A: This can be a very controversial issue and I commend you for digging deeper to find out how to make sure you have a financially secure retirement. There are quite a few books available at the Capital Area District Library that will help you sort through the issue of just how much you should be saving.
o You Can Do It!: The Boomer’s Guide To A Great Retirement by Jonathan D. Pond
o Coming Up Short: The Challenge Of 401(K) Plans by Alicia H. Munnell, Annika Sundén
o Live It Up Without Outliving Your Money!: 10 Steps To A Perfect Retirement Portfolio by Paul Merriman
o We’re Not In Kansas Anymore: Strategies For Retiring Rich In A Totally Changed World by Walter Updegrave
o Your Complete Retirement Planning Road Map: The Leave-Nothing-To-Chance, Worry-Free, All-Systems-Go Guide by Ed Slott
And as you’ve noticed, there are a wealth of articles out there about whether we’re saving too much, or not enough, for our retirement. One article in Fortune Magazine by Yuval Rosenberg that covers this very issue. Use the link below to read the entire article.
I’ve included a few snippets for you to read now.
Financial planners often set savings targets based on replacing 70% or more of pre-retirement income. Yet recently a cadre of economists have challenged that approach, suggesting it often results in wildly misguided targets. Foremost among those fighting the orthodoxy is Laurence J. Kotlikoff of Boston University. In a 2006 paper, Kotlikoff found that online savings and insurance calculators from the likes of Fidelity and TIAA-CREF can tell people to save five times too much. (Kotlikoff admits he is not an impartial observer, having developed his own planning software called ESPlanner.) On the other hand, Dartmouth economist Jonathan Skinner – a former student of Kotlikoff’s – used ESPlanner for a forthcoming paper and concluded that retirement-savings requirements may be significantly higher than Kotlikoff suggests. Fortune’s Yuval Rosenberg asked the two professors to sound off on the topic. What follows are excerpts from their debate.
FORTUNE: Professor Kotlikoff, you call much of financial planning "malpractice" and say that online calculators are telling people to save way too much. Why?
KOTLIKOFF: The basic problem here is that they’re using a replacement-rate methodology, which makes mind-bogglingly stupid assumptions, including that the spending you do before retirement will continue right through age 100. And by that I mean all the spending you do on your kids, all the mortgage payments you’re making before retirement. So it’s not surprising it comes out with crazy recommendations. For a lot of middle-class households, following those recommendations and trying to get an 80% replacement rate would involve starvation. Then the second stage of the malpractice is that after you’ve recommended far too much saving, you then induce them to invest in riskier securities to raise the probability of making this target.
FORTUNE: But isn’t it better to save too much than too little?
KOTLIKOFF: I’m talking here about these companies recommending five times too much saving and five times too much life insurance. So the risk there is that people will squander their youth rather than their money. They’ll save like crazy, and they’ll either die too young to enjoy their savings or they’ll not die and have spent all this money enriching life insurance agents.
FORTUNE: Professor Skinner, you used Larry’s ESPlanner and concluded people aren’t saving enough.
SKINNER: A mind-numbing number of variables really matter a lot. Let me give you an example. Let’s say you take Larry’s program and you set up a couple with no kids and run the numbers. Now let’s add two kids and future college costs of about $160,000 combined. Well, actually your required wealth drops by a quarter of a million dollars because with kids you get rid of the caviar and fine wine and you go to peanut butter.
But the model assumes, then, that you stick with peanut butter throughout your retirement. It assumes you won’t celebrate your kids’ leaving by breaking out the caviar or by saying, "I’ve been deprived for so long – now I want to go on a cruise." It is possible to change the program’s assumptions, but I think there are a lot of implicit default parameters in the model that really require almost a Ph.D. in economics or demography to understand.
FORTUNE: So is there anything one can do to better prepare for retirement?
SKINNER: I agree that a lot of people are constrained. My own impression is that for people in their 20s and 30s the name of the game is to max out on your 401(k) contributions or set up a supplemental savings program that you can do through your employer and start thinking about housing equity. And it’s really only in your 40s and 50s that people should be focusing on saving a lot outside of houses and 401(k)s.
Elizabeth Kudwa is the Head Librarian at the Leslie Library,
201 Pennsylvania Street, Leslie, MI. Contact her at 517-589-9400 or by e-mail at