x amount to live comfortably in retirement, but what happens if gas prices sky rocket? cars become mush more expensive? technnology in the future necessitates more spending? People planning for retirement in the 50's and 60's didn't know that a civic would cost 20k now, that you need cable or high speed internet access for many functions, etc. With the tech revolution, I can only assume what may be necessary to live comfortably when I will retire. If I overestimate, I can always retire early and travel, buy a summer house, or do what I want. What do I do if I underestimate? keep working if I can. Also people are living longer, but with increasing health costs, Is that accounted for? I'll pass on the plasma big screen and the BMW to ensure I have a roof and food in 50 years.Thanks

[redav]

There is a joke: An engineer, a body-builder, & an economist are stranded on a deserted island. They find a coconut in a tree. The engineer suggests calculating the trajectory & velocity for throwing a rock to knock down the coconut. The body-builder suggests shaking the tree to make it fall. The economist says, "Assuming we have a ladder ..."

Everything economists do assumes things that will happen in the future. And, statistically speaking, all of it is wrong. They just hope that they are close enough that the final results will work out.