People may be saving too much for their retirement

[madcow]

Hi,

please could help me to understand this article?
“Now a group of economists is offering a wildly contrarian view: People may be saving too much for their retirement. A few go so far as to suggest that the financial services industry is deliberately encouraging over-saving because it profits from managing such assets.

Consider a recent study conducted by Paul Smith and Lucy McNair of the Federal Reserve Board, and David Love, an economist at Williams College. They found that 88 percent of all households with breadwinners over age 51 had accumulated sufficient resources to finance adequate consumption in retirement.

A separate study by John Karl Scholz, an economist at the University of Wisconsin, Madison, and two other researchers found more than 80 percent of households headed by Americans born between 1931 and 1941 have accumulated their optimal wealth targets for retirement.

The other 20 percent missed their goal by a relatively small margin, according to the study published in the Journal of Political Economy.”

Should I read it “We own your house, now give us your retirement money?”

Thank you in advance for your help

madcow

[hipmatt]

I would say that its a pretty bad article considering that we have a negative savings rate, and that there are very few people who can say that the save enough money. When you throw in inflation, skyrocketing medical costs that the boomers will be facing, further potential increases in oil prices, and a likely recession / stock market and housing collapse, no amount of savings is too much or has ever been.

They found that 88 percent of all households with breadwinners over age 51 had accumulated sufficient resources to finance adequate consumption in retirement. … Probably are considering their home equity as a source of "resources" which is very risky at best.

I also don't see how this can be a bad thing, because whatever these boomers eventually die with, even if it is more than they need, will be passed on to their kin, and will be consumed immediately by the next generation which is much further in debt and has much worse savings habits anyways. 

[FormerOwner]

I see both sides of this argument. A lot of people born in the 30’s and 40’s that I can think of have saved way more than enough money to retire comfortably. They worked during some pretty prosperous times and a lot of them made big money on their investments too. Plus, those born in the 30’s (like my parents) have a depression-era work and savings ethic that made them always sock money away for a rainy day, sometimes a lot more than they really need.

HOWEVER, a lot of the people born in the 50’s and later are way UNDER-SAVING and will not be able to retire or will have to work until they are very old. I don’t think this is necessarly a horrible thing except that, in our society, older people tend to get laid off during economic downturns.

So, I think some generations did oversave but the younger generations are definitely under-saving.

[madcow]

Hipmatt, FormerOwner – thanks, I agree with you both. We should save more. It is a bit strange that someone from the Federal Reserve Board release this story now, when people spend more $$ they earn and HEW finally starts to go down. We should save more, but if we do, that can trigger a recession. I don’t propose any conspiracy theory, but their timing is a bit strange…

[Diego Mamani]

As an obessive-compulsive saver and investor who is on track to retire in his early 40s, I’d say that I like articles like this. Let me explain, by consuming more, non-savers make my investments (shares, etc.) more profitable. Stop reading this! Get yourself to the mall and buy and charge until you drop! Don’t just stand there, buy something!

[/sarcarsm off]

[an]

As an obessive-compulsive saver and investor who is on track to retire in his early 40s, I’d say that I like articles like this. Let me explain, by consuming more, non-savers make my investments (shares, etc.) more profitable. Stop reading this! Get yourself to the mall and buy and charge until you drop! Don’t just stand there, buy something!

That’s exactly what I’m thinking. The spenders are the one that’s helping me to reach my early retirement goal. Spend baby spend.

[hipmatt]

Good point you two above!

[Anonymous]

This smacks of George W. Bush-think. Spend more money, go out and visit our national parks, buy a car, take a vacation, spend, spend, spend.

He doesn’t have to worry about his retirement. He’s never had to worry about anything. He just doesn’t want to have the economy collapse until after he’s out of office so someone else will have to face the music. If that requires ginning up the reports, meddling with various government departments and telling outright lies to the public, so be it.

I think once he’s gone you’ll see huge revisions in housing reports, employment, etc. It’s going to be a scary time.

[SHILOH]

It contradicts the what has already been reported — that average credit card debt is about$10K and individual debt has risen. Also savings is reportedly -1%. Many people don’t understand how debt grows with compounding interest. I personally don’t know anyone –who is “saving too much” for retirement.

In today’s market, if the average American makes $43K and the average San Diegan makes $50K —how can anyone be “saving too much” for retirement? No one has that kind of excessive income.

[SHILOH]

“A separate study by John Karl Scholz, an economist at the University of Wisconsin, Madison, and two other researchers found more than 80 percent of households headed by Americans born between 1931 and 1941 have accumulated their optimal wealth targets for retirement.”

This may be true for people in my parents’ age group.

But this is not true for boomers –those born after the end of WW2—-through the early 1960s who are the largest group heading for retirement.

[SHILOH]

“He doesn’t have to worry about his retirement. He’s never had to worry about anything. He just doesn’t want to have the economy collapse until after he’s out of office so someone else will have to face the music. If that requires ginning up the reports, meddling with various government departments and telling outright lies to the public, so be it.”

George Bush is not the only one. I have read that over 1/2 of those who enter the Senate and House are already millionaires when they take office. And…they receive the best health care amongst their perks.

[Duck]

I agree with the article to a point. I stopped funding my IRA and 401K (before I became self-employed) at age 35 because I started very early and based on historical returns I was going to end up with %7-8 million in an IRA account. There’s no way I need that much money. That would be like winning the lottery when you turn 65. Then what, totally change your lifestyle and try to spend the money before you kick the bucket?

I think once you reach a point where you can safely say that you’ll have a few million in your retirment account, you should probably cut back. I’m not saying to spend the money on consumables, but maybe look for other investments such as a vacation house that you can enjoy now.

[one_muggle]

In an article about the negative savings rate (sorry, I can’t find the link) the author explained that the savings rate is misleading since it does not include investment in assets, which blows my mind, if true. He said that investing in stocks or RE, including buying or improving your own home, even 401K’s are NOT considered savings… By that measure, I save very little.
Now that I have a reasonable stash of emergency cash, all my money goes to investments in retirement accounts and brokerage accounts (mostly equities), mortgage payments, and the rest consumer spending. With the exception of some short term cash I save for vacations, I don’t “save” much, but I am stashing away ~20% of my income–and have 6-9 months of salary in cash.
I found it strange that, according to that article, I would not be considered a “saver” since I am not adding cash to my accounts every month!
Go figure.
If the article is correct, I would think that there would be very few savers. Either you spend your paycheck every week, or you are investing. I would think only a rare few keep stuffing money into cash accounts, once they have a cushion or a plan to invest it in the near future.
-one muggle

[PerryChase]

The savings rate is the net of income less consumption. If you consume less than you earn and put the difference in investments, that counts as savings. However the appreciation of your investments is not counted as savings.

Think of it as Income Statement (P&L) vs. Balance Sheet. Savings is Net Income/Loss.

[Author]

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