Old-age saving called too high

Could it be possible that many Americans are saving too much for their retirement?

Such an idea would fly in the face of almost every exhortation to a nation of spendthrifts that saving more is an imperative. After all, even as people are living longer, corporate pension plans and Social Security can no longer be relied on to ease most Americans through their retirement years.


Fidelity, the nation's largest provider of workplace retirement savings plans, says the average 401(k) account balance is only $62,000.

What's more, the national savings rate - the difference between after-tax income and expenditures - is actually negative, government statistics show.


Nevertheless, a small band of economists from universities, research institutions and the government are clearly expressing the blasphemy that many Americans could be saving less - and spending more - while they are younger.

They say that the financial industry, with its ostensibly objective online calculators, overstates how much money a person will need in retirement.

Some, in fact, claim that financial firms have a pointed interest in persuading people to save much more than they need because the companies earn fees on managing that money.

The more realistic amount could be as little as half the typical recommendation made by Fidelity, Vanguard, or any number of other financial institutions.

For a middle-income couple, that could mean trading $400,000 in retirement money for about $3,000 a year more during prime working years to spend on education or home improvement.

"For a middle-class household, that's a lot of money," said Laurence J. Kotlikoff, a Boston University economics professor, who is on the forefront of this research into spending and savings.

The findings of the economists are being met as most challenges to the orthodoxy are: with stony silence or extreme umbrage.

"I count myself as deeply skeptical," said Christopher Jones, the chief investment officer at Financial Engines, a financial planning software company.


The big financial services companies refused to comment on the research, but say their use of simple rules of thumb keeps the process of retirement planning less complicated, and thus, less daunting.

John Rother, policy director with AARP, says the economists are "not doing anyone a service because of the tremendous amount of effort it takes to get people to save."

Nevertheless, the loose confederation of well-regarded economists, who have not been working in concert, says their research points to the startling conclusion that many Americans are saving too much, not too little.

"Even the most casual reading of the popular press will have you convinced that Americans are heading like lemmings over a cliff," said John Karl Scholz, an economics professor at the University of Wisconsin at Madison. "Going into this, I had no idea that we'd find any results anything like this."

The argument between the two sides is similar to the classic debate between the hardworking ants and lazy grasshoppers of Aesop's fable. The financial planning industry says saving, even too much, provides a safety net and peace of mind, and possibly a gift to heirs at the end.

The economists answer that people would get more out of their money by using it when they are younger. "There is risk in saving too much," Kotlikoff said. "You could end up squandering your youth rather than your money."


Scholz said he and his co-authors of a study, "Are Americans Saving 'Optimally' for Retirement?" found over-saving across all economic and education levels and most ethnic or racial groups as well. (It found that Hispanics tended to save less.) Those who were not saving enough were usually missing their target by only a small amount.

The one exception to this optimism are people who enter retirement single, either because their spouse died early, they are divorced, or they never married. The studies found this group did not save enough.

"If they are worried about end-of-life medical expenses or they don't mind leaving money to their heirs," Scholz said, "then over-saving is fine."

The dispute revolves around how financial planners determine how much a person should save. That amount can vary depending on age, income and assets. To simplify the calculations, computer programs resort to rules of thumb.

The starting point for most retirement plans is the so-called replacement rate. It says an American needs an annual income in retirement equal to 75 percent to 86 percent of what he or she earned in the final year of employment. Someone making $100,000 would typically plan for about $85,000 a year in retirement.

That's Coupled with a second industry rule of thumb that says retirees should spend no more than about 4 percent of their assets each year to make them last. A typical couple with that level of income should enter retirement with at least $2.1 million in assets.


Not so, says Kotlikoff. It may be simple, but he argues it is more important to look at how people spend their income while they're working to determine how much they will need when retired.

Did they, for instance, buy a house in their 20s and have it completely paid off so they now live rent free?

Scholz's calculations showed that Fidelity's online calculators typically set the target of assets needed to cover spending in retirement 36.4 percent too high. Vanguard's was 53.1 percent too high. A calculator offered by TIAA-CREF, one of the largest managers of retirement savings, was 78 percent higher than his calculation.

Fidelity's Retirement Quick Check calculator says that a 50-year-old person making $100,000 a year with $700,000 stashed in retirement accounts would still fall short of the $3.6 million goal that would provide the necessary monthly retirement income it sets of $7,408.

Fidelity actually recommends saving $1,058 a month more. But it encourages the person to put away up to $9,749 a month on top of the $15,000 already being saved, an impossibility since that would more than consume the person's entire gross income.