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Are Americans Saving Too Much for Retirement? An Interview with Laurence Kotlikoff
By JLP | April 27, 2007
The May issue of Money has a short interview with Laurence Kotlikoff, who is sort of the new ambassador of the consumption-smoothing movement. I’m not that familiar with consumption smoothing but I remember Scott Burns mentioning it when I interviewed him last year. Anyway, I thought this little tidbit from the Kotlikoff interview was interesting:
Q.: Do you really think we’re saving too much?
A.: I’m not saying everybody is oversaving. What I am saying is that online calculators advise most people to save too much. The same is true with the software that planners use. They start with the assumption that you need 70 percent to 85 percent of your current income to maintain your lifestyle in retirement.
While I understand what he is saying, I STILL think it is better to save too much rather than too little unless people aren’t able to enjoy life now because they are saving too much for retirement. It’s called b-a-l-a-n-c-e and I think any reasonable financial planner would recommend balance. When it comes to planning for something that is years or decades away, it is difficult to estimate how much is going to be necessary to fund income needs. I’m pretty sure that’s why most planners use the 70% – 85% rule-of-thumb. They know that some expenses will drop during retirement and others like healthcare and long-term care will likely rise during retirement. Personally, I’m running my numbers based on replacing 100% of our current income without social security. Although I’m sure we could make it on less than that during retirement, I don’t think I would be comfortable with planning on anything less. I mean, who wants to retire and live in poverty?
UPDATE: Vanguard Responds (Thanks Trip!)
Topics: Retirement Planning | 12 Comments »
April 27th, 2007 at 4:04 am
Perfect BALANCE ….
April 27th, 2007 at 7:10 am
When I retire I plan to travel a bunch more than I currently do because, hey! I’ll have the time. And travel is expensive. I’ll want to be able to visit my children and their grandchildren, which can be costly if people live in different states, etc. So traveling expenses alone suggest we’ll need a healthy retirement account or two. I did recently realize, though, that I’m grateful for the limit on retirement accounts right now, or it’d be hard to know where to draw the line.
April 27th, 2007 at 8:19 am
Some people, as they get older, think about rejecting the American standard of overconsumption and start to live a simpler life. The environmental crisis is another push for us to reduce our consumption in the future. At the start of my retirement, I’ve scaled back my consumption greatly. I don’t think of this as “living in poverty”, but as living in balance with the world. I still spend money on things that I really use and which add to my quality of life (an iPod, a Tivo, a computer), but otherwise don’t acquire lots of “stuff”. Health insurance (I’m still pre-Medicare) is one of my biggest expenses right now.
I guess it also depends if you’ve got children to leave your money to. I don’t, so there’s no incentive to accumulate more than I will need.
April 27th, 2007 at 8:51 am
Are saving too much for retirement. It’s hard to beleive when you read things like this blurb from CNNMoney:
“In a 2007 survey by the Employee Benefit Research Institute, a nonpartisan research organization, about a half of workers ages 35 to 44 said they had salted away less than $25,000 for retirement. ”
So, who are these supersavers Kotlikoff is so concerned about? I dunno. Probably paranoid people like me who actually have financial planners and run retirement projections. I would much much much rather oversave and sleep well at night, rather than risk undersaving. But, perhaps thats easy for me to say since I don’t feel like I’m skimping very much on lifestyle.
Are planners very conservative in their calculations – absolutely and I don’t blame them. Why should they risk you missing the goal.
April 27th, 2007 at 9:34 am
America has a debt and spending problem. I think that is pretty evident to everyone. Am I wrong here?
April 27th, 2007 at 9:41 am
Miguel,
I’ll agree with that!
KMull,
As a nation, I’m sure that’s true. However, that doesn’t mean that some people aren’t saving too much, which is the point that Kotlikoff is trying to make.
April 27th, 2007 at 10:25 am
Vanguard responds
April 27th, 2007 at 3:22 pm
I tend to agree with Brennan’s argument. While it may be possible to “smooth” your consumption and get a modest increase in your standard of living in the present, you are still placing a lot of faith in some pretty abstract math. The idea that a small sacrifice now can give you big gains over time and increase your options later in life is a no brainer. If I’m going to err a bit, it had better be on the plus side!
The most important part of the argument is the statement “Developing a clear picture of the tradeoffs is the first step.” That is absolutely true. You can choose to live marginally better in the present, but you need to understand the opportunity costs of that choice.
In my opinion making a small sacrifice now for greater future rewards is the wiser choice.
April 27th, 2007 at 5:03 pm
As noted by some folks above, the best arguement for perhaps saving “more than you need to” is that the risks are asymetric:
- If you undersave, by the time you discover your mistake, the ability to make up for it will be greatly diminished. In other words, you’re totally screwed.
- But if you oversave, you can cut back on saving further down the road when there is greater certainty. Then you could treat yourself to luxuries you had forgone, maybe retire earlier than planned, or make some positive life changes you were not counting on.
I know people in both camps. To be honest, I don’t think any of them, on either side of the issue, regret their choices. It seems to be an almost philosphical issue. Some people are happiest when they can have it now, even if that leaves them “without a pot to piss in” as the saying goes. Those are usually the same people that figure family will bail them out. (What’s mine is yours and whats yours is mine, you just happen to have a lot more.).
Others feel better about life when they know they’ll be prepared for the worst.
April 29th, 2007 at 2:05 pm
My wife and I put away somewhere around 20% of our take-home pay for retirement. That may be too much, but in actuality, we’re only maxing out our Roth IRAs. If you factor in the high likelihood that our income will go up in the future, and that we’re not going to save a larger amount of money every month just because our income goes up, the current rate of retirement savings seems quite reasonable.
April 30th, 2007 at 7:44 am
Presumably, as you get closer to retirement, the amount of money you’re going to need becomes clearer. That is you’ll have a larger pot and lots of the growth will have already happened, so you are better able to make decisions about your level of savings.
April 30th, 2007 at 1:35 pm
Wasn’t the 2005 savings rate in the US negative? Any numbers for 2006? How can we be saving too much?