And can I contradict myself in a week?
When I was in college, I dressed like a homeless person. Now, I dress like I’m in college. It’s not that I can’t afford nicer clothes. Thankfully I’m well beyond the “no money” years. It’s just that I never really “upgraded” to the stuff most of my peers are wearing nowadays.
So I should be patting myself on the back, right? Living like a poor person—when you’re not—is one of those tried and true personal finance adages that mark classics like The Millionaire Next Door. The millionaires live like they’re not rich. They buy used cars. They eat at home. Then they retire early or spend retirement travelling the world because they’ve saved so much gosh darn money.
But sometimes left out of the discussion of saving, is how much is too much when you’re retirement planning.
To take it to an extreme and keep things simple, let’s say we’ve got a 25-year old making $60,000. He’s totally bought into saving like a madman and maxes out a Roth IRA and a 401k every year until he retires. Based on one, mainstream retirement calculator, that would give him about $8,900 per year per month once he retired at age 66—almost two and a half times what he used to live on at age 65.
He could fund two of his retirements, and still have half a retirement left over. Should we celebrate that?
The concept of “consumption smoothing”
I think most people would say “No.” The 25-year-old self was cheated out of current pleasures…his trip to Norway, his “grown-up” clothes…that would have been perfectly fine for him to buy. Instead, his 80-year-old self either goes on a spending binge, leaves a large inheritance, or tries to pay off St. Peter.
Instead, many economists consider the ideal savings amount to be that which “smooths” your consumption over your lifetime. In short, you want your quality of life in your 60s and beyond to be about as high as it was in your 30s.
At some point and to make things simple, personal finance gurus started to back out savings targets—like 10% or 20%—that would achieve consumption smoothing as long as the stock market hit certain rates of return.
Laurence Kotlikoff, a Boston University economist, a few years ago took it so far as to create an extremely comprehensive retirement calculator, that can show you how much you should consume every year into and through retirement based on the assumptions you put in. (Here’s the more basic, free version.)
Can you save too much for retirement? Yes! But in personal finance circles, it’s generally not “cool” to spend. A recent Wall Street Journal column derided people who buy iPad 2s (or is it iPads 2?). The logic: It’s really costing you $2,000 since you could have invested it instead! By that logic, I should really feel bad about my $5 lunch today—that could have been $20, after inflation, in 2041. This year, I will blow $7,200 of my future money on lunch. I’m such a moron.
The columnist’s logic assigns little to no value to present enjoyment, in favor of future enjoyment. That makes no sense.
Don’t get me wrong, this doesn’t apply to most people. Most Americans will retire with little to no savings. And those people shouldn’t be buying iPads. But given that you’re reading this blog, I’m betting you’re putting at least a bit away already, or at least thinking about putting a bit away.
Throw uncertainty into the mix, and suddenly saving “too much” seems impossible.
The idea of consumption smoothing has a major flaw, of course: uncertainty. We don’t know what stocks will return over the next decades. We don’t know where tax rates will be or if we’ll be in a car accident or if the roof will need to be replaced, etc.
Or perhaps a more dire situation: Imagine you’re a 53-year old staring down the newly proposed Republican budget. In 12 years, you were expecting Medicare. Bzzzzz. Wrong. Maybe you could have seen some sort of Medicare reform coming, but you probably didn’t predict the fairly random age-55 cutoff that would probably allow you to save thousands in insurance costs if you had only been born in 1956.
There are two ways to react to that uncertainty: To save as much as you can in case a worst-case scenario comes along or to save for a best-guess scenario and risk having to cut consumption if the dice come up snake eyes.
I’m saving for a “best guess”, with the reasonable safety measures of a year-long emergency fund, an annuity, etc. Sure, fate could frown on me, but I’m not willing to make a guaranteed sacrifice of reasonable happinesses today just to prepare for a possibly scary future. There’s a chance, my 66-year old self might be unhappy with the current me, but he’s going to have to deal with it.
{ 417 comments… read them below or add one }
← Previous Comments
Thank you for the good writeup. It if truth be told used to be a amusement account it. Glance advanced to far delivered agreeable from you! By the way, how can we keep up a correspondence?
