Straight Story: Retirement hype

Chris Farrell

TESS VIGELAND:
It's time once again for our economics editor, Chris Farrell, to help you sort out what is smart, what is stupid, and what's the Straight Story. This week, Chris, Americans are saving too much?

CHRIS FARRELL:
According to a recent New York Times story, yes.

VIGELAND:
No way.

FARRELL:
Yes. A cottage industry of good research suggests that many younger Americans could be spending more and saving less.

VIGELAND:
Get thee to the mall.

FARRELL:
That sounds good, doesn't it? The problem? I think it's the wrong message to take from the research. Here's the Straight Story: It is indeed a myth that we're doomed to live penniless in retirement. But we all need to keep investing and saving for old age, especially the young.

VIGELAND:
So are you saying the story was wrong?

FARRELL:
I'm saying one cheer for the story not two cheers. There's a very good body of research. And it starts out with the assumption in retirement you're going to need about 80 percent of your pre-retirement income. And when you look at all your sources of income, your home ownership, investment, a couple things come out of this research: One, we're better off than our parents. Two, about 80 percent of us are saving at a reasonable rate. And you know, if you're undersaving a little bit or you're a little bit short, guess what? You work a couple years and all of a sudden you're okay. And what this research is? This is the anecdote to those Wall Street ads, those surveys; you get those surveys all the time from XY or Z saying that 75 percent, 80 percent, 95 percent of Americans aren't saving anything.

VIGELAND:
Right.

FARRELL:
It's an anecdote to that. It's saying, "Look, we're a wealthy society. The top 20 percent, they're saving probably about 127 percent of what they now need. You know the rest of us around 80 percent. And then there's a group of people who are in deep trouble; single women with children, but as a society we are not lemmings to the sea, marching toward Armageddon.

VIGELAND:
Well, I have to tell you I'm still confused by this whole question of how much you need to save to be able to live the lifestyle you want to in your retirement. Yes, I've heard 80 percent. I've heard 70 percent. I've gone on all kinds of calculators on the Web. I still can't figure out what numbers to plug in. Help me.

FARRELL:
All right. The honest answer? You can't know. That's not a recipe for despair. A couple things briefly: On the study that the New York Times article was based on, it's Are Americans Saving Optimally, that was in quotes, For Retirement? And in this particular one, they're saying 80 percent of the households they looked at were actually saving above the optimal rate. But in their conclusion, they go, "Be careful with this. People could be worried about healthcare expenditures, Social Security. So maybe they're not saving too much. Maybe they're saving about the right amount." That's what it really comes down to. For most people, the latter stage of your life is going to be a variation on how you live right now. But let's say you say to me, , "You know what I really want to do in retirement? Visit every country in the world. I've been a reporter."

VIGELAND:
That's exactly what I want to do.

FARRELL:
Well, at that point, I'm going to say, "You know what? You're going to need 130 percent of your pre-retirement income in order to fulfill that dream."

VIGELAND:
I'm in trouble, then.

FARRELL:
You are in trouble. You're working for a long time.

VIGELAND:
Good thing I like my job.

FARRELL:
But somebody who has worn blue jeans and a t-shirt all their life; they shouldn't be going to these calculators that suggest that if they don't have the . . .

VIGELAND:
$5 million in the bank?

FARRELL:
Right, to pay the country club dues, they're going to be in trouble. Well, they've never been to the country club; they're not going to the country club.

VIGELAND:
So the bottom line here? You like the research, but you're pretty skeptical about this advice that young people can spend a whole lot more and save a whole lot less.

FARRELL:
Okay, this is where I think there is a very bad message: The day I meet young people that graduate from college, they go to their first job, they're opening up that 403B, they're opening up an IRA; I gave a talk at a high school, and they all started asking me about IRAs. I'm going, "What is going on? You're juniors in high school. What are you doing?" Well, it turned out they were working at McDonald's or different fast food restaurants. And on the bulletin boards, there was information about retirement plans. And their parents were saying to them, "You know, you should probably put some money aside because boy, I've seen those compound interest tables and how much money you would have." So I think you want to keep the message of investing, and I would not want that to be lost by some sort of notion that you can spend more, because I don't think we have a problem with that, frankly.

VIGELAND:
All right, our man, Chris Farrell. Chris, I can promise you I will not withdraw anything from my 403B.

FARRELL:
You've made my day.

VIGELAND:
Thanks, Chris.

FARRELL:
Thanks, Tess.

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