There are these sayings such as “there are no bad questions” or “everyone has the right to their own opinion.” For the most part, I can agree with this and try to be supportive. But, when is it appropriate to call out the bad advice even if it might be against popular opinion? Maybe when it is really, really bad advice!
Business Insider Article
A few days ago, Hillary Hoffower, a Correspondent on Millennial Wealth for Business Insider wrote the following article – Saving for retirement before age 40 could make you miserable. The clickbait title alone should make anyone’s head explode; assuming some rationale in common sense. It completely goes against EVERYTHING we know. It is true that I do like to challenge the established norms; however, when most American’s aren’t saving for retirement or can’t afford a $500 let alone a $1,000 emergency, this advice borders being irresponsible and downright harmful. It is bad advice! Period!!
Summary of Things I’ve Found Wrong with this Article
- Title – Title is clickbait and if nobody reads the article, they may walkaway with “hey, look I don’t need to save right now.”
- First Sections – Hillary starts off with “Young adults could be making a big mistake in saving for retirement early.” This is utter nonsense and I’ll provide a beautiful graphic to show this.
- Pay Wall – Hillary then writes “this finding goes against conventional financial wisdom that one should start saving as early as possible…” The “saving as early as possible” is a link to another article that is behind a pay wall.
- College-educated can delay retirement savings – No, they cannot.
- Oversaving for retirement – Is there such a thing?
- Life is short and unpredictable – Well, I can agree with that. All the more reason why the Business Insider shouldn’t have been published.
Hillary does get some aircover because she is just writing an article based on a new working paper — that has yet to be peer-reviewed — from the National Bureau of Economic Research titled Is Automatic Enrollment Consistent With A Life Cycle Model? You can find this paper here.
Right from the beginning I had trouble with this article. It references a non-peer-reviewed paper and mentions that “money doesn’t always equal fulfillment. I do agree that money can’t buy happiness. But, then Hillary references that the paper “looks at ‘total life satisfaction from material consumption (Shoven).'”
Excessive material consumption is what gets most people in a bind. With the “buy now, pay later” attitude, many are putting this material happiness on their credit cards and paying the absolute worst in high interest fees.
In the first section, Hillary makes note that this advice goes against “conventional financial wisdom” and references an article that people should “start saving as early as possible.” The problem with that article is that you can’t read it unless you are an Insider to Business Insider (currently at $69/yr).
This is garbage nonsense and removes any potential credibility I could possibly give her and Business Insider. I’m all for premium, pay-based content. But, not when you are giving bad advice and people should probably understand the better advice.
College-educated can delay retirement savings
It is true that college-educated people will out-earn those that just have a high-school diploma. There are several things that I think this article misses and probably hasn’t thought of; or at least didn’t address:
- Compounding of Interest: A dollar saved today is better than a dollar saved tomorrow thanks to the compounding of interest. Take a look at the graph below where I shared with my son that getting a new car loan at the age of 20 will mean he will miss out on so much FREE MONEY if he paid cash for a used car or truck. This is just a simple example but look at the differences:
- If you saved $6,816 per year starting at 20, you can stop in 5 years and have only invested ~$34,000. Estimated Retirement Savings of $670,000+. Compare that to someone that started at age 40, had to invest $6,816 per year for 25 years totaling ~$177,000 to then have a retirement nest egg of $500,000.
- Did you notice the FREE MONEY (this is what I call it). The 20 yr old received ~$600,000 in FREE MONEY while the 40 yr old received ~$300,000 in FREE MONEY. Thank you Compounding Interest!!!
- Life Circumstances: You life will change dramatically in the future. Maybe a relocation to a high-cost of living area, being fired or experience a reduction-in-force, illness, accident, getting married and having children? Do you really think all of a sudden you will be like “gosh, I didn’t save any money for retirement and now that I’m 35 or 40 I should start including it?” Well, you probably will as you look down the road and realize you have saved nothing and that next birthday just means another year closer to voluntary or forced retirement.
- Habits: They say it takes 21 days to form a habit. If you haven’t built the “saving for retirement” muscle in your early 20s, why do you think you will all of a sudden create good savings habits in your 40s?
- We live within our means: It’s human nature to just do more. This is no different when it comes to our lifestyle living. We get a raise, we can spend more each month. We get an unexpected bonus, we can get that shiny object we have always wanted to purchase. If we don’t build the habits early, all of this extra income will go towards our lavish lifestyle or paying off the credit cards just so we can buy more stuff. Our retirement planning just gets delayed for another year, again and again.
- Ageism – If you are in a positioned where you can be tenured maybe with a pension or you don’t have to worry about getting fired, you might be in a good spot. But, ageism is a real thing. The job market is highly competitive and there is always someone younger, faster, and most likely less expensive. Plus, as you begin to age, it takes more effort to continuously self-improve to maintain your value to your company. Add ageism with bad habits and life circumstances, you are leading yourself into a disaster.
NOTE 1: Even if you are drowning in debt, including student loans, make a little effort to start saving for your retirement today. Even if it is $100 per month. It will seem like nothing initially but during this time you are starting to build the right habits, you are learning, and you might actually receive tax advantages (i.e. if you put that $100 in a pre-tax account, it may only impact you with ~$80 less in your wallet thanks to pre-tax savings advantages).
NOTE 2: If you had saved $100 per month starting at the age of 20, you will have approximately $400,000 (using a 7% annual growth) when you reach 65. Now, imagine what that money can do if you increase the amount as you earn more, free up cash by reducing debt payments, or are able to take advantage of a company match, etc.
Oversaving for retirement
Is this even a thing? This is one of the worst section headings I could ever read. There is no such thing as oversaving for retirement. How do I know? Because majority of the people in America don’t have a healthy retirement savings plan. So, before you worry about “oversaving” how about we become a nation of “savers?”
Investor’s Business Daily just did an article sharing the update from Fidelity on retirement savings accounts. Do you know what they found? They found that through this bull market, we have a record breaking year:
- There are now over 300,000 people that have cracked the $1M retirement savings in their 401(k)… that is a 27% increase
- There are now approximately 288,000 people that have cracked $1M retirement savings in their IRA.
This is good news, but it isn’t great news.
Fidelity doesn’t account for all of the brokerage accounts… so, for arguments sake, lets 5X these numbers to hopefully account for the other platforms. That would put us at about 3 million people that have saved $1M.
As of 2021, there are approximately 72 million Baby Boomers and 66 million Gen X. That is less than 2% of the “at” or “close to” retirement age with $1M in retirement savings (assuming these are the age groups where all of the million dollar plans reside). If we add in the 75 million GenY/Millennials and recognize that the average 401(k) and IRA balance is around $120,000, I don’t think we need to worry about oversaving for retirement. (Source: Boomers, Gen X, Gen Y, and Gen Z Explained)
Let’s assume you are one of the fortunate ones that have saved $1M in your retirement savings. Is that even enough? Using the 4% rule, that would allow you to draw $40,000 per year to live on. Is that going to be enough? Is that before or after you draw on Social Security. When will that happen? At the suggested age of 67? Or maybe you will take it early at 62? Will you wait until you are 70 to max out Social Security? What about healthcare?
In order to answer that, the real question is – “Have you gone through all of your expenses that you think will incur on an annual basis during retirement?” Most people will focus on the typical yearly expenses such as gas, electricity, subscriptions, food, clothing, etc. Don’t forget about the cell phone replacement every 3-5 years, new roof every 10-20 years, new carpet, etc.
So… is there such a thing as oversaving for retirement? Not in my book. And if you did, think of the legacy you are leaving behind for your children. Or, the difference you could make in the various charities you love or want to support. Or the additional travel you could possibly do.
Life is short and unpredictