MarketWatch: Many young people shouldn’t save for retirement, says research

[jinga nation]

https://www.marketwatch.com/story/many-young-people-shouldnt-save-for-retirement-says-research-based-on-a-nobel-prize-winning-theory-11664562570

Many young people shouldn’t save for retirement, says research based on a Nobel Prize-winning theory.
New research based on the life-cycle model says that people should strive for a consistent standard of living through their lives

If you hit a paywall, try this:
https://web.archive.org/web/20220930192020/https://www.marketwatch.com/story/many-young-people-shouldnt-save-for-retirement-says-research-based-on-a-nobel-prize-winning-theory-11664562570

I don't know what to say about this. Reads like a hit piece designed to curb savings and promote spending.

[Morning Glory]

I've seen something like this before.  It probably works out fine for most people,  but breaks down if the person has slower than average wage growth (say their whole industry collapses and they are unemployed at 50 with no marketable skills), or a health issue that doesn't allow them to work to their full ability in middle age.

[achvfi]

What the heck is this. So many crazy assumptions to their research and explanations. It seems to me that these tenured academic researchers are far from reality.

[Ichabod]

Economists call this consumption smoothing. At the state-level, this is why central banks try to encourage savings during expansionary times and encourage spending during recessions.

FIRE is a form of consumption smoothing because we try to avoid ratcheting up our lifestyle. Barista FIRE and mini-retirements could be thought of as consumption smoothing for time. Why "save up" all your free time for the end of your life?

As for this particular article, this could be one of those ideas that's better in theory than in practice. The economists behind the study also gloss over the effect of compound interest. They consider compound interest, but dismiss it because of low interest rates. Well, I'd hope young people saving for retirement are investing in equities rather than bonds. They explicitly acknowledge this by saying saving for a house is worthwhile because of equity returns.

[Chraurelius]

This economist ignores compound interest, because, yes, interest rates are very low.  The point is that people should be investing in stocks and real estate, and it's been an amazing market for years.  Sure, the $0.16 interest I get every month on my checking account doesn't do much.  Doubling my mutual funds every decade, or less, is great.
The other problem is that when someone says not to save for retirement, it's like saying not to bother saving at all.  Definitely save up a good emergency fund, pay off student loans or other loans,  and only then think about saving and investing for retirement.

[clifp]

Definitely written by an academic who should get out more. 

The $25+ go out to lunch with your colleagues or skip the morning latte really don't really add a lot to your happiness.  Better to bring your own lunch,or eat at the company cafeteria.
The $100/month by skipping one a week can really add if you but in a 401K, plenty of companies will provide a match. So even the Starbuck barista making $30K, could and I'd argue should save $100/month. Now trying to save 25-30% on that salary is a different story.

[Freedomin5]

I can see where they’re coming from, since my savings trajectory follows the research.

When I was in undergrad, I “earned” $8000 a year in scholarships and from my summer job. I spent pretty much the entire $8000 for tuition, books, and living expenses. And my parents contributed some money to fund my expenses.

After grad school, I earned $24000 a year. The researchers would suggest that I ought to inflate my lifestyle because $24k is still low income. But they failed to consider the fact that I had learned to live on $18k, so there was really no need to spend the entire $24k. It was good practice for me to save 25% of my net pay.

In my 30s, I became a high earner, still lived on $20k, and saved 80% of my net pay. We’ve maintained the same savings rate now that we are in our early 40s.

So yes, the research makes sense for high earners. Does that mean young people shouldn’t save? No, but the older you get, the more you should be saving. The savings curve remains the same. It’s just, for Mustachians, the curve is shifted to the right. And also Mustachians have the option of tapping out and retiring earlier.

Also, your spending should not be correlated to your earnings.

[Morning Glory]

I can see where they’re coming from, since my savings trajectory follows the research.

When I was in undergrad, I “earned” $8000 a year in scholarships and from my summer job. I spent pretty much the entire $8000 for tuition, books, and living expenses. And my parents contributed some money to fund my expenses.

After grad school, I earned $24000 a year. The researchers would suggest that I ought to inflate my lifestyle because $24k is still low income. But they failed to consider the fact that I had learned to live on $18k, so there was really no need to spend the entire $24k. It was good practice for me to save 25% of my net pay.

In my 30s, I became a high earner, still lived on $20k, and saved 80% of my net pay. We’ve maintained the same savings rate now that we are in our early 40s.

So yes, the research makes sense for high earners. Does that mean young people shouldn’t save? No, but the older you get, the more you should be saving. The savings curve remains the same. It’s just, for Mustachians, the curve is shifted to the right. And also Mustachians have the option of tapping out and retiring earlier.

