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Saving More Vs. Living More


We'll be far happier if we sacrifice something today to create a modest cushion beyond what's needed for the bare essentials.


Let's be clear about one thing: economist Laurence J. Kotlikoff, who over the weekend asserted in the New York Times that many Americans are saving more than they need, is a rational, clear-headed and visionary thinker-much like Ed Yardeni, whose Y2K disaster scenarios never unfolded, and Bob Prechter, who's been expecting the Dow Jones industrial Average (DJIA) to tumble below 1,000 for about 20 years.

I respect all three of these guys mightily. Really. They have passion for their work and can lay out a compelling case for everything they believe will come to pass. As a society, we benefit from their kind of maverick thinking, and should embrace it.

In the years leading to the flip of the calendar to 2000, Yardeni, an economist, forecast a global technology meltdown as computers interpreted the common "00" designation as the year 1900 instead of 2000. It just may be that his worst fears for the tech world were avoided precisely because he and others were so vocal about them that remedies were put in place prescriptively. Prechter is a once-prominent stock-market analyst who long predicated his bearish forecasts on waves of mass mania, the traces of which were easily visible just ahead the brutal market decline of 2000-2002.

As for Kotlikoff, an economics professor at Boston University, he has argued in recent years against conventional wisdom like maxxing out your 401(k). Tax rates in the years ahead-when you will be taking taxable distributions-are likely to be so high that they may overwhelm any accumulated advantages from tax deferral, he believes. I don't know if he'll be right. But I think he has a point, and these days I advise most folks to contribute only enough to their 401(k) to get the full company match-not a penny more.

But I'm troubled by Kotlikoff's message in the Times. "There is a risk in saving too much," he said. "You could end up squandering your youth rather than your money." Well, yeah, if you wrestle alligators or work for the mob. But the vast majority of us are going to live into our 80s, and we'll be far happier if we sacrifice something today to create a modest cushion beyond what's needed for the bare essentials.

Kotlikoff's quote reminds me of my teen-age daughter justifying another cell-phone upgrade. I'm trying desperately to get her to start saving something, rather than indulge her whims and live for today. I shredded the Times before she could see it.

To be fair, the Times piece pinned this notion that we're saving too much on a band of economists working independently, not just Kotlikoff. When I reached him on Monday, he assured me that there are many folks who are not saving enough and who should make sacrifices now. His beef is with Wall Street, which asks many families to live in a smaller home or send their kids to a lesser school so that they can meet what he deems are excessive savings goals.

Kotlikoff has his own financial planning software, which shows that online retirement calculators offered by the likes of Fidelity, Vanguard and TIAA-CREF overstate your savings needs by 36% to 78%. Those estimates are what seem excessive to me. Here's what lies behind some of the new thinking:

  • The generation born between 1931 and 1941 has enjoyed documented success in transitioning to their retirement years; 80% appear to have accumulated enough savings.
  • Future generations, it is argued, will do even better because they have the tailwind of some $25 trillion of inheritable wealth coming their way.
  • Kotlikoff's software also takes into account the value of your home, which most calculators do not.

I believe anyone who plans their future relying too much on these assumptions is making a mistake. We are today witnessing the total breakdown of a century's worth of financial and social safety nets. Earlier generations would not have it nearly so well today if not for backstops that future generations will have to do without-generous and secure pensions, plentiful Social Security and medical benefits, and the greater ability to save that comes with continuous lifetime employment during their working years.

Voice your thoughts on this matter in this poll!

If future generations are going to save enough, they're going to have to do it pretty much on their own. Inheritance? Mom and Pop may just live longer than you expect. Your house? Do you really want to sell, and rent or take out a reverse mortgage after 70? Your house may be your safety net; it shouldn't be your retirement ATM.

Kotlikoff is correct in asserting that financial services firms have a vested interest in your saving too much. After all, they earn something on every dime you stash with them. But let's not forget: you do too.

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