The Perils of Oversaving (From Morningstar) (Part 1 of 3) [4 Articles]
~ Monday, October 30, 2023 Blog Post ~
By Christine Benz, March 29, 2010
You shouldn’t party today and starve tomorrow, says economics professor and author Larry Kotlikoff. But you don’t want to do the opposite, either.
Christine Benz: Hi. I am Christine Benz from Morningstar.com. I’m here today with Larry Kotlikoff. Larry is the author of a new book called “Jimmy Stewart is Dead,” and he is also the author of another book called “Spend ’til the End,” which talks about spending and saving in and before retirement. Larry thanks for joining us.
Larry Kotlikoff: My pleasure.
Benz: Let’s start with “Spend ’til the End” and talk about the concept there because it’s a contrarian idea. You acknowledge that many people are very under-prepared for retirement but also say some people are over-saving for retirement.
Kotlikoff: Yeah and the title of this book that I wrote with Scott Burns who is a syndicated columnist… it has a double meaning here. You want to spend, but you want to spend until the end.
Benz: You don’t want it to run out.
Kotlikoff: Yes. You have to plan to spend up to your maximum age of life, which could be 100. So we have in our country a lot of people that are undersaving I would say probably 40% of the population in is undersaving, but we also probably have 20% that are oversaving, because it is a very difficult calculation how much should you spend. Traditional financial planning asks you to set some target. They say that’s your number. Set your number.
<TRANSCRIPT>
Benz: How much you’ll need to last you during retirement.
Kotlikoff: That’s an extremely complicated problem.
Benz: Extremely.
Kotlikoff: Nobody could possibly do that on his own.
Benz: You have to predict your own longevity in a way, right?
Kotlikoff: Yeah, but even going beyond that, you have to think about all your tax payments every year from age 65 on. And you have to think about when you’re going to pay your mortgage off.
Benz: Tax rates, which may change.
Kotlikoff: Right. It is beyond human capacity. It’s like plotting your own trip to the moon when you have no physics background.
So what I have developed with my company is a software program called ESPlanner, Economic Security Planner. And we have a version that is free to the public on the web. It is at esplanner.com/basic.
It’s a really cool program. You just go in there, it doesn’t take very long; it’s really simple to input your family information, your earnings, your assets, your basic information, and the program figures out how much you can spend on a sustainable basis, not just in retirement but starting right now.
Benz: Leading up to retirement.
Kotlikoff: Yes, and the idea is trying to get a smooth living standard per person. So it’s figuring out how much discretionary spending per person you should be doing every year to have that level be smooth. The idea is that some of your spending is not discretionary and that is treated like negative income. You have to pay your mortgage, you have to pay for your college tuition for your kids if you want to do that.
It’s really saying let’s take the resources, let’s figure out the nondiscretionary spending, what’s left is the discretionary spending power and let’s even that out so that we are not spending all our money on one day, which is not what we want.
We don’t want to party today and starve tomorrow. And we don’t want to do the opposite. We don’t want to starve today and party tomorrow.
Traditional software tends to lead people to try and get them to starve today and party tomorrow because then the financial planner gets to manage more assets and charge more fees.
And then people are also induced to get into risker securities in order to make these targets that are far too high for a lot of people.
So we want to make it so targeting to save too much is not a very healthy thing either because A, you could lead yourself into investing in a more risky way that you want to, and secondly you may not survive. You may die at 65, right on the eve of spending this big pile that you spent your years accumulating. You may die.
So there is a risk in both ways. It’s like yin and yang, and economics says you want to have a smooth ride.
The other cool thing about the software is that it allows you to safely raise your raise your living standard. Once you have a machine that can figure out your living standard, you can figure out how to raise it safely.
Benz: How does a deal with unknowables? So the threat of unforeseen medical expenses or something like that? How does it tell you to plan for those issues.
Kotlikoff: While the program runs in two seconds, so you can put in what-ifs. What if I have a special expenditure on medical. So you can certainly plan to have a special expense like a nursing home expense for seven years at a very high cost and put that into the program and see what your living standard looks like versus buying long-term care and paying the every year a special expense, which equals the premiums you have to pay every year.
So you can make comparisons of your living standard if you buy the long-term care policy versus you try and self-insure and see how you do.
