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Americans Saving Too Much
Old 10-29-2008, 10:51 PM   #1
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Americans Saving Too Much

According to research conducted by a couple of University of Wisconsin professors:

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We looked at two generations born before the original HRS cohort, the original HRS cohort, and two generations born after, the so-called War Babies (born 1942 to 1947), and the Early Baby Boomers (born 1948 to 1953. ... Households in every birth cohort were overwhelmingly at or above their optimum wealth targets. For the youngest group, the numbers were slightly less favorable. But even so, only 10% of that cohort fell short of their optimum target.
The "wealth target" is the amount that people should have saved by this point in their lives in order to maintain their lifestyle after retirement.

I think this is consistent with other threads on this forum. The professors say that the 75% rule is off the mark. It turns out that children are an important factor:

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We can illustrate the finding by giving the example of two couples, who are otherwise identical, but one has five kids and the other has no kids. The couple with five kids is eating peanut butter, and the couple with no kids is going to restaurants. ... It takes far fewer resources to maintain the living standards of the husband and wife with the five kids after the kids have left the house than it does for the couple with no kids. ... Once they have left the nest, the wealth needed to maintain the living standards of the adults remaining in the household is substantially less than what is needed for the childless couple.
I like this research because it supports my long standing claim

Basically, so little of your gross income goes to support you and your spouse while your children are at home, that if all the "saving" you do during those years is to make payments on the mortgage you are probably saving enough to continue that lifestyle in retirement. You build some financial assets after the kids are gone, get social security, and you can still afford peanut butter. (We actually did a little better than that, we eat a lot of pizza).

I've said that SS alone is enough to provide the two of us the same consumption in retirement that we enjoyed when we had three kids at home. I wonder how many other people think they could do the same.
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Old 10-30-2008, 08:31 AM   #2
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The linked author has a point... That if you aspire to a peanut-butter lifestyle then it won't cost much.

However, most of the people that I know want more than that. The article may sell newspapers but it does everyone a dis-favor by letting them off the hook to meet their savings targets for a less-than-poverty lifestyle.

I'm afraid that the author really meant to say is that since Boomers haven't saved much then a peanut-butter lifestyle is in their future regardless of the number of kids they have. The new retirement is a paid off dwelling and whatever social security pays. For those in debt going into retirement - you will have it really bad.

Perhaps there is a long term investment opportunity in Laura Scudders stock.
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Old 10-30-2008, 08:44 AM   #3
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Households in every birth cohort were overwhelmingly at or above their optimum wealth targets.
I wonder what the authors consider to be my optimum wealth target? You mentioned that apparently they said the optimum wealth target is equal to the amount required to maintain their LIFESTYLE, not their income. You know, I might not agree as I have been seriously LBYM'ing in preparation for a more plush ER, for quite some time now. Frankly, musing about the words "optimum" and "wealth" brings forth images of tens of millions as a nice target.

I was born in 1948 which according to them, is the very earliest baby boomer year. I think they are off by a year or two.

Hey, I used to be a university professor too so I can tell you that such an occupation does not necessarily mean that someone is always right. Or even right most of the time! It just means that you ostensibly have the training, capability, and skills to approach certain types of problems in an intelligent and sensible way, but there are never guarantees.
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Old 10-30-2008, 08:52 AM   #4
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I was born in 1948 which according to them, is the very earliest baby boomer year. I think they are off by a year or two.
I believe the baby boomer years are commonly referred to as 1946-1964.

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Hey, I used to be a university professor too so I can tell you that such an occupation does not necessarily mean that someone is always right. Or even right most of the time! It just means that you ostensibly have the training, tools, and skills to approach a problem in an intelligent and sensible way, but there are never guarantees.
The other thing it means is that if you get tenure, the only way you get fired is if you die..........
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Old 10-30-2008, 09:00 AM   #5
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The other thing it means is that if you get tenure, the only way you get fired is if you die..........
You are living in the 60's, dear FD. True tenure is markedly out of favor with parents, voters, and politicians, and has been eroding for a long time. One more reason that I didn't feel an academic career was all it sounded like when I was in grad school. Plus, there is the reality of publish or perish and the drying up of research money in recent years. I always had plenty of grant money but it is not guaranteed.

Sorry about the topic drift! Anyway, to get back on track, I don't think my present level of spending (averaging $17,400/year after taxes for the past six years not including my mortgage when I had one) is my optimum spending level. It is only a small fraction of my salary and the idea is delayed gratification - - something the authors may not quite grasp.
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Old 10-30-2008, 09:29 AM   #6
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from the article in the original post...
The couple with five kids is eating peanut butter, and the couple with no kids is going to restaurants. ... It takes far fewer resources to maintain the living standards of the husband and wife with the five kids after the kids have left the house than it does for the couple with no kids.

first off, i plead guilty as charged (no kids). and i've taken a lot of heat for that over the years. so i'm pretty bulletproof. j/k
i have seen all forms of this claim that DINKs (remember that acronym?) have it made over couples with kids.

the biggest diiference i've seen, from observing my age peers, in the household $ resource management game boils down to this:
how much the parents BUY for their kids vs
TEACHing their kids to get odd jobs to EARN spending $ for the kids' extra wants and desires.
the BUYer parents have money problems.
the TEACHer parents have stable budgets.

the tiebreaker, i believe, comes from the sheer volume of supply of basic necessities like food, clothing, heat, transportation, etc. these are, of course higher for the couple with kids.

so savings is definitely less for the couples with kids until the kids start earning their own "mad money".
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Old 10-30-2008, 09:45 AM   #7
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Sorry, I forgot the link in the OP.
The article was published by the "University of Michigan Retirement Resource Center".http://www.mrrc.isr.umich.edu/public...em_details.cfm
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Old 10-30-2008, 10:01 AM   #8
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The linked author has a point... That if you aspire to a peanut-butter lifestyle then it won't cost much.

However, most of the people that I know want more than that. The article may sell newspapers but it does everyone a dis-favor by letting them off the hook to meet their savings targets for a less-than-poverty lifestyle.

I'm afraid that the author really meant to say is that since Boomers haven't saved much then a peanut-butter lifestyle is in their future regardless of the number of kids they have. The new retirement is a paid off dwelling and whatever social security pays. For those in debt going into retirement - you will have it really bad.

Perhaps there is a long term investment opportunity in Laura Scudders stock.
If the goal was to sell newspapers, the authors failed. All the references I can find are by academics and think tanks.

I think that everyone "aspires" to more, but the question is "What will your earnings support?". Some of us (I'm one, you may be another) actually saved with the intention of being able to afford some things in retirement that we didn't have when we were working.

But I think it's very reasonable to point out that a "rational" goal for many people is to maintain the same lifestyle in retirement that they had when they were working. If you crunch the numbers, that may not require much more "saving" than a mortgage payment while the kids are at home, e.g. there is no point in eating peanut butter when you are working just so you can afford steak when you retire.
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Old 10-30-2008, 10:18 AM   #9
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there is no point in eating peanut butter when you are working just so you can afford steak when you retire.
Are you quoting my sister and her husband here ?

I believe that they actually said...
"I am entitled to steak now and I will use my Mastercard to pay for it" which is a little different than what you quoted.


By the way I did get the drift of the article the first time. This whole topic of what is the proper replacement rate in retirement has been kicked around for decades. There are many articles discussing it both through the academic literature and the popular press. The gist of many of the articles is similar to yours in that low(er) income retirees need modest amounts of savings due to the progressive nature of social security and taxation.

here are couple of other articles discussing this topic:

http://articles.moneycentral.msn.com...ntBeSoBad.aspx

http://www.urban.org/publications/309531.html

and for what it's worth, many people aspire to something better. Many people will indeed eat peanut better now so that they can have steak later.
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Old 10-30-2008, 10:32 AM   #10
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and for what it's worth, many people aspire to something better. Many people will indeed eat peanut better now so that they can have steak later.
Peanut butter sometimes does seem a little easier than cold steak for a sack lunch at work.
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Old 10-30-2008, 10:45 AM   #11
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I think that just maybe I have been overdoing the peanut butter thing a bit too much over the years.

Recently I have been doing small amounts of steak. However the credit shock turmoil makes me want to go back to my peanut butter days.
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Old 10-30-2008, 10:57 AM   #12
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Sorry about the topic drift! Anyway, to get back on track, I don't think my present level of spending (averaging $17,400/year after taxes for the past six years not including my mortgage when I had one) is my optimum spending level. It is only a small fraction of my salary and the idea is delayed gratification - - something the authors may not quite grasp.
Wow! You are up there with Khan. I thought only my wife and I are such little-spenders.

But here is another problem with delayed gratification. My wife has been teasing me that I wouldn't "know how to spend" when the time comes. I retort that "what is there to learn". The truth is I never value materialistic things, nor need any status symbols to spend like many others do. I might just as well burn my FERNs to get the same gratification: nothing.

But when you get to travel, now, you burn cash quick with that, and oh boy do we enjoy it

But I remember you've said you do not like to travel. So, what do you do, besides giving to charity?

PS. About the article the OP mentioned, its point may be that after retirement, it is easier to maintain your spending level if you are frugal by necessity (having kids), than if you are childless and have been splurging. This logic may apply well to most people, but perhaps not to us LBYM'ers self-deprivation types. We may be fortunate in that our income may be higher than the bare necessities so we could save. Some people never make much.
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Old 10-30-2008, 02:51 PM   #13
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Wow! You are up there with Khan. I thought only my wife and I are such little-spenders.
I checked; I spend about $20,000/year after taxes ($2000/year to charity) and have been since 2004 (I finished major home renovations in 2003).
I did buy a car in 2007 but the money was from my 'replacement fund'.

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But here is another problem with delayed gratification. My wife has been teasing me that I wouldn't "know how to spend" when the time comes. I retort that "what is there to learn". The truth is I never value materialistic things, nor need any status symbols to spend like many others do. I might just as well burn my FERNs to get the same gratification: nothing.
Why should I 'learn how to spend'?

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But when you get to travel, now, you burn cash quick with that, and oh boy do we enjoy it

But I remember you've said you do not like to travel. So, what do you do, besides giving to charity?
I don't like to travel either. I'm thinking of increasing donations to charity.

Quote:
PS. About the article the OP mentioned, its point may be that after retirement, it is easier to maintain your spending level if you are frugal by necessity (having kids), than if you are childless and have been splurging. This logic may apply well to most people, but perhaps not to us LBYM'ers self-deprivation types. We may be fortunate in that our income may be higher than the bare necessities so we could save. Some people never make much.
What about those who don't have children AND don't splurge? This article seems to be assuming the trope that those who have children are somehow more noble and virtuous and thrifty than those who don't (and therefore have careers and go to restaurants).
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Old 10-30-2008, 03:23 PM   #14
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Why should I 'learn how to spend'?
There's really no reason.

What my wife meant was that we have been "delaying our gratification", only to, at this point in life, sit on some money that we may not know how to convert to happiness. We came to realize that we have always had what we really needed. Well, the money sure buys a lot of good night sleep, not worrying about our economic security (knock on wood), compared to the spendthrifts out there. But what have we been saving for? That's what we have been asking ourselves. Outside of travel, there's nothing that money can get us some pleasure.

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I'm thinking of increasing donations to charity.
We give to charity, but perhaps not as much as we should or could.

I also view our travel expenses as "spreading the wealth", giving jobs to people in that service business.

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What about those who don't have children AND don't splurge? This article seems to be assuming the trope that those who have children are somehow more noble and virtuous and thrifty than those who don't (and therefore have careers and go to restaurants).
I don't read it that way. I think they only make an observation that certain circumstances may condition people to more easily accept an austere retirement. That's all.
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Old 10-30-2008, 06:19 PM   #15
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But here is another problem with delayed gratification. My wife has been teasing me that I wouldn't "know how to spend" when the time comes. I retort that "what is there to learn". The truth is I never value materialistic things, nor need any status symbols to spend like many others do. I might just as well burn my FERNs to get the same gratification: nothing.

But when you get to travel, now, you burn cash quick with that, and oh boy do we enjoy it

But I remember you've said you do not like to travel. So, what do you do, besides giving to charity?
There are lots of ways to spend money other than travel. Remember that since I have never spent much, my delayed gratification doesn't have to have a very high dollar value to seem lavish to me.

I don't feel especially deprived right now, and like you, I am not interested in status things or impressing anyone at this point in my life. But, I will have more time available in ER and the leisure activities to fill it will increase the amount that I spend. Plus, as I grow older I will want to hire more help around my house. I have a weakness for art. All in all, I may approximately double my present expenditures. I don't have to spend every penny availalble to me.
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Old 10-30-2008, 06:29 PM   #16
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I am 35 and the twins on the left

<------

we born in March of this year. The kids factor needs more variables:
1) start saving then have kids
2) have kids, then start saving later

We reached 20% savings rate with my most recent raise (came when kids were about 5 months old). If we maintain that 20% and market stays low for another year, I think we retire in 18 years when kids move out.

I know many couples younger than us which had kids 7-10 years older than my boys now, and they are not on path to even retire "on time" (defined by me as age 68 for people born after 1970). This is because they did not start saving because kids came young, when income was low and obviously every penny mattered.
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Old 10-30-2008, 06:47 PM   #17
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For some people money is its own reward. Not lifestyle, better social life, travel, better food. Just balances.

They are lucky. Hoarding money is their hobby.

Ha
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Old 10-30-2008, 06:57 PM   #18
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For some people money is its own reward. Not lifestyle, better social life, travel, better food. Just balances.

They are lucky. Hoarding money is their hobby.

Ha
It's not a matter of hoarding.

I'm not interested in travel; I do spend above average on food (mostly local farms); I have recently started spending more on a social life (clothes and travel and such) (I actually went to the mall and bought an outfit and wore it to an event).

I am planning on increasing my spending/donating to match my 'income'.
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Old 10-30-2008, 07:08 PM   #19
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There are lots of ways to spend money other than travel. .
I am sure, but I myself couldn't think of much non-materialistic expenses outside of travel. Hence I asked.

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Plus, as I grow older I will want to hire more help around my house. I have a weakness for art.
There! As long as one knows what he/she wants.

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For some people money is its own reward. Not lifestyle, better social life, travel, better food. Just balances.

They are lucky. Hoarding money is their hobby.

Ha
You mean Buffet? Though my networth is equivalent to but a handful of BRK A shares, I sometimes wonder if I am not becoming an Uncle Scrooge. Once I found a pleasure that I could spend my money on, I felt relieved!

I have not craved fast cars, nor airplanes, nor boats since I was in my 30s. Never as status symbols, but as something that I would really enjoy. Now, I want things that are slow, and mellow... As I have posted before, I feel easily 20 yr older than my age.

The only thing I would want to do now is to get a house in the Puget Sound, on or near the water, with a small sailboat, or just a little cheap boat to go crabbing. Thought that would be fun, although I got sick as a dog when we took a catamaran sailing in Hawaii (forgot to take Dramamine).

Oh well, just something to look forward to, I guess...
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Old 10-30-2008, 08:08 PM   #20
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What about those who don't have children AND don't splurge? This article seems to be assuming the trope that those who have children are somehow more noble and virtuous and thrifty than those who don't (and therefore have careers and go to restaurants).
BINGO - childless savers. in some cases, DINKS + no splurging = FIRE

hmmm...do we both know anyone who has done that route?

a derivative of above..."less noble and thrifty" - this is the heat i was referring to in my previous post. if i had a dollar for every time...nah, i don't want to start a firestorm.
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