Thanks for your information on this blog. A single thing I would wish to say is the fact purchasing consumer electronics items on the Internet is not something new. The truth is, in the past ten years alone, the market for online consumer electronics has grown drastically. Today, you can get practically any kind of electronic gizmo and tools on the Internet, which include cameras in addition to camcorders to computer components and video gaming consoles.
Valuable information. Lucky me I found your site by accident, and I am shocked why this accident didn’t happened earlier! I bookmarked it.
After I originally commented I clicked the -Notify me when new comments are added- checkbox and now every time a remark is added I get 4 emails with the same comment. Is there any manner you possibly can remove me from that service? Thanks!
http://www.arttree.com.au is Australia Popular Online Art Store. We sell Canvas Prints, Handmade Canvas Oil Paintings, Customer Artwork, Handmade Canvas Portraits. We Offer Year Round Sale and Get Up-to 70 Percent OFF Discount. We give FREE Delivery Australia, Sydney, Melbourne, Brisbane, Adelaide, Hobart and all regional areas. We ship Worldwide at many international locations.
Howdy! Do you know if they make any plugins to protect against hackers? I’m kinda paranoid about losing everything I’ve worked hard on. Any tips?
Very interesting points you have remarked, appreciate it for putting up. “It’s the soul’s duty to be loyal to its own desires. It must abandon itself to its master passion.” by Rebecca West.
Great post. I was checking continuously this blog and I’m impressed! Extremely useful information specially the last part
I care for such information a lot. I was looking for this particular information for a long time. Thank you and good luck.|
It?s arduous to seek out knowledgeable individuals on this matter, but you sound like you understand what you?re talking about! Thanks
Hi colleagues, its impressive paragraph regarding cultureand entirely explained, keep it up all the time.|
Wow, superb blog layout! How lengthy have you ever been running a blog for? you made running a blog glance easy. The full glance of your website is excellent, let alone the content material!
Hey very interesting blog!|
I read this post fully concerning the resemblance of most up-to-date and preceding technologies, it’s amazing article.|
Thanks for helping me to achieve new concepts about pcs. I also contain the belief that certain of the best ways to keep your notebook in best condition is to use a hard plastic case, or even shell, that will fit over the top of your computer. These kinds of protective gear will be model targeted since they are manufactured to fit perfectly within the natural outer shell. You can buy these directly from owner, or via third party sources if they are designed for your notebook, however only a few laptop can have a covering on the market. Once more, thanks for your guidelines.
I just left a webpage similar to this one, but the material wasn’t as interesting as what’s here.
Thanks for the marvelous posting! I quite enjoyed reading it, you are a great author.I will always bookmark your blog and definitely will come back someday. I want to encourage you to ultimately continue your great writing, have a nice holiday weekend!|
There are some attention-grabbing deadlines in this article but I don’t know if I see all of them center to heart. There may be some validity however I will take hold opinion until I look into it further. Good article , thanks and we wish extra! Added to FeedBurner as nicely
I have been browsing on-line greater than 3 hours nowadays, but I never found any attention-grabbing article like yours. It is lovely value enough for me. Personally, if all website owners and bloggers made just right content as you did, the web will likely be much more helpful than ever before.|
Well I definitely liked reading it. This article offered by you is very useful for proper planning.
Hello! I’ve been reading your web site for a while now and finally got the bravery to go ahead and give you a shout out from Dallas Tx! Just wanted to tell you keep up the good work!|
Every weekend i used to pay a quick visit this site, because i want enjoyment, since this this web site conations actually good funny material too.|
Magnificent web site. Lots of helpful information here. I am sending it to a few buddies ans also sharing in delicious. And obviously, thanks on your sweat!
Thanks for the new stuff you have disclosed in your text. One thing I’d like to touch upon is that FSBO associations are built as time passes. By launching yourself to owners the first weekend break their FSBO is actually announced, prior to masses commence calling on Wednesday, you build a good relationship. By mailing them tools, educational components, free reports, and forms, you become an ally. By taking a personal affinity for them in addition to their circumstances, you build a solid relationship that, on most occasions, pays off in the event the owners opt with an agent they know in addition to trust — preferably you actually.
An attention-grabbing dialogue is price comment. I think that it is best to write extra on this topic, it won’t be a taboo subject however generally persons are not enough to talk on such topics. To the next. Cheers
Hi, Neat post. There is a problem with your website in internet explorer, would check this? IE still is the market leader and a good portion of people will miss your wonderful writing due to this problem.
I will immediately clutch your rss feed as I can’t find your email subscription hyperlink or newsletter service. Do you have any? Please allow me know so that I may just subscribe. Thanks.|
This was such a well-structured and thoughtful read.
Wow! In the end I got a weblog from where I be able to truly take helpful data concerning my study and knowledge.|
Please let me know if you’re looking for a writer for your weblog. You have some really great posts and I feel I would be a good asset. If you ever want to take some of the load off, I’d love to write some articles for your blog in exchange for a link back to mine. Please shoot me an e-mail if interested. Thanks!|
I have been surfing online more than 3 hours today, yet I never found any interesting article like yours. It is pretty worth enough for me. In my opinion, if all website owners and bloggers made good content as you did, the web will be much more useful than ever before.|
Howdy! I know this is kind of off-topic however I needed to ask. Does building a well-established blog such as yours take a large amount of work? I am completely new to blogging but I do write in my diary every day. I’d like to start a blog so I will be able to share my own experience and thoughts online. Please let me know if you have any suggestions or tips for new aspiring bloggers. Thankyou!|
You’ve turned information into pure excitement — impressive!
windshield replacement 29316
I’m excited to uncover this web site. I wanted to thank you for ones time just for this fantastic read!! I definitely appreciated every little bit of it and i also have you saved to fav to look at new things on your site.|
If some one wants expert view on the topic of blogging and site-building afterward i suggest him/her to pay a quick visit this website, Keep up the nice job.|
magnificent post, very informative. I wonder why the other specialists of this sector don’t notice this. You must continue your writing. I am confident, you have a great readers’ base already!
I’m impressed, I must say. Rarely do I encounter a blog that’s both educative and entertaining, and let me tell you, you have hit the nail on the head. The problem is something that too few people are speaking intelligently about. I am very happy I stumbled across this during my search for something concerning this.|
Nice post. I learn something totally new and challenging on sites I stumbleupon everyday. It’s always interesting to read content from other authors and use something from other sites. |
I think this is one of the most significant information for me. And i’m glad reading your article. But want to remark on some general things, The web site style is perfect, the articles is really nice : D. Good job, cheers
One thing I would really like to say is the fact car insurance canceling is a terrifying experience and if you are doing the correct things as a driver you simply will not get one. Lots of people do have the notice that they’ve been officially dropped by their particular insurance company and several have to scramble to get additional insurance after a cancellation. Low-cost auto insurance rates are frequently hard to get from a cancellation. Understanding the main reasons regarding auto insurance canceling can help car owners prevent losing one of the most essential privileges obtainable. Thanks for the suggestions shared via your blog.
اکنون می توانید با استفاده از خدمات وب سایت شوپی احراز هویت صرافی های ارز دیجیتال را با استفاده از مدارک فیزیکی و معتبر بصورت نامحدود انجام دهید
certainly like your web-site however you have to check the spelling on several of your posts. Many of them are rife with spelling problems and I in finding it very bothersome to tell the truth however I?ll surely come again again.
auto glass discount 29303
Hey there! Quick question that’s completely off topic. Do you know how to make your site mobile friendly? My weblog looks weird when browsing from my iphone. I’m trying to find a template or plugin that might be able to correct this problem. If you have any suggestions, please share. With thanks!
whoah this blog is wonderful i love reading your articles. Keep up the great work! You know, a lot of people are hunting around for this information, you could aid them greatly.
Thanks for your write-up. What I want to point out is that when evaluating a good online electronics store, look for a web-site with comprehensive information on important factors such as the security statement, basic safety details, any payment methods, as well as other terms and policies. Continually take time to read the help and FAQ areas to get a superior idea of how a shop performs, what they can do for you, and just how you can maximize the features.
What an insightful and thoroughly-researched article! The author’s attention to detail and capability to present intricate ideas in a comprehensible manner is truly admirable. I’m totally enthralled by the scope of knowledge showcased in this piece. Thank you, author, for providing your expertise with us. This article has been a game-changer!
This is the kind of article people bookmark for later.
Your perspective on this topic is so valuable.
This is exactly the kind of excitement I love to read!
← Previous Comments