Also, your spending should not be correlated to your earnings.

And not everyone who goes to grad school becomes a high earner in their 30s. You were smart not to count chickens before they hatched.

[StarBright]

This doesn't sound insane to me.

I read it as maximize happiness in your low income earning years (don't squeeze yourself too hard when your income is already low), but don't succumb to lifestyle inflation in your high earning years.

It assumes your spending should be relatively flat over your whole life, and assumes that you will retire at traditional retirement age.

[Nicholas Carter]

As for this particular article, this could be one of those ideas that's better in theory than in practice. The economists behind the study also gloss over the effect of compound interest. They consider compound interest, but dismiss it because of low interest rates. Well, I'd hope young people saving for retirement are investing in equities rather than bonds. They explicitly acknowledge this by saying saving for a house is worthwhile because of equity returns.

I think his logic goes like this:
"The preference for money now, over money later, is captured inexactly by inflation rates. But there is in addition an preference for money when you're poor over money when you're rich- I once dove in front of a moving car because someone else could have grabbed a dime out of the street before me if I'd hesitated-. And there is also in addition a preference for money when you are young over money when you are old, because most kinds of expenses are particular to a season of life, and for most people that season is between 20 and 35. So what is the real rate of return for things like "I can't wait another 16 years to take 14 months off work to hike the Appalachians because the doctor says by then the arthritis will be too advanced." or "I need the money for the pre-natal care now, not in ten months."? He conjectures the answer is "about 10% annualized" so unless the nominal return on your investment is about 13%, you're not actually getting a return on investment after inflation that's higher than the ROI of cash spending.

[Ichabod]

I think his logic goes like this:
"The preference for money now, over money later, is captured inexactly by inflation rates. But there is in addition an preference for money when you're poor over money when you're rich- I once dove in front of a moving car because someone else could have grabbed a dime out of the street before me if I'd hesitated-. And there is also in addition a preference for money when you are young over money when you are old, because most kinds of expenses are particular to a season of life, and for most people that season is between 20 and 35. So what is the real rate of return for things like "I can't wait another 16 years to take 14 months off work to hike the Appalachians because the doctor says by then the arthritis will be too advanced." or "I need the money for the pre-natal care now, not in ten months."? He conjectures the answer is "about 10% annualized" so unless the nominal return on your investment is about 13%, you're not actually getting a return on investment after inflation that's higher than the ROI of cash spending.

I can't find these quotes in the Marketwatch article. Are they from the original study? I'm particularly interested in his real rate of return for experiences being 10%, because I'm not used to seeing economists make that kind of calculation.

I did go back and read the abstract. High-income earners planning on a traditional career length, sure. Low-income workers who have to rely on social security regardless, sure. Generalizing from that to all levels of income, I don't know. They cite low real interest rates, but I'm skeptical of low real interest rates.

The abstract also implies that the authors are particularly interested in 401k auto-enrollment options. Politicians are probably more concerned that we're living comfortably in our retirement rather than in our 20s, because people vote more when they're retired. Companies that auto-enroll their employees often link the default contribution rate to the company match, and they're probably thinking about meeting safe harbors and employee retention. You're less likely to leave your job if you have a significant match still vesting.

I think the authors are possibly right if you're counting on a traditional career length and don't value FI. You'd have to figure your projected ROI and place a financial value on having those experiences/goods now, but reasonable numbers could get you there. If we accept that, then we should accept that RE has a large economic cost. It's interesting that we discuss that here (OMY posts or judge my expensive hobby posts), but we do frame it differently.

[lifeisshort123]

I’d imagine many workers are doing a variation of this in the real world.  However, I’d argue that this “clever thinking” of not saving at all until you are “older” creates several dangerous precedents.

- 1. It leads to people relying on “catch up contributions”, which will offer limited utility in the scheme of a retirement system.
- 2. People get used to spending a certain amount, and for most workers, their wages will likely plateau and not meaningfully exceed inflation in a significant enough way to give them the “larger” resources to spend later.
- 3. When younger, people tend to be single or have no children.  Being able to allocate additional money later to things like home remodels, college tuition for kids, etc. will likely suck up the money supposedly available for retirement savings.

Also, I have met so many people who said “I wish I could retire”.  I have yet to meet someone who said “My mistake was I saved too early and too much”.

[Chris Pascale]

people should strive for a consistent standard of living through their lives

Translation: Save 20% and you are saving 1 year's living in 4. Work for 30 years and the invested capital will prob bring you to that standard.

Save 30%, 40%........get there faster.