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Tilting at Windmills

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January 27, 2007
By: Kevin Drum

DO WE SAVE ENOUGH?....Do Americans save enough? Considering that the national savings rate has been declining for decades and is now actually negative, the answer seems pretty likely to be "no." Today, though, the New York Times reports that "a small band of economists" holds the contrarian view that Americans actually save too much. Shazam!

But what a peculiar article. If you read through it, it presents a grand total of three pieces of evidence for this view. Here they are:

  • A study of the generation born between 1931 and 1941 "revealed that at least 80 percent had accumulated more than enough wealth for retirement."

    This is absurd. This cohort is one of the most singular generations in American history: they were born during the Depression, had famously high savings rates, came of age during the go-go 60s, often had generous pensions, and had a very high Social Security payout compared to the taxes they paid in. Of course most of them had enough wealth for retirement. This is like studying the NBA and reporting back that Americans are taller than you think.

  • Another study found that "88 percent of retirees age 51 and older had adequate wealth."

    Again, this means nothing. Almost by definition, retirees between the age of 51 and 65 are those who have saved enough to retire comfortably. The ones who haven't (the vast majority) aren't retired yet and are automatically excluded from this study. As for the retirees over age 65, they're part of an older generation that we already know had high savings rates. [UPDATE: See below for a correction.]

  • Laurence Kotlikoff, a Boston University economics professor, thinks people save too much.

    Why? The article doesn't really say, except to tell us that Kotlikoff has invented his own retirement planning software that he's trying to market. His selling point is that his software produces different results than the calculators used by most financial planning firms.

So: two meaningless studies and one guy who's trying to sell a software package. What a ridiculous piece. It's possible that Kotlikoff is right, and I certainly wouldn't be surprised if the retirement industry overstates the savings most people need. Still, the broad evidence suggests that the current generation of American workers doesn't save enough, and this article does nothing to suggest the broad evidence is wrong. Who let this through the copy desk?

UPDATE: The second study is here. It appears that the authors actually say not that 88% of retirees over age 51 have adequate wealth for retirement, but that 88% of all households with one member over age 51 have adequate wealth for eventual retirement. So my initial criticism doesn't apply. Their definition of "adequate wealth" can be challenged, of course, but that's a separate issue.

Kevin Drum 5:43 PM Permalink | Trackbacks | Comments (73)

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Bill Keller, patron saint of Judith F. Miller.

Posted by: Roger Ailes on January 27, 2007 at 6:31 PM | PERMALINK

but it's conventional wisdom... Debunking it _must_ be right!

Posted by: jr on January 27, 2007 at 6:33 PM | PERMALINK

What a load of bollocks.

One thing that is interesting to me is that while it is good for the individual to save it is good for the economy to spend.

So the average guy gets mixed messages depending on what somebody is trying to sell, including newspapers.

Posted by: Tripp on January 27, 2007 at 6:34 PM | PERMALINK

It's Saturday. They'll print anything on Saturday.

Posted by: Pinson on January 27, 2007 at 6:38 PM | PERMALINK

FDR called Social Security a "floor of protection." When it began, it was only a supplement. Today, for most workers, SS benefits are enough to live on. So, assuming that SS is never cut, most all of us have enough savings.

However, it's likely that SS benefits will have to be reduced. Without SS, almost none of us have adequate savings for retirement.

Posted by: ex-liberal on January 27, 2007 at 6:40 PM | PERMALINK

I am just flitting by and am too time constrained to look up the details, but I'm sure someone out there can clarify: isn't that "national savings rate" a bit of a bogus number in that excludes a lot of significant items, such as investment and real estate appreciation?

Posted by: Tom on January 27, 2007 at 6:56 PM | PERMALINK

I had the same reaction as Kevin. but I was not sure if it was because I work for one of those financial service companies that the article notes have an incentive to overestimate required savings.

I kept reading, expecting to see what the difference in assumptions between the two camps was and came up empty.


Posted by: Tom G. on January 27, 2007 at 6:58 PM | PERMALINK

What they mean is, rich Americans they know personally have too much savings.

There are no other Americans worth discussing.

Posted by: craigie on January 27, 2007 at 6:59 PM | PERMALINK

You make interesting points, Kevin, but my reaction was totally different. I had made calculations about how much I would need for retirement on my own. When I went to the financial sites and got told that I would actually need a far larger amount -- something in the seven figures -- I started thinking: "wait... where did I make the mistake?"

It seems like I didn't make a mistake. Those sites use the most conservative assumptions and don't take into account things like SS and real estate. It's nice to have my judgement validated.

Posted by: Wagster on January 27, 2007 at 7:01 PM | PERMALINK

No doubt the article was written by a Republican. Eating the seed corn seems to be a distinct modern American conservative endeavor.