You’re absolutely right that all these uncertainties that we face such as how much our earnings will be in the future, it’s very hard to fully deal with those in a comprehensive manner. So we are trying to keep it simple, but we allow people to enter assumptions and we caution people to make safe assumptions.
The middle name of our software is “security,” so we are assuming a very low rate of return after inflation, and we’re telling people take your current earnings and assume you can make the same thing in the future.
Benz: Right.
Kotlikoff: Not s higher pay.
Benz: Right. Well it sounds like an interesting program. It is ESplanner.com.
Kotlikoff: /basic.
Benz: /basic. So that’s the free version. Thanks so much. Sounds like well worth checking out.
Kotlikoff: Thank you.
Benz: Thank you for joining us. I am Christine Benz from Morningstar.com.
Source:
https://www.morningstar.com/articles/330896/the-perils-of-oversaving
Article #2: ‘More wealth than necessary’: Could you be over-saving? (From Sydney Morning Herald)
By Paul Benson, May 21, 2023
To achieve peak performance athletes need to train. Train too little, and they risk lacking the fitness and skills to achieve their full potential. Train too much though, and they risk fatigue and injury. A balance needs to be found in order for the athlete to succeed.
In the world of finance, the typical goal is finding ways to save more. But saving involves forgoing spending today, for benefits in the future. And whilst some level of saving is unquestionably wise, just as with the athlete who over-trains it is possible to over-save, wasting opportunities to enjoy today only to end up with far more wealth later in life than is necessary.
Let’s begin by defining over-saving. We don’t know how long we are going to live, and we don’t know what our health will look like in our final years or what sort of care expenses might be needed. With these considerations in mind, most of us would like to know that there’s no significant prospect of running out of savings before we hit 100.
Distinct from our savings, we typically own our home, which provides a secondary form of financial security, particularly if we need to go into aged care. My definition of over-saving then is when projections indicate you will have significant wealth, over and above your home, at age 100.
Now it could be that a particular goal of yours is to pass on significant wealth to the next generation, and if that’s the case, then you may well wish to see an expectation of meaningful assets at the end of your life.
But in most cases, I would suggest that if your goal is to support future generations you are likely better off achieving that through funding education expenses, perhaps helping out with the deposit on a home, or gifts, rather than delaying all that assistance until after you’ve passed away.
We want to save enough to ensure we are financially secure throughout the entirety of our lives and can achieve our goals along the way. So, how do we go about finding a balance between spending today, versus saving for the future?
Start by interrogating your goals and ensuring that they truly reflect what you hope to happen. I find that sometimes people’s goals are determined more by what they think they should aspire to, rather than what actually makes sense to them.
Next, crunch your numbers. How are you looking long term? If you’re savvy with a spreadsheet and your situation is fairly simple, you can probably get a reasonable approximation yourself. If you want to dial that in, or just gain the confidence of having a fresh set of eyes test your thinking, then, of course, reach out for external help.
A final filter to help you identify potential over-saving is to reflect on what you are sacrificing today to achieve the savings regime that you are currently adhering to. For example, if saving 50 per cent of your wage is resulting in you being unable to socialise with your friends on the weekend, perhaps give some thought to dialling that savings rate back to a level that enables you to enjoy your life, even whilst being financially sensible.
Money is an enabler. Happiness is our goal. Taking a few months to travel around Australia with your kids, backpacking in Europe in your 20s, or paying for childcare or a cleaner to give you some de-stressing time. These will all dent your savings. But their value can’t be measured in dollars.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
Paul Benson is a Certified Financial Planner, and the host of the Financial Autonomy podcast.
Source:
Article #3: Is There Such A Thing As Oversaving? (From Pru Life UK)
By Pru Life UK, 2020
We can all agree that it’s easier to spend rather than save money. Who could resist upgrading to the latest mobile phone, getting the newest laptop, or buying that pretty dress? If only we had unlimited resources, saving money would be out of our vocabulary.
Unfortunately, that’s not how it works. In the real world, our desires are always much bigger than our available resources — thus the need to save money. You save money ultimately to confidently pursue things without having to worry about where and how you will get the needed resources.
