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How to save for your retirement
...for most of us, it would probably be easy to save for retirement if we were willing to live like your parents did--or at least like my parents did. One television, no stereo, no VCR, no cable, one (used) car, six rooms for four people, no eating out, no cell phones, no vacations other than visiting relatives, stretching meat out with egg and bread and noodle rings, jello as a salad, turn the light off when you leave the room and get off the phone--it's long distance!
Jane Galt has more. Saving is less fun than it used to be, most of all in the United States. That is one reason why we save less, or save only in fun forms, such as capital gains on our homes. The better your society at marketing and retail, the harder it is for abstinence to compete.
Posted by Tyler Cowen on December 5, 2005 at 04:31 PM in Economics | Permalink
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Comments
That's why you should "pay yourself first" and automatically! When presented with the marginal case to spend or save, we almost always choose that which is more immediate.
The miracle of compound interest doesn't really sink in when you are looking at the latest cell or 3D game.
You don’t even realize you’re missing out on one extra of the latest toys if you never see the money. This is coming from a young home-owner with an IRA.
Posted by: Ivan Kirigin at Dec 5, 2005 5:14:46 PM
Well, even within the range of consumer options, there is still a high and a low. Basic cable, etc.
I like taking hikes, riding bikes, running my bread machine and barbecuing what's on sale.
(yes, it is a "real" barbecue in that it can maintain 225F, or higher (big green egg))
Posted by: odograph at Dec 5, 2005 5:26:46 PM
On the other hand, the only tax-advantaged defined-contribution retirement plan people had back then was the Payroll Savings Plan (i.e., Savings Bonds), which were a rotten investment with no employer matching or ability to diversify.
Posted by: KipEsquire at Dec 5, 2005 5:37:10 PM
Wealth disparities in the US are so huge that talking about "most of us" is just silly. Would the cost of living Jane described be enough to save for the 30th percentile family, with an income of ~$18,000, or for the 70th percentile family, with an income of ~$55,000, more than three times as much?
Posted by: michael vassar at Dec 5, 2005 5:43:22 PM
A neighbor who works as a financial advisor is often struck in comparing the net worth of some lawyers driving BMWs and taking overseas vacations with that of a Vietnamese or a Korean couple who started out penniless and now own restaurants. These lawyers come off looking poorly next to either the Vietnamese or the Koreans. He said, "You won't believe how many of these [lawyers and doctors] have nearly negative net worth."
What's amazing is not that some people are poor, but that some people who should be rich, aren't.
Posted by: nn at Dec 5, 2005 6:28:37 PM
70th percentile is 55K$? where is that? I think the mean in my county (santa clara) is $66K.
The other thing is credit is much easier to come buy in 2005 than it was in 1955. I get 100+ credit card applications per week, some in Chinese and Spanish even, and only a small percentage of that has to do with my income.
Posted by: Andrew at Dec 5, 2005 7:10:52 PM
The easiest way to do it is to not increase your standard of living when you get a raise. Instead, pay yourself first with the extra money, like Ivan Kirigin mentioned. Preferably into your 401(k) or Roth IRA, of course, but don't stop when you're maxing out your retirement account contributions.
Better to start earlier and not wait at all, but this way is almost completely painless.
Posted by: fling93 at Dec 5, 2005 8:33:04 PM
Well, there are people who want to limit our
"choices" since we have too many.
Posted by: Sandy P at Dec 5, 2005 8:37:03 PM
"The other thing is credit is much easier to come buy in 2005 than it was in 1955. I get 100+ credit card applications per week, some in Chinese and Spanish even, and only a small percentage of that has to do with my income."
Note, however, that just because you get a "pre-approved" credit card offer is no guarantee that you'll actually get the card if you apply. A rejection is entirely possible. While there's no doubt that credit is easier to get today than it was in past decades, it's not quite as easy to get as all these credit card offers would lead you to believe.
Posted by: Peter at Dec 5, 2005 10:27:53 PM
We as a society have forgotten how to say no to ourselves. I frequently think about all the things we consider necessities that our parents wouldn't have considered wasting money on. I've known people making over 100k who were poor because of spending habits and people making 50k who became rich over time because they saved.
Posted by: LargeBill at Dec 6, 2005 12:01:24 AM
Haven't this thread overlooked the fact that the real price of goods has fallen over time, and that a host of innovated goods we take for granted today didn't exist back in Pleasantville? Scuse me, but I didn't see Gram and Gramps on CMDA asking whether to bring home sushi or sashimi for take out. I think Michael Cox at the Dallas Fed has had a lot to say on this.
Posted by: Ed at Dec 6, 2005 1:04:16 AM
Should we expect a corollary of Jane's argument to be that American's not only save less, but work fewer hours? The reason is that the leisure that a person can afford at a given income level now is greater than it was in the past, and thus the opportunity cost of working (in leisure forgone) is greater.
Is additional consumption of leisure now indicative of additional stresses in the modern world. Assume people have some basic requirement of restorative-leisure (like they have a basic requirement of food, sleep, etc.). Perhaps more taxing demands of modernity require us to consume more leisure to maintain emotional balance. On this assumption, at least part of additional expenditure on leisure might be explained by additional stresses (ie longer commutes, greater job stress), not just that leisure has improved.
Posted by: Andy at Dec 6, 2005 1:36:28 AM
This will be true when electronics become more expensive and
housing becomes cheaper. It is not true at this time. Electronics costs
less as a percentage of middle class expenditures in 2005 compared to
middle class expenditures on housing in 1955, 1965, 1975, 1985, and 1995.
Posted by: wkwillis at Dec 6, 2005 5:06:20 AM
so it's work longer hours, consume less than your parents did and still end up unable to pay for retirement? I think that we can manage a *leetle* bit better than that given that this is meant to be an advanced capitalist economy.
Posted by: dsquared at Dec 6, 2005 5:30:18 AM
Last time I looked, average work hours were still declining slowly, although not for the professional classes. And I think that we're consuming much more than our parents did, particularly in the form of housing, but also in restaurant meals and so forth. Nor do I buy the notion that our lives have become uniquely stressful; working in a factory full of big moving things that can kill you, or little chemical things that can poison you, or medium-sized sharp things that can cut a limb off, is way more stressful than my job.
Posted by: Jane Galt at Dec 6, 2005 8:38:12 AM
I've waited tables. Now I work in cubeville. God I'd prefer cubeville if waiting tables paid the same and had the same future prospects.
Posted by: michael e vassar at Dec 6, 2005 8:50:56 AM
I'm with Jane on the work stress issue. I work in cubeland as an entry-level analyst at a bank...the worst job-related injury I'm likely to suffer is a bit of ye olde carpal tunnel. The worst stress comes from other folks at the bank calling me with innane questions, but I'll take that over the threat of being crushed by some sort of metal stamping machine.
Posted by: Timothy at Dec 6, 2005 9:45:54 AM
The bane of the modern American is that with rising wages, the options out their provide an outlet for rising spending. The great thing about being a modern American is that even if you save money, what you have left provides you with the option of getting so much more than it would have 10, 20, 30 years ago.
It's the old problem of learning to limit yourself based upon possible future shocks. The problem is either a) that few of us have had any real experience at being penniless beyond temporary shocks, that we don't feel that bottom of stomach feeling that we better save for 'armagedon' or b) even if we've experienced something similar we are trained to think that once we've 'made it' then we don't need to worry about any future setbacks; thus we spend like tommorrow will always be bright.
Posted by: ElamBend at Dec 6, 2005 9:50:05 AM
I think life has simple pleasures, but the simpler they are, the less likely someone is to market them. I think there's a magazine called "Real Simple" isn't there? (maybe discussed before) If they write as story about a simple thing, which doesn't require any purchases ... who's going to put an ad next to it?
Maybe this is "too simple" to even bring up, but in a mass production and mass consumption economy, the fast majority of the "messages flying" are about to buy something, and be happy. That becomes the societal expectation, and "voluntary simplicity" types end up as fringe weirdos, fed by a few low-volume outlets.
I mentioned that I hike and bike. I "gear up" a bit for that, but I'm a little stubborn. I don't want to be one of those people I see coming the other way, clothed head-to-toe as the latest sport-fashion-victim. YMMV.
Posted by: odograph at Dec 6, 2005 10:43:16 AM
It would not be a problem if 12.5% percent of my income wasn't taken.
But, according to a recent mailing, if I continue to make my current salary
with modest increases, then in 30 years (when I am 67) I can retire on
about $1,200 per month. What a bargain! Of course if I drop dead at my
retirement party I guess I'm SOL.
Posted by: Tflan at Dec 6, 2005 12:35:41 PM
I'm not sure saving was ever "fun," but neither is lying awake at night worrying about debt. Being skeptical of marketing and retail can take one a long way. I wouldn't like to think that a manufacturer or an ad agency could push me into buying crap I don't need. I don't do recreational shopping, don't impulse-buy, I pay in cash whenever possible, don't carry credit card debt, do drive cars until they die of old age, etc. I don't feel I'm giving up much, and I don't feel stressed by either debt or too many "toys" to which I must attend.
Posted by: Linda at Dec 6, 2005 6:16:32 PM
By the ineluctable math of it, Ke**(rt), you got a simple choice: you can save a little bit early in llfe, or a hell of a lot later. Can't change e, can't control r, without more risk. But giving your money more time is a powerful thing. So the stupid crap you buy when you're young, for courtship display, or status or whatever, is far more destructive than a primary-impotence Porsche in later life.
Posted by: psh at Dec 7, 2005 10:51:58 AM
My wife and I share one car. It's been easy to adapt to the lifestyle. It is a lifestyle. Occasionally my parents leave their car with us when they travel, and then we get out of sync for a while.
Admittedly we do live in a city with good public transportation and many shops in walking and biking distance. When we lived in rural New York, one car was not an option. But then, everything else was a lot cheaper.
Posted by: Henry Woodbury at Dec 7, 2005 11:59:19 AM
With modern western welfare there is less of a need to save "for a rainy day". That being said I do think most people are also sucked in by consumerist marketing. Most of my friends have huge numbers of clothes they never wear, holidays they don't need, and cars when they should walk.
Personally I have no fear of starving but save about 50% of my net earnings anyway. I'll need the money to buy a house. Let's hope the real estate crash comes soon...
Posted by: shawfactor at Dec 7, 2005 9:33:08 PM
<>
The Japanese don't find it hard.
Posted by: jim at Dec 8, 2005 1:46:13 PM
