Retirement is big business. Financial planners, investment brokers, and accountants are eager to convince you to save big bucks in preparation. There are scores of books packed with advice about finding the magic number, that target dollar amount that will be your ticket to the easy life. All these people have a vested interest in having you funnel money through them. Surely some of what they say is correct, but could they be overstating the problem?
A recent article in The New York Times suggests that this may be the case. Damon Darlin writes that some economists believe that the average person could save less and still retire with enough.
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.
According to them, the financial industry, with its ostensibly objective online calculators, overstates how much money someone will need in retirement. Some, in fact, contend that financial firms have a pointed interest in persuading people to save much more than they need because the companies earn fees o managing that money.
The more realistic amount could be as little as half the typical recommendation made by Fidelity, Vanguard or any number of other financial institutions.
This is a bold claim, and flies in the face of conventional financial wisdom. If true, an average couple might be able to free several hundred dollars a month to use for other priorities.
But this research should not be viewed as a license to give up retirement savings. Providing for your future is essential. Darlin quotes skeptics like John Rother of AARP who worries that these economists are “not doing anyone a service because of the tremendous amount of effort it takes to get people to save”.
This is an important point. The economists are not saying that one shouldn’t save for retirement; they’re saying that the average person may be able to save less than they’ve been led to believe. Several surveys and research projects have independently reached the same conclusion: most senior citizens have acquired adequate wealth.
But while most retirees have enough, a large minority find themselves unprepared for the financial obligations. USA Today recently published an article describing how many retirees are running up against debt. This piece is more typical of the doom-and-gloom retirement stories we’re accustomed to hearing.
Soaring health care costs are hitting seniors at a time when more employers are cutting back on retiree medical and pension benefits. People are living longer. Yet many seniors subsist on fixed incomes and have little means to boost their incomes. For them, debt provides a temporary — and often costly — reprieve from unexpected expenses.
What does this all mean to you? How is this applicable to your life?
Don’t be overly influenced by either article. It’s important to evaluate your needs and your circumstances rather than searching for some magic number. Each person’s situation is different. Certainly if you can afford it, you should save as much as possible, up to the amounts recommended by financial planning organizations. But don’t panic. Save what you can.
The best thing that you can do is start a retirement account and begin saving now. Regardless of how much you’ll ultimately need to have saved, there’s no question that it’s easier to reach this figure by using the power of compound returns. If you start saving while you’re young, time will help you earn more money.
Ultimately I believe the best choice for young people is to save as much as possible toward retirement. If by some quirk of fate you actually save too much, then retire early. For my part, I’m only just beginning to save for retirement. I’ll be 38 next month. I have roughly $70,000 set aside. I’m a little behind the curve. The good news is that I’ve realized the error of my ways, and when my debt has been eliminated, I will pursue retirement savings with vigor.
[New York Times: A contrarian view: Save less and still retire with enough, via Cognitive Daily]