Economists, academics, projections and formulas…don’t save too early❓🤪

Hogwash!

I have no idea what all the following is saying and I have not a clue what that formula says. I do know that many academics and economists do not live in the real world. And I know most people are like me and don’t know what all this means.

This appears as obtuse as the argument to maximize lifetime Social Security benefits as opposed to the maximum monthly benefit when you most need the money.

“optimizing behavior in a life cycle model?” Give me a break. Worry more about understanding compounding interest first.

The real danger lies in creating the impression saving for retirement can wait. I can just see the headlines. Ah, here’s one now😢

Remember, I didn’t write the following🙄

🔲 We examine optimal retirement saving for young adults in a life cycle model. We find that for liquidity-constrained young adults who anticipate significant earnings growth, optimal retirement saving is zero. Specifically, we find that with a plausible wage profile for college-educated workers, retirement saving does not begin until the late 30s or early 40s, even with standard employer matching. In fact, inducing workers in their mid 20s to participate in a retirement plan requires employer match rates of more than 1000 percent. In contrast, workers facing a flat wage profile begin saving much earlier in life. We also find that participating may be optimal for younger workers facing steeper wage profiles if they anticipate switching jobs and cashing out after 1-2 years. Our results suggest that automatically enrolling workers, regardless of age or anticipated future earnings, in defined contribution plans is not consistent with optimizing behavior in a life cycle model.

II. Model

a. Basic Problem

We begin with a standard life cycle model in which an individual who begins working life at time 0 and live for up to 𝑇𝑇 years. Labor is supplied inelastically through an exogenous retirement age, at which point Social Security is claimed. Each period, the individual has the opportunity to save a in a tax-deferred employer-sponsored retirement account (with an employer match) and in a taxable brokerage account. The individual solves the following problem:🔲

https://www.nber.org/system/files/working_papers/w28396/w28396.pdf

6 comments

  1. I don’t understand it, either. I don’t think that shows it is hogwash. In 1994, at 52, we spent all our savings on the down payment for a house, except for a small amount in IRAs. The mortgage payments kept us broke for 10 years. So we didn’t start saving for retirement until 2005, when we were 63 The point is that there are other good things to do with your money when you’re young besides let it compound in a retirement account. Like buy a house. Like pay for a postgraduate degree.

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  2. CRAZY article. A bird in the hand is worth 2 in the bush. My son age 35, started saving for retirement at age 27. He now has $210,000 in retirement savings. He purchased a new home from a builder that needed work in Feb 2015, closed in August 2015 @ $160,000. The home appraised for $175,000 and is now worth $225,000. Those who fail to plan for the future, just plan to fail, I guess. I am glad my son did not wait to start saving for retirement or purchase a home. Zero credit card debt and only car payments on used cars, can help your dreams come true.

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  3. The mistake is simple – these academics don’t understand that the majority of Americans must “walk and chew gum at the same time” – deal with current needs and retirement preparation at the same time. So, many, perhaps most Americans don’t view the 401k as a retirement plan – but as a wealth accumulation device. That is, over 95% of American workers will not become retirees with respect to their current employer – 19 out of 20 will change jobs at least one more time (some 15+ more times) before they stop working. So, folks need to meet workers where they are – and where they are is that they need liquidity, without leakage, along the way to and throughout retirement. They simply don’t have enough net pay to set aside thousands, or tens of thousands of savings in preparation for a distant, uncertain, remote retirement.

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  4. I am willing to bet that this study was financed by employers who do not want to either contribute to a savings plan or want to automatically enroll employees into a plan to save themselves money. This study has an assumption that young people pull their money out after switching employers every 1-2 years. The phase “exogenous retirement age” makes it sound like retirement is forced upon you so wouldn’t this be more reason to save earlier? I am total confused by the statement that employers need to made 1000% match for mid 20-yr-olds? My company match was a flat percentage rate and did not vary with age. Never heard of a plan that did vary with age.

    Accepted facts: The longer the term of investment the greater the yield due to compounding of interest and dividend if they are reinvested. Long term investing takes, well, a long term. Life insurance companies know this so that is why whole life policies are so much cheaper when you are younger. If this long term investment model was wrong, insurance companies would have figured it out long ago because they are in the business of making money.

    It seems like they trying to get people not to save. Is this to enhance the consumer consumption driven economy, to save money for employers, or to make people more dependent on big socialist government later in life? Or is this telling people what they want to hear to justify why they don’t have to start saving for retirement?

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    1. Some employers do like participation and may use automatic enrollment as part of a safe harbor plan to reduce HCE (highly compensated employees) means testing of the plan.

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