By Patricia SabatiniIt's a ubiquitous and alarming admonition: Americans are in miserable shape when it comes to saving for retirement.
As told by a barrage of grim studies and surveys, a majority of workers are destined to fall far short of what they'll need to maintain a comfortable lifestyle in retirement. Worse yet, many simply won't be able to afford to quit working, stuck behind the register at Wal-Mart well into old age as a way to make ends meet.
It's considered conventional wisdom, taken like gospel.
But what if the opposite were true? What if many Americans actually were saving too much, scrimping and sacrificing to pay for their golden years when they could loosen up and spend more now, or at least quit agonizing about a future shrouded in financial despair?
That could be the situation for millions of workers who follow the advice typically handed out by the financial services industry, according to Laurence Kotlikoff, an economics professor at Boston University.
Kotlikoff says standard retirement calculators "wildly" overestimate how much people need to save for retirement.
"They can easily tell a middle-class couple to save four times more than they should," said Kotlikoff, who has spent more than a decade developing his own retirement savings estimator that he's now trying to market.
He says the industry, including behemoths such as Fidelity, Vanguard and TIAA-CREF, embraces "unbelievably crude" methods for setting savings goals. He says they do so partly out of ignorance, but also out of greed, using scare tactics to pump up sales of mutual funds and other fee-based products and financial management services."These companies are not interested in (clients') well-being," he said. "They are interested in the bottom line."While Kotlikoff has been the most strident critic of the retirement planning business, others share his contrarian view that Americans are doing a better job of saving than the industry typically proclaims.One is John Karl Scholz, economics professor at the University of Wisconsin at Madison, who contends that most Americans are preparing well for retirement."There's no huge retirement savings crisis," Scholz said. "Most people are roughly getting it right."Scholz, co-author of the recent study "Are Americans Saving Optimally for Retirement?" examined the saving behavior of heads of households born from 1931 to 1941 and found that roughly 85 percent were on track for maintaining their living standards as they got older.Although he and his colleagues did not study younger generations as closely, Scholz said other data suggest that baby boomers are similarly well-situated for retirement.
His findings, he said, surprised him."Even a casual reading of the financial press would give one the perception that households weren't preparing well for retirement," he said.For their part, industry leaders reiterated that their research overwhelmingly shows Americans aren't saving enough, and that retirement calculators used on the Web and by financial planners are designed to make the process less intimidating, not to draw business."We're trying to simplify this planning process to get (investors) engaged as early as possible," said Debra Pont, spokeswoman for Fidelity.Kotlikoff calls that argument "ridiculous."The crux of the problem, he says, is the industry rule of thumb that maintains retirees will need annual income equal to 75 percent to 85 percent of their pre-retirement income.This so-called replacement rate calculation assumes "all the spending the person does before retirement will continue all the years after retirement," Kotlikoff said, including money spent raising children, paying for college and paying down a mortgage.Using a test case, Kotlikoff's analysis showed Fidelity's online calculator set savings targets 36 percent higher than his calculator, called ESPlanner and available online for $149.
Vanguard overestimated by 53 percent, he said, while TIAA-CREF and American Funds -- another mutual fund giant -- set targets that were 78 percent too high.The Pittsburgh Post-Gazette used Fidelity's Retirement Quick Check calculator to review the fictitious case of a single 50-year-old worker with $250,000 in retirement savings, earning $80,000 a year and contributing $1,000 a month toward retirement.Quick Check projected the person would need a nest egg of $1.86 million at retirement but would fall far short unless he boosted monthly savings to between $3,000 and $5,500, an impossibility since it would consume most to all of his take-home pay.In contrast, ESPlanner recommended a modest bump up in savings to $1,247 per month, which would give him peak assets of an estimated $500,000 right before retiring, assuming a minimal 3 percent return on savings.Both ESPlanner and Fidelity supposed the man would be collecting Social Security benefits.ESPlanner's recommendations changed dramatically assuming the man was married, had two children and a mortgage. (Fidelity's calculator doesn't adjust for such demographics.)In that case, the man actually could quit saving for nine years, starting up again from age 59 to 64, when he would need to put away an estimated $500 to $833 a month.
Fidelity, TIAA-CREF and American Funds declined to comment specifically on Kotlikoff's research, presented in a recent paper titled "Is Conventional Financial Planning Good for Your Financial Health?"A spokesman for Vanguard said experts there "disagree with his work."Kotlikoff said the goal of retirement planning should be to ensure a smooth living standard that "maximizes your happiness over your whole life."There is this sense that you can't save too much," he said. "That isn't true. You can save too much. I call it squandering your youth instead of your money."Patricia Sabatini can be reached at psabatini@post-gazette.com.Source: Scripps Howard News Service. Powered by Yellowbrix..