However, people usually have a hard time saving because it demands dedication and a lot of will power. On the other extreme, however, people can end up obsessed with saving that it becomes disruptive instead of being helpful. We know that too much of something, even of a good thing, can be bad for us. So here are ways to identify when oversaving is hurting your financial goals in the long run:
You scrimp even on your needs
Building your wealth is not the end-all and be-all of financial planning. The ultimate goal is for you to have enough resources to live the life you want, especially when you retire.
Do you take too long to decide whether you will get a thing that will just cost you a peso more, even if it means you’re getting better quality? The number one symptom of oversaving is when you always worry too much about keeping money that you sacrifice even your basic needs.
Most often, this habit is also reflected on misconceptions about spending. Some people opt not to invest on life or health plans because they think their money is better being put in a savings account, but it is important to note that there is a big difference between being frugal and being a miser.
You overwork yourself
There is wisdom in the saying “work smart, not hard”. But some people prefer to waste their precious time on working even when they already have accumulated enough resources to start a business, invest, or even retire. Oversaving is often fueled by fear of outliving your resources when you decide to retire. There is nothing wrong with working and earning your living, but you should also account that time is one of the limited resources you should invest in properly.
You miss on opportunities to create and enjoy life’s moments
Consumer psychologists have a term for the behavior when people always see things too far ahead that they miss enjoying the present. They call it hyperopia. Because you are too focused on saving up for the future, you forego of the opportunities to invest in things or experiences that allow you and your loved ones make the most of the present. You may feel guilty of spending for a family vacation even if you know it will allow you to enjoy and strengthen your bond with your family or you may forego of buying things your loved ones might enjoy and appreciate, thinking that your money is much better be placed in your savings account.
The problem with hyperopia is the feeling of regret that you missed opportunities to invest on your relationships when you look back at your life.
Being financially responsible calls for balance in the way you handle your finances. You don’t have to compromise the present in order to secure your future. Oversaving can be a real problem and it is important to address it now because what is at stake is your quality of life now and in the future.
Source:
Article #4: Retirement planning: Could you be saving too much? (From Yahoo! Finance)
By Julie Hyman and Joseph Santangelo, August 24, 2023
Many Americans are unsure about their readiness for retirement, with most models telling them they are either saving enough or not. PGIM DC Solutions Head of Retirement Research David Blanchett believes that this either/or view on retirement is impacting how Americans are preparing for it. Blanchett explains that advisors “treat retirement as binary, where either you succeed or fail.” This thinking could lead to oversaving and what Blanchett describes as, “the sense that you’re not doing well when you’re actually on track for success.”
Video Transcript
[AUDIO LOGO]
JULIE HYMAN: Retirement planning can be a difficult path to navigate for some, or maybe all. And a recent report from BlackRock showed that only 56% of Americans feel like they are on track for their goal. Our next guest says the two outcome guidelines of success or failure could be leading people astray.
David Blanchett is PGIM DC Solutions head of retirement research. He is joining us now in the studio. Thank you so much for being here. And you actually posit that there’s such a thing as saving too much for retirement, which might be something I’ve never heard before. So please explain yourself.
DAVID BLANCHETT: So that could be good news for a lot of folks out there. But I think the key is how we measure outcomes. And I worry that a lot of the tools that advisors use today, they treat retirement as binary, where either you succeed or fail. And you can’t get like most of the way there. And if you use metrics like that, it could lead to over saving. So I’m not suggesting, folks, don’t save for retirement. What I am concerned about is the way that we often relay the information could create the sense that you’re not doing well when you’re actually on track for success.
BRAD SMITH: Have we seen a massive shift post the depths of pandemic in how people are saving for retirement?
DAVID BLANCHETT: Well, I mean, for better or for worse, if you’re saving for retirement, there’s a really good chance it’s only going to be in a company sponsored 401(k) plan, right? You see very little contributions in personal accounts. And so I think that we have seen a growing use of 401(k) plans, DC plans for Americans. But there’s still a big coverage gap. So we’re seeing we’re seeing gains, but it’s not where we should be.
JULIE HYMAN: And so if people are trying to save for retirement, whether it’s through their employer sponsored plans or for the very few who are doing it outside of that, how should they think about what success looks like, or how they should meet their goals?
DAVID BLANCHETT: Well, I think it’s really important to get help. You can get help online through an advisor. But have someone else run a projection for you to think about what you should be saving. I think that if you’re fortunate to have access to like a 401(k), save in that.
But then beyond that, a question you should ask yourself is like, what are you passionate about financially that you actually enjoy saving for? Saving for retirement is tough. It doesn’t excite folks to save. And so if it’s paying off your student loans, if it’s saving for a house, find the things that you care about, save for those, and then hopefully over time, you can accumulate some wealth.
BRAD SMITH: You mentioned student loans. We’re coming back up to another critical period where a lot of students who hadn’t had to pay off their loans recently or weren’t penalized for it, where that’s going to reassume. And so what type of impact is that expected to have on people’s retirement savings now, as they’re reprioritizing that?
DAVID BLANCHETT: I think it’s definitely negative. I think that for a lot of younger Americans, there is this competition for dollars. And resuming student loans will require some folks to save less for retirement. There’s obviously no easy answer there.
But my suggestion is if you can, at least save up to the match. I understand that there’s like new moneys you’re going to be spending on your student loans. But the employer matches free money. If you’ve got it, at least save to there.
JULIE HYMAN: And I’m also curious over time how people’s philosophy towards saving for retirement has changed or has it not. I mean, it’s hard to do not just because like it’s hard to make enough to put enough aside, da, da, da, but it’s hard as humans to think long term in that way.
DAVID BLANCHETT: What’s — I mean, 30 years away is retirement that’s going to last for 30 years, that’s really tough. And so that’s why for a lot of folks that want to save it’s tough to save for retirement. And I think that that’s why you need to ask this question, what am I passionate about. I think that retirement is going to come due. I mean, and hopefully, for all of us we can retire.
So it does require making this conscious choice to save. And people tend to save more as they age. But I think there’s that key of like what will actually drive you to make better savings choices and focus on that when you’re younger because it’s hard to save given things like student loan repayments.
BRAD SMITH: But are people saving right now as if they’re expecting to have to work longer. I’ve always had this mindset that, look, I’m just going to be a starter ranger at a golf course somewhere, ride around in a cart all day, maybe have a couple transfusions here and there, and it’ll be a rosy retirement for me because I’ll be having some savings that I’ll be putting to work. But then I’ll still be generating some income elsewhere.
DAVID BLANCHETT: So I mean, to call a spade a spade, Americans are not very good savers, right? If you look at like the data, the personal savings rate is like 4%. It should be like 15%. And so people don’t save enough. There’s also this problem where people tend to retire before they expect to do so.
So there’s about a three year gap in actual retirement age and expected retirement age. And so I think that collectively Americans aren’t saving enough for retirement. It’s not quite like gloom and doom, but I think that we can be doing more now. If you can work in retirement, if you can delay retirement, that will improve things. But still like saving is vitally important. And we need better ways to help folks do that.
BRAD SMITH: The golf cart is pretty easy to drive around. I’d just rather be playing on the other side, though.
JULIE HYMAN: Do you think most people can expect to either retire later now or work in retirement?
DAVID BLANCHETT: So people expect to do both. So there’s been a notable shift over time in expected retirement ages. But there’s still this gap that exists between expectations and reality. There’s also this expectation you’re going to work in retirement. The problem there is that let’s say that half of folks expect to do so, only like less than a third end up actually working. I think that that’s going to change. I think that we’re moving away from a society that devalues older workers. So working retirement is a viable thing.
But I would recommend even volunteering. When you start retiring, a lot of folks start dying, and they start losing cognitive function. They start losing relationships. So there’s actually benefits just to staying active in retirement versus the actual like making money part of it.
JULIE HYMAN: David Blanchett who is the PGIM DC solutions head of Retirement Research. Thanks for joining us in studio today.
Source:
https://finance.yahoo.com/video/retirement-planning-could-saving-too-154004336.html
j m, 25 August, 2023
We had good careers and saved some and spent some. Now retired for 11 years and still haven’t touched 401k’s money or other savings other than to move some 401k money to Roth. There just aren’t any other things we need or want.
> Darrell, 25 August, 2023
You’ve led a blessed life. Good for you.
