I was sent a link to this article by Paul Farrell on MarketWatch the delves into a study that apparently says we are saving too much for retirement.I saw a segment on CNBC about this a while back and actually it is a little confusing. The headline says "You're saving 'too much' for retirement!" but the issues seems to be more about online calculators from brokerage firms telling us we need more than is actually true.
These are two different matters and to complicate things further the article notes that the average American has a net worth of $50,000 excluding home equity. I can't vouch for the stat but that is the number given.
The reason brokerage calculators tells to save more than we need to (if this is even true) is to rack up more fees at our expense. As a theory it seems plausible and I am sure their data backs up the idea.
There are a couple of so whats and a little bit of philosophy to tie this up.
The first so what has to do with the fees (here I am talking about paying minimal fees using a few index funds and a few stocks with a $10 commission as a discount firm). You are only as healthy as your teeth. It would be nice if the dentist was cheaper but he/she is not, you gotta go, you gotta pay what it costs and you should be at least a little wary if the dentist is too cheap.
I'm not sure if this metaphor stands up or not but you get the idea.
The other so what is that since no one has enough money, who cares? If after plugging in your numbers you are told to save more than you can afford what are you going to do? Your going to save what you can.
And for a little philosophy; If you crunch out all the numbers and come up with $800,000 as your number. It would be not be wise to quit if you get to your number a little early. How often do unexpected things come up that cost money or have you ever known someone who needed to spend money bailing their adult children out of some sort of problem? Life can bring many surprises and most of them cost money.
A problem can't arise from having a little more money than you think you need. Do you think a problem can pop up when you save the exact number your plan calls for? Your answer to that question determines what you think of the Farrell article.
10 comments:
I saw the original study recently suggesting the notion of saving too much. It was quite a surprise to me. I can't imagine that most of us will have too much money in retirement. If you consider that pensions are drying up, I know I won't have one, social security won't be enough, rising health care costs, rising insurance and property taxes and, I believe, inflation is much higher than what is reported. The only thing in the study that i firmly believe is that many of us will be working long into old age to be able to support ourselves. Of course, you have to be healthy enough to work, what if you can't? I believe the answer can be downsizing. You may need to rein in your high standard of living, if you have one, and learn to live comfortably and happily with a little less. That i know I can do.
Roger,
I read Farrell's article yesterday and forgot to post it for your reaction - which turns out to be exactly the same as mine. "So what?".
I've been doing a lot of research lately on this topic and I ran across this report from the the Congressional Research Service: http://tinyurl.com/2jjkfd
According to the CRS only 50.2% of American households owned at least one type of retirement account. The median balance of their total accounts was $28,000 (in 2004). Households headed by persons between the ages of 55 and 64 had only saved a median balance of $88,000.
So who cares if the online calculators are wrong? It's like telling a couch potato to exercise 3 hours a day.
Last thing Farrell conveniently forgot to mention: Are these calculators adequately assessing the likelihood of much higher tax rates on retirees 20 years from now?
RS the notion of living below your means; huge.
TomK the 50% number surprises me. I would have thought that a big number would have accounts but the average balance would be like $800 but there I have it.
I find the whole thing shocking. As much as I despise the big government nanny state, I hope the automatic 401k enrollment provision in the Pension Protection Act of 2006 helps to reverse the tide.
In the last week or so, I've seen a couple of bloggers ruminate on future tax rates. Its a bit of syncronicity for me, for I was thinking about it myself while driving home and saw it posted.
I share the belief that taxes are going to be much higher in the future. I've not sat down to do any calculations to show what the break even marginal rate would have to go to start withdrawing NOW (and taking the penalty) rather than withdrawing later (and of course using a DCF model).
I may ruminate on that at bit. However, with the wider airing of concerns over our current indebtedness you know that we are going to see within the next say 36 months some tax reform--and it won't be in the direction of putting $'s in your pocket.
Also, I couldn't help but note on the FRED site the parabolic after tax corporate earnings--the delta between the corporate after tax and personal after tax is incredible. Anyway, not that I like taking money out of anyone's pockets but the individual's pockets have nothing but lint in them these days.
60 mimutes did a segment this past weekend on U.S. comptroller general David Walker.
Scary stuff. You can read the transcript here:
http://www.cbsnews.com/stories/2007/03/01/60minutes/main2528226.shtml
Paul Farrell is an idiot. Investors would be better off if they took him, Suze Orman and a handful of other goofballs and shut them up. Everytime I see one of his articles it reinforces my self confidence that I can add value as an investment professional.
Thanks Tom K...I used to watch 60 minutes religiously, but no more. I do have Walker's road show presentation. I give him lots of credit for doing his "fiscal wake up" tour. I also appreciate Ben B's unflinching commentatary about some of this "stuff".
I've not figured out this Greenspan loose lips business. Very strange. While I'm glad that I pay attention to this stuff now, I have to say that it leaves me scratching my head more often than not.
Greenspan?
I am in the camp that thinks it does not matter if he speaks. He will not cause a recession. I think there is a greater than 1/3 chance of recession, many have said his comments are not that shocking, I agree.
Roger.
It's funny that you should mention Greenspan. More than a few folks believe that his comments on inflation last week had some effect on the recent correction. But if you want to have a real laugh, check out this article in a Pittsburgh paper where a gent complains that Greenspan was responsible for the dot-com melt-down:
http://www.post-gazette.com/pg/07061/766200-110.stm
I am assuming that he was referring to his "Irrational Exuberance" comment in his letter. That is still the perception for some folks that it was Greenspan's fault. But didn't he make these comments about a year and a half before the bust?
I held a local telecom stock that I bought for $12 and sold for $24 and the stock went up to $165 before the bust. It now sells in the $9-14 range. I guess that some people think that such a run-up in price should be the norm, and hold it's ground.
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