On January 29th, I wrote this article asking the question of whether or not we are over-saving for retirement. It was based on a fairly interesting New York Times piece on January 27, 2007 on the topic. Since then, I’ve seen this topic appear fairly often in the personal finance press.
As a reminder, this graphic sums up the issue: spending in retirement is not level, so planning for a steady “80% of your pre-retirement income” may be overly conservative for many. This graphic does a fair job outlining the issue:
Anyway, Vanguard has recently posted their take on the issue, and it’s worth reading.
Look, you could be cynical and say that Vanguard has every incentive to encourage people to over-save. After all, they make money on the amount you have saved with them. However, given Vanguard’s reputation for low costs and history as a staunch consumer advocate for savings, that’s an unlikely scenario.
Vanguard’s response to this issue is really basically the following:
- It doesn’t take a significant savings rate to accumulate significant retirement wealth
- It is better to over-save than to under-save, all things considered
It’s the second point that I really believe is the most material. Look, I wish we lived in a country where everyone had been acting like good little ants, storing away food for the winter. But that just isn’t the case. The average retirement account has approximately $56,000 in it, and that isn’t going to cut it.
The WWII generation had three legs to their retirement system – social security, pensions, and savings. Social security is evolving to a cash-starved system that will only really be there for people with modest means. Anyone with significant savings will see their social security benefits means-tested and taxed at fairly high rates. Pensions are also gone, for the most part, largely because the only institutions that can afford them are governments who don’t have to do proper accounting.
So that leaves saving. As a result, I’m inclined to think that while the argument that common financial planning goals are too conservative might be interesting in theory, it sends the wrong message at the wrong time. It’s like we’re telling an addicted gambler in Vegas that whoops, we made a mistake, and their savings account isn’t totally tapped out yet.