Posted by: The Conservative Deflator on January 27, 2007 at 7:05 PM | PERMALINK

Does it violate some economic law to worry that a generation might save a ton, and still wind up in a pickle because the intermediaries who invest their money put it into stuff that the savers won't really need at retirement? Retired savers will have tons of cash, perhaps, but they'll NEED it, because they'll be bidding against one another for needed, but scarce, goods and services that the intermediaries skimped on.

Better for the intermediaries to fund more actual things the retirees will need, and focus less on mere cash return?

Posted by: ferd on January 27, 2007 at 7:16 PM | PERMALINK

Kotlikoff is one of the primary proponents of Social Security privatization. Nutty economic policy is his forte.

Posted by: Eric on January 27, 2007 at 7:26 PM | PERMALINK

The article misidentifies the problem; it's not the American people's collective amount of savings (or lack thereof) I'd be concerned about, but the accumulated and astonishing amount of debt they've compiled.

Posted by: Donald from Hawaii on January 27, 2007 at 7:28 PM | PERMALINK

Ah, Kevin.

So it's you're opinion that we're saving too little. Oh, okay. Anything to disparage the muscular Bush economy.

Right now we're enjoying unprescedented hights of a bull stock market, record low unemployment, and even the housing data is showing a bounce- back in that market.

Where's the good news of the housing market, Kevin? Does it threaten your agenda? DOES IT THREATEN YOUR AGENDA?!

Posted by: egbert on January 27, 2007 at 7:56 PM | PERMALINK

Only 50% of people have some money set aside for retirement. Of those that do, mean value of retirement funds is 150K, which ideally will yield about 10 to 15K a year. The wealth contained in a house can only be recovered through sale or reverse mortgage, the value of which will become less as more boomers retire (along with the current housing downturn). And these are the prepared people-what about the other 50%. Time to invest in the stock of dog and cat food producers. Doesn't seem as though there is too much savings. Very hard to eat a HD-TV.

Posted by: Neal on January 27, 2007 at 7:56 PM | PERMALINK

Where's the good news of the housing market, Kevin?

Don't take a couple of months' data as a bounceback. Inventory is still very high and foreclosures are going up. You're talking about statistical noise so far... if the rise in sales holds up for six months or so then we can start considering that there might be a bounceback.

Posted by: Wagster on January 27, 2007 at 8:06 PM | PERMALINK

This article was also in my local paper (Idaho Statesman) but had more of the report edited out. In fact, all three points Kevin made did not appear.

Posted by: Carl on January 27, 2007 at 8:15 PM | PERMALINK

Nowadays it is critical to have a pension plan, and a savings plan such as deferred compensation, with diversified investments. Something one cannot get to to buy a car, or for a down payment on a house. Retirement savings must be separate, untouchable. Everything else is bullshit.

Posted by: consider wisely always on January 27, 2007 at 8:28 PM | PERMALINK

The country as a whole has a terrible savings rate - negativo to the max, as evidenced by the large foreign trade deficit and growing national debt. As individuals, it's the younger portion of the populace that doesn't save, not us older farts who fall into your first bullet above.

Just remember that the Republicans want to take away corporate pension plans as well as Social Security, leaving your generation able to shop only at Wal-Mart.

Posted by: Hedley Lamarr on January 27, 2007 at 8:35 PM | PERMALINK

Kotlikoff is also selling his book The Coming Generational Storm that suggests we face massive deferred tax liabilities. Does he factor this into his software? Over at Angrybear, we use this simple fact to suggest this NYTimes author is incredibly confused as to how to define national savings.

Posted by: pgl on January 27, 2007 at 8:50 PM | PERMALINK

Kotlikoff is not in favor of privatizing social security. Kevin: you usually get your "evidence" from a newspaper article in the "your money" section? Wow. I would refer you instead to the studies these academics actually conducted; they are much longer than this news article, with bigger words, but that's one of the main differences between popular journalism and good research. Finally, the whole point is that some (not all) are saving based on shallow rules of thumb--that seems to be the best the financial planning industry can offer. Esplanner--which I've used--gives users much more meaningful facts about a family's life economy. And it probably often does reveal that traditional retirement calculators overestimate to cover for their lack of accuracy. It certainly has revealed this startling fact in the cases I've explored with it.

Posted by: Dan Royer on January 27, 2007 at 8:53 PM | PERMALINK


Besides taking away corporate pensions and Social Security Bush announced last week he wants to do away with corporate medical insurance, too.

Okay, I get it that Bush wants nobody to benefit from the government but what does he have against the average joe getting what he can from his job?

Posted by: Tripp on January 27, 2007 at 8:58 PM | PERMALINK

Egbert says, "Right now we're enjoying unprescedented [sic] hights [sic] of a bull stock market . . . ." Last I looked [and, nearing retirement, I look a *lot*] the S&P 500 was at 1422--about 100 points off its high set in the late Clinton administration. I guess you think the Dow is "the market"? Only people who know nothing about the market think the Dow is the market.

Posted by: David on January 27, 2007 at 9:00 PM | PERMALINK

Jesus saves.

Posted by: Absent Observer on January 27, 2007 at 9:05 PM | PERMALINK

jesus saves

moses invests

aaron rents

Posted by: maccabee on January 27, 2007 at 9:32 PM | PERMALINK

Jesus SAVES, he passes to Maravich...he's up...he SCORES!

Posted by: maccabee on January 27, 2007 at 9:33 PM | PERMALINK

I saw the headline and my BS detector went off. Yeah, the retirement investment community want you to invest as much as possible with them, but how can we have a negative savings rate and still be saving too much?

As for the "cash in your real estate equity" people, that doesn't always work well in reality. You've got to live somewhere, and the market's getting awfully soft in the major metropolitan areas - meaning that there'll likely be a downturn soon. To my mind, this makes basing retirement strategies on the equity on the family home a risky proposition - especially as so many people have already gotten home equity loans to pay for their kids college tuition, buy plasma TVs, new cars, etc.

Meanwhile, there's the Bush deficit madness to worry about. If mega-inflation hits, US-currency denominated savings can disappear quickly. All in all, the next ten years will be "interesting times."

Posted by: RepubAnon on January 27, 2007 at 9:58 PM | PERMALINK

When the interest rate on savings is below the inflation rate it doesn't make any sense to save. There's a better return on your income spending your money now.

Posted by: beb on January 27, 2007 at 10:04 PM | PERMALINK

jesus saves

moses invests

aaron rents

Spit take. (Only a Maccabee would come up with that!)

Posted by: Blue Girl, Red State (aka Global Citizen) on January 27, 2007 at 10:05 PM | PERMALINK

Best economist comment (stolen from another blog):

There was a study in either the JPE or AER about 10 or 15 years ago which found that elderly people in nursing homes with significant amounts of money to pass on received more visits and attention from relatives than elderly who had little or nothing. If you don't want to die alone, it is well to plan to "leave some money on the table."

Posted by: Dammitman! on January 27, 2007 at 10:47 PM | PERMALINK

Oh, yeah:

Jesus Saves

Esposito scores on the rebound!

Showing my age.

Posted by: Dammitman! on January 27, 2007 at 10:50 PM | PERMALINK

The NYT article is terrible, but the idea is actually worth considering. While I think the notion that Americans are saving too much is wacko, it's arguably the case that the financial-services industry is pushing overly scary scenarios. Consider the standard advice that we should all be maxing out our tax-advantaged retirement funds. My income is well above average, and I'm a pretty aggressive saver, but maxing out my 403(b) and Roth IRA contributions would take over one third of my income! If I'm in that position, most people are in far worse shape. How many people get so scared at the prospect of having to live monastically--or at weighing retirement savings against their kids--that they just get paralyzed? How many of the people on this comment thread are "saving enough" by standard criteria? If there's in fact a way to retire that doesn't require a couple of million dollars, it might be worth investigating.

Posted by: David on January 27, 2007 at 10:54 PM | PERMALINK

"When the interest rate on savings is below the inflation rate it doesn't make any sense to save. There's a better return on your income spending your money now."

Gee-My money market fund earns over 5% right now; last year the CPI went up 3%. And that's if you're 100% in cash; in the long run stocks do better. Even the pessimists expect stocks to at least meet inflation over the next decade, and if inflation were to currently beat interest now, it shouldn't in the long run, because real interest will usually adjust upward to attract funds. Maybe if your decision to save is made against having the money next year, this argument makes sense; if the choice is between having it now or having it 20 years from now, and being too old or sick at that time to acquire money any other way, I'd just as soon take my chances with inflation.

Posted by: David on January 27, 2007 at 11:09 PM | PERMALINK

Why worry? Bush will tax cut us to eternal prosperity. Don't you know that cutting taxes boosts govt. revenues? So, if we cut taxes to zero, we would have infinite revenues, then after we get done killing all the A-rabs, we will be raptured, just like George W. tells us.

Don't you get it??? It all makes so much sense to me.

Posted by: A True Republican Believer on January 27, 2007 at 11:12 PM | PERMALINK

Kevin - You make excellent points. You ask where the copy editor is. Why can't we know (1) the identity of the copy editor, and (2) why he let this worthless article go into print.

Posted by: Frequency Kenneth on January 28, 2007 at 12:46 AM | PERMALINK

Egbert says, "Right now we're enjoying unprescedented [sic] hights [sic] of a bull stock market . . . ." Last I looked [and, nearing retirement, I look a *lot*] the S&P 500 was at 1422--about 100 points off its high set in the late Clinton administration.

Right, and that's just in nominal terms. In real terms, the S&P is off something more in the vicinity of 20% from its all time high when Clinton was president. His point about "record low unemployment" was off, too. In the late 60s it briefly dipped below 3%, and during WWII unemployment was essentially at zero.

Posted by: anonymous on January 28, 2007 at 1:05 AM | PERMALINK

Dan Royer, yes, Kotlikoff is in favor of privatizing SS. From the Boston Globe:

* Step 2 eliminates the employee FICA taxes (7.65 percentage points of the total 15.3 percentage point employer plus employee tax), directing these contributions to individual Personal Security accounts. The employer FICA contribution continues to finance Social Security disability, survivor, and Medicare benefits. [...]

* Step 6 invests all Personal Security account balances in a global, market-weighted index fund of stocks, bonds, and real estate securities. "Market-weighted index" means buying assets in proportion to their share of the financial market. The allocation of the portfolio is thus determined solely by the marketplace, not the government.
Sure, you can play semantic games and argue that's not privatization but you wouldn't be fooling anyone. Posted by: Eric on January 28, 2007 at 1:05 AM | PERMALINK

I'll be 69 in a couple of months and am reluctant to retire precisely because I'm worried about healthcare: My wife and I have a decent amount set aside in TIAA/CREF, 401K, and other retirement accounts; Quicken tells me that we've got enough socked away, but I just can't trust the guys in charge now not to F*** it all up.
So I shan't be retiring next yearl

Posted by: Brian Boru on January 28, 2007 at 1:15 AM | PERMALINK

Why save? The glorious State will take care of all our needs. The Democrats have promised us!

Posted by: John on January 28, 2007 at 1:20 AM | PERMALINK

Savings are not the issue. The Federal Reserve and their paper money is the problem. 'Paper' money is just another Constitutional abuse by our gov't.
They violate the 1st Amendment by opening mail, caging demonstrators and banning books like "America Deceived" from Amazon.
They violate the 2nd Amendment by confiscating guns during Katrina.
They violate the 4th Amendment by conducting warrant-less wiretaps.
They violate the 5th and 6th Amendment by suspending habeas corpus.
They violate the 8th Amendment by torturing.
They violate the entire Constitution by starting 2 illegal wars based on lies and on behalf of a foriegn gov't.
Buy Gold and Silver. Support indy media.
Last link (unless Google Books caves to the gov't and drops the title):
America Deceived (book)

Posted by: Warren on January 28, 2007 at 1:35 AM | PERMALINK

There is an interesting chart in the article that shows an "optimal" savings scenario for a couple (one spouse making $100K and the other $25K, presumably at retirement).

It shows them retiring at age 65 (seems like equal ages are assumed) with $400K total savings, and living to age 91 (husband) and 95 (wife). During their retirement, the couple spends $70K annually ($55K after he dies), and their savings is at zero at the wife's death.

There is no breakdown, but I assume the logic is something like this:

- Combined Social Security income for the couple: $40K

- Income from savings (assuming lifetime annuity -- gotten from a calculator): $30K

- Total annual income: $70K

All this, presumably, in current dollars (except for the $30K from the annuity which would not be indexed, right?)

Posted by: JS on January 28, 2007 at 4:07 AM | PERMALINK

If the above assumptions are correct, an annual retirement income of $160K would require four times the savings, or $1.6M -- correct?

And would that work if the savings is in tax-deferred accounts? And would it be indexed? Any expert clarifications of this would be welcome.

Posted by: JS on January 28, 2007 at 4:14 AM | PERMALINK

egbert writes:

Right now we're enjoying unprescedented hights of a bull stock market, record low unemployment, and even the housing data is showing a bounce- back in that market.

The Naz is nowhere near the highs it reached right after Bush took office in 2001. The Dow isn't really an accurate measure of the broad market as the S&P 500 and the Nasdaq. Record unemployment? The unemployment rate is the lowest since.. right after Bush took office in 2001. And the housing market is only showing a minor bounce - we're not out of the woods yet. Does that threaten your agenda?

FWIW, Americans aren't saving enough, including me.. :(

Posted by: Andy on January 28, 2007 at 4:50 AM | PERMALINK

News flash: Responsible people save more than enought to get them through the rest of their lives.

Irresponsible people spend foolishly.

"The poor you will always have with you..."

Posted by: Orwell on January 28, 2007 at 8:23 AM | PERMALINK

Hey Orwell,

circa 1910:

"The poor are poor. One is sorry for them, but there it is."

You wanna step outside, bub?

Posted by: Forster (aka ThresherK) on January 28, 2007 at 8:34 AM | PERMALINK

Kevin, you expect too much from journalists. The present system of journalism education teaches people how to gather facts and write stories in a particular format, but does little to nothing to teach them the basics of the subject they're dealing with, or frankly math or statistics.

Posted by: AJ on January 28, 2007 at 9:00 AM | PERMALINK

I think you're misinterpreting what the article and economists such as Kotlikoff are saying. Not the generic "we aren't saving enough," because obviously some are not (for whatever reason, including the difficulty of saving for those who are having trouble just making ends meet).

From the article (emphases mine): "... [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. ...

"Andrew Behla is a case in point of someone who is not saving enough. Mr. Behla, a Los Angeles graphic designer and consultant, is at age 38 just starting to think about retirement. He and his wife, Michele Krolik, a payroll manager, together have just $70,000 squirreled away for their old age. ...

" 'I think we will have to save a lot more,' he said, a point on which the economists and the financial planning industry would agree. ...

"But other people like Beverly Alexander, 49, an energy consultant in Marin County, Calif., might be able to slow down. Her financial planner has her retirement finances mapped out to age 105 (her parents are still alive in their 90s), a plan that gives Ms. Alexander, a former utility executive, the freedom to quit her corporate job and live on her consulting income."

The point I see them making is that for those who are conscientiously saving for retirement, the financial services industry overestimates the amount of the nest egg one must have. Obviously, as in the example of Behla and his wife above, many are not saving enough.

Posted by: JK on January 28, 2007 at 9:37 AM | PERMALINK

Well, Kevin, it turns out that the authors are correct, although only partly for the reasons they mentioned. See: Is Saving Money A VIRTUE?

It is simply not true that saving money is always a virtue. Just ask yourself what kind of world would we be living in if everyone were to start saving money and no one were to ever borrow again? Well, we can be sure that one of the most celebrated benefits of saving money---the opportunity to earn interest income---would disappear. It turns out that savers need borrowers. So how can we say that saving is a virtuous act if it is necessary for some people to dis-save in order for the savers to benefit?

There is a certain ideal that all savers pursue as a sort of ultimate goal: to save a very large amount of money and then retire and live off their accumulated dollar wealth. Isn't that what all the financial experts out there are advising us to do? But just ask yourself what the world would be like if everyone were to somehow become extremely rich in dollars one day and then we all decided to retire and live off our accumulated money wealth.

We'd all be able to enjoy lives of luxury, right? Well, no. What we would soon discover is that we actually possessed no real wealth at all because no one would be producing anything of value that we could buy. In order for savers to benefit optimally from the saving of money, they need to have a lot of other people out there who are not able to save like them, but who are forced to work for a living, instead.

The Real Wealth of the economy is its productive output: the real goods and services that are produced by our combined work efforts. The more we collectively produce, the richer we collectively are, in real terms. It ultimately doesn't make any sense for us to all seek to become millionaires, because we cannot all live off of the productive efforts of "others." But that’s actually the Republican Party’s 'solution' to the problem of poverty, isn't it?

What we should all be seeking is to maximize the production of real wealth in our economy so that we can maximize our consumption of real wealth. Enhanced economic security is something we can provide ourselves with, but it's not going to come from everybody finding a way to save more money. The good news is that we can collectively provide ourselves with something (financial security) that we cannot all individually hope to provide ourselves with.

There is yet another very important reason why the practice of saving of money is not always a good idea. If everyone were to "perfectly embrace" the ideals of thrift that are endlessly promoted by voices within the financial community, the result would be an economic disaster. That is to say, if all Americans stopped borrowing money and they committed themselves, instead, to the practice of putting off all purchases until they had saved enough money to pay cash for them, America’s economy would immediately collapse into an economic depression, perhaps one that would even exceed the Great Depression of the 1930's.

Why do we know that this is an absolute fact? Because we know that ALL JOBS IN THE ECONOMY ARE DEPENDENT ON THE SPENDING OF OTHERS. Just ask yourself where the money comes from that pays for nearly every job holder's income? It comes from the SPENDING of other people. An economic recession is defined as a period of time when there is a decline in aggregate spending (GDP). When spending drops; jobs disappear. That's what happened during the Great Depression; too much SAVING was going on. People who had 'extra' money that they could have spent, chose to save it instead. Those who would have spent the money if it had been placed in their hands, did not have it in their possession.

There is no denying that---all else equal---an individual will benefit from saving money so long as not everyone else is also saving money. But we need to understand that the practice of saving money is not a pure virtue because bad things can happen if too many people are saving too much. Yes, go ahead and try to save as much money as you can, but understand that when there is any level of unemployment in the economy, the government is going to have to reduce total savings if it wants to improve the welfare of all. The only issue then is which savers should be asked to give up some of their savings in order to help the national interest? I say tax the savings of those who are in the best position to make a sacrifice: the extremely wealthy.

It may be prudent for an individual to save (or save more) in certain circumstances that are strictly defined, but it is ridiculous to refer to the act of saving money as a virtue. So can we please stop referring to Saving as some kind of Absolute Good, one that a society can never get too much of? If anything, economic history has taught us that exactly the opposite is true.

More on this:

The Economy: America Saves Too Much (Explains what's wrong with the BEA's calculation of the National Savings Rate.)

The Edwards/Kemp Effort To Promote Savings (Explains why it is true that the only rational way to reduce America's total indebtedness is by reduce America's total savings.)

The Misunderstood Relationship Between Savings & Investment (Between 1988 & 1997, an average of nearly 85% of the money that corporations spent on investment came from retained earnings or other internally generated funds...an empirical fact that would seem to strongly refute the assumption that firms are desperately dependent upon borrowed money (and therefore upon savings) when they want to make investments. What is the ultimate source of the internally generated funds? It would be the expenditures of consumers and firms and government, not savings.)

Posted by: James Kroeger on January 28, 2007 at 9:42 AM | PERMALINK

Good evidence or not, the piece struck home with me. I've often felt that the retirement estimates put out by the financial services industry were wildly overinflated; now come some economists who say...the same thing! Lone Wolf

Posted by: Lone Wolf on January 28, 2007 at 10:53 AM | PERMALINK

Like Micawber in Dickens' David Copperfield, most of us are hoping that something will turn up.

Posted by: Duncan Kinder on January 28, 2007 at 11:08 AM | PERMALINK

I read the article and did not find it very useful. The facts and analysis presented hardly help with any financial decision making other than that, obviously, many of us could stand to give a little more attention to what, if anything, we are saving.

But the statements about Social Security are curious:

Its calculations do not include Social Security payments.

After all, even as people are living longer, corporate pension plans and Social Security can no longer be relied on to ease most Americans through their retirement years.

These statements remind me of the last two financial consultants my wife and I have talked to. They both stated flat out that “everybody knows” that Social Security will not be there for my generation. A pretty remarkable assertion.

In case you are wondering, yes, both of these consultants are Republican.

Posted by: little ole jim from red country on January 28, 2007 at 11:24 AM | PERMALINK

If you think you're saving enough and will have enough to retire on, take look at the worst case scenario depicted in William Bernstein's "Retirement Calculator From Hell." It shows how a million dollar nest egg would have been depleted for someone retiring in 1966 at the beginning of a "long, brutal bear market," and taking out $70,000 per year (http://www.efficientfrontier.com/ef/998/hell.htm). Such a market can't happen again? You'd better hope not.

Posted by: JHM on January 28, 2007 at 11:54 AM | PERMALINK

My parents were born in 1912 and the depression hit as they were finishing high school. It definitely colored the rest of their lives. When my dad died he left my mom very comfortable. But they were both frugal.

Having been born in 1941, I have one piece of advice re: retirement. One can never save too much for retirement.

Posted by: Chief on January 28, 2007 at 11:58 AM | PERMALINK

Having been born in 1941, I have one piece of advice re: retirement. One can never save too much for retirement.

If hyperinflation occurs or if securities otherwise become wothless, then all the saving has been in vain and one would have been better off spending the money while the times were good.\

Posted by: Thinker on January 28, 2007 at 12:08 PM | PERMALINK

I think some of it is hooey, about what they tell you "you need" to retire on. Assume that you have your mortgage paid off by age 65 and you are retiring then. This is the point that many people downsize.

They sell their large homes and move into a condo. They invest the proceeds conservatively.

You have a moderate condo, moderate energy bills, you have social security, and the proceeds of the home sale, plus your 401k. No, you aren't going to go out to Spago every night, but under this scenario, you should be ok. If you were poor your whole life, the situation is different. Just thinking about middle class people here.

Assume $30k a year and assume you live past the median age to 80. That is 15 years of retirement. That comes up to be $450,000 and your SS is part of it. You buy down to a condo and net $100,000. You get $1200 a month in Social Security and that is another $216,000. If you did nothing else, had no other investments, no 401k, you would budget out $1755 a month with no house note. Not luxury, but $21,000 a year is above the poverty line especially with no rent due.

Posted by: trifecta on January 28, 2007 at 12:29 PM | PERMALINK

One of the things not addressed in the article, or in the financial service plan models, is the "life cycle" of retirement spending. The models assume you need the same amount, forever, but fail to take into account that you -- and your spending -- frequently slow down as you age, and that your need for cash for things like hobby or travel or cultural pursuits tapers off. Thus, assuming that you need 70-85% of your pre-retirement income level more or less assumes that your spending will go down only by those expenses that you are no longer incurring because you retired. But the truth is, some expense will go up (obviously, health care) but many others not only go down, but continue to go down as you age. This is from someone (me) who is something of a compulsive saver. I thought the article raised an interesting point of view, even if it could have been handled in more depth.

Posted by: Barbara on January 28, 2007 at 12:54 PM | PERMALINK

Terrific article on Barack Obama's family background,

Obama, 45, has two half- sisters, one living in Britain, and five surviving half-brothers, the eldest of whom converted to Islam, and whose stories span the globe. . . .

Posted by: cld on January 28, 2007 at 2:03 PM | PERMALINK

I save about 30% of my gross pay (about 45% of net) every month, not counting equity payments on the house or car. Over the past 3.5 years, I've paid off $100k in credit card and student loan debt run up while in school, put down $75k on a house, bought a brand new car with cash, and I still have $50k sitting in the bank in case I get fired tomorrow.

Course I make $250k/year and live pretty reasonably (the house is 120 years old and the car was a base model VW station wagon).

Posted by: Arrogant Lawyer on January 28, 2007 at 2:30 PM | PERMALINK

Taking the day off today, Kevin?

Anybody notice that since Kev's cat died that his posting has dropped off?

Dude, I know your cat died, but pull yourself together.

Posted by: Knudds on January 28, 2007 at 2:32 PM | PERMALINK

Knudds--dude--kind of a below the belt post. Struck me as a bit harsh and unkind?

Posted by: consider wisely always on January 28, 2007 at 2:42 PM | PERMALINK

Gotta say what I feel, dude. I'm bored, and I want to be entertained.

Posted by: Knudds on January 28, 2007 at 2:51 PM | PERMALINK

Tripp at 8:58 PM

Okay, I get it that Bush wants nobody to benefit from the government...

Base slander! Er... libel?...anyway, Bush does too want somebody to benefit from the government! Himself and his "base" (the haves and the have-mores). He just doesn't want "ordinary" folks like you and me dipping into the pot, because, that would reduce the amount that Bush and his buddies would get.

Simple economics, dude. You an only make the pie so high...

Posted by: KarenJG on January 28, 2007 at 4:22 PM | PERMALINK

Why are we attacking the Shia in Najaf?

The shia in Najaf have formed a defense network to keep the Sunni terrorists bottled up in Arabia. Yet Bush is attacking them, why?

Are my fears realized?

Has Bush finally turned on Americans and is currently supporting the Sunni Al Queda network?

The Sunni are doing the car bombs, the Mahdi army is our ally against this, and the Shia are giving up their lives to protect Americans from Sunni terrorism.

Now the damn Republican party, once again, has allied itself with Sunni terrorists for oil and we will be attacked again, by Sunni and their US troops.

I do not get it? Perhaps if Iran can get the nuclear bomb then, and only then; will the American people be defended from the Republicans and their Sunni terrorist allies.

Posted by: Matt on January 28, 2007 at 5:27 PM | PERMALINK

I read that article yesterday and thought it was nuts. What's made me a saver is the people I've seen involved in my job who are barely getting by. I know plenty of people who I work/have worked with who have zero saved. Lots of these people are in their 40s and 50s. A good bunch of these people are in decent paying jobs. We had a matching 401k at my previous company(small 25-30 employees.) Granted it wasn't anything great but it was matching. I am willing to bet that less than 5 people signed up for the 401K. The vast majority of these employees were in their 50s. I also have a friend who got sick recently who makes about $200k who really should stay home for another month but essentially can't afford to. So, don't tell me Americans are saving more than they need to because a good bunch of them are a couple of paychecks away from living on the street. As far as the Depression era folks leaving tons of money behind. Uhm, has anybody seen the medical related costs these people are having to pay for towards the end of their lives? Having somebody to come in to help just a little can run into a few hundred dollars a month. An assisted living(not nursing home) facility can cost $3K/mo and that's just basic housing cost and some food cost. Part D doesn't cover all drugs. What about the $3/day drug or the $250 monthly drug. What about the Enron's and Global Crossings of the world? $2million per couple is not unreasonable at all. And for the people upthread who think older people want to downscale their homes - if you're living in a cracker box in NY then I am willing to bet you aren't going to be downscaling. Not everybody lives in a McMansion and some people who do live in a McMansion may want to continue to live in them.

Posted by: azggl on January 28, 2007 at 9:16 PM | PERMALINK

Given how much money people are wasting on things like vanity cars, high-definition TV's, etc., there's no question in my mind that people do not save enough.

But then that's not really suprising given that:

a) our public education system is so poor that most people never learn enough math to make basic financial calculations such as interest payments

b) at no point in time, be it in high school or college, are students required to take a class in personal finance

c) people are being constatntly bombarded not only with cheap credit, but also with endless amount of advertising encouraging them to spend money on things they do not really need

Posted by: mfw13 on January 28, 2007 at 11:30 PM | PERMALINK

I save about 30% of my gross pay (about 45% of net) every month, not counting equity payments on the house or car.

Why would you even consider mentioning "equity payments" on a car in a discussion about savings? You're not only an arrogant lawyer, you're a stupid one.

Posted by: anonymous on January 29, 2007 at 3:38 AM | PERMALINK

When the interest rate on savings is below the inflation rate it doesn't make any sense to save. There's a better return on your income spending your money now.
Posted by: beb

And that's part of the cost of Greenspan cutting the cost of borrowing to practically nothing. You blow out the returns to owners of savings accounts and CD's in favor of speculators and the 'carry trade'.

The Fed, in effect, has become a serial bubble blower.”
-- Stephen Roach, chief economist, Morgan Stanley

Posted by: MsNThrope on January 29, 2007 at 8:23 AM | PERMALINK

>Having been born in 1941, I have one piece of advice re: retirement. One can never save too much for retirement.

Er, my dad was born 5 years before you, took early retirement and died 15 months into it.

Yeah, he saved a shitload of money. So do I. Did him a lot of good. I wonder how things are going to work out for me, as only one male relative made it to 70 years old and the oldest female was 76.

Posted by: doesn't matter on January 29, 2007 at 8:25 AM | PERMALINK

doesn't matter,

You've hit that one on the head. A co-worker said his goal was to spend all he could, borrow as much as possible, and die in the biggest debt he could.

I asked him what happens if he lives past when he thought he would die? What happens when he is still alive, in debt, and no one would loan him any more?

Turns out the guy died of cancer in his 30s so maybe he knew more than I did, but who can say?

Posted by: Tripp on January 29, 2007 at 11:06 AM | PERMALINK

Like most things, moderation is the key. You don't want to make too many sacrifices in the present for the sake of a future that may never come, but you don't want to be a pauper when it does. The old rule of thumb of trying to have enough from all sources (SS, savings, pension if you're lucky) to generate 60-70 percent of pre-retriement peak earnings seems solid. I suspect lots of people will need part-time work to get to that level, but lower-stress part-time work doesn't sound that bad, at least in the 60s/early 70s.

Posted by: Occam'sRazorBoy on January 29, 2007 at 1:28 PM | PERMALINK

70 comments and only Hedley Lamarr gets it?

The country as a whole has a terrible savings rate - negative to the max, as evidenced by the large foreign trade deficit and growing national debt.

Our extremely high trade (current account) deficit proves that our savings rate is too low. It's pretty much an accounting identity that the current account deficit is equal to the savings deficit. Economics and trade 101. Those dollars that "flow out" of the country buying Chinese widgets "flow back in" when the People's Bank of China loans them back to us (buys US treasury securities). As economist Max Sawicky put it:

the triumph of Republican-conservatarian economic policy consists of an expansion of government jobs financed by loans from the Communist Peoples Republic of China
Posted by: alex on January 29, 2007 at 3:17 PM | PERMALINK

Knudds - you are seriously lacking in compassion.

Posted by: Cat lover on January 29, 2007 at 6:07 PM | PERMALINK

The current account deficit and the trade deficit are not the same thing, alex.

The current account deficit is a measure of the difference between the foreign assets Americans own vs the domestic assets foreigners own. It's currently around $2.2 Trillion.

The trade deficit is the difference between exports and imports. That's running at about $800 Billion a year.

There's a relationship to be sure but please refrain from confusing the two. And both are accelerating to alarming levels.

The budget deficit is helping to drive the current accounts deficit in that the US must sell its debt to foreign central banks.

"Since at least 2003, the White House has continued to run up record-high trade and budget deficits that force us to turn to foreign investors and foreign governments for loans of $600 billion to $700 billion a year. It adds up quickly: By the latest count from the Bureau of Economic Analysis, the U.S. assets now held by non-Americans – roughly $12.5 trillion worth – equal 20 to 25 percent of all the assets in the American economy. Americans own about $10 trillion in foreign assets, so that leaves us $2.5 trillion in the hole -- and it’s still going up fast, every year. It also leaves America forfeiting the interest, dividends, capital gains and rents that we would otherwise have earned on that $2.5 trillion difference. In the past, a current account deficit anywhere near the dimensions our country has run under the Bush administration has always led to a currency crisis – when everybody begins to move out of the currency running the deficits, forcing the home country to sharply raise interest rates even if it stalls out the economy."


"A current account deficit means that the United States is selling off assets (e.g. stocks, bonds, real estate) to foreigners. As a result, in the future, income from these assets will go to foreigners rather than people in the United States. In other words, the United States will be poorer, just like with a budget deficit. There is also a secondary concern, that when the annual current account deficit and/or foreign debt grow sufficiently large relative to GDP, lenders could begin to question the country’s creditworthiness and then demand very high interest rates. This would have serious consequences for investment and growth."
Rob Shapiro, March 15 2006
Bush Plays Chicken with Global Capital Markets http://www.ndnblog.org/archives/001579.html

Posted by: MsNThrope on January 30, 2007 at 9:26 AM | PERMALINK



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