Start saving early for retirement? Perhaps not, according to new report
In fact, there may even be such a thing as saving too much.
Conventional wisdom has always said that young people should start saving for retirement early in their careers. That may be the wrong approach for some workers, according to a new report from the National Bureau of Economic Research.
Researchers suggest that because life is uncertain, sacrificing now for a presumed better life decades in the future may not always be the best strategy. The report uses a lifecycle model based on a millennial born in 1995 who begins work at age 25 and retires at age 67. It assumes a 27% in federal and state tax rate, 2% inflation and standard Social Security benefits. It also looks at the effects of an employer 401(k) match of 50% on up to 6% of wages.
Related: The power and pitfalls of retirement savers’ illusions
When is the best time to begin saving?
Workers with only high school degrees are more likely to experience flat wage growth and a small rise in inflation-adjusted earnings. When interest rates are high, they begin saving when starting work at 25, regardless of an employer match. When interest rates are low, this group is more likely to wait to save for retirement until their 30s.
For college-educated workers, earnings at age 25 are typically only 42% of their peak earnings at 45 or 50, and in this case, “saving for retirement when income is temporarily low could be suboptimal,” the report states. They can begin investing in their 40s if interest rates are low.
In fact, there may be such a thing as saving too much.
“Over-saving is pretty easy to do when you’re a high earner,” said Priya Malani, a financial adviser and founder of Stash Wealth. “The potential issue with over saving for retirement is that if you’re saving in an arbitrary fashion (without any specific goal in mind), you’re likely compromising on the goals you probably want to accomplish between now and retirement.”
However, not all millennials should procrastinate. This generation is behind on building wealth, thanks to an affordability crisis marked by astronomical student-loan debt and two recessions that led to stagnant wages. The 55% of millennials who don’t have a 401(k) said it’s because they’re not earning enough money, and 9% of millennials said they expect to never retire at all.
Ultimately, retirement planning is circumstantial and best done with a financial expert, Malani said. Saving for retirement is important, she added, but is all about establishing a balance between the lifestyles workers want, both in the short term and in the long term.
“Our lifecycle model is a simple one in which retirement is the only reason for saving,” the authors of the report concluded. “In reality, it may be rational for young people to save for other goals, like buying a house or taking a vacation.
“However, our results suggest that nudging people to save for retirement at all points of their career may be inconsistent with a lifecycle model. In such a model, it is not optimal for someone whose earnings are temporarily low, such as a college graduate at the start of their career, to save for retirement.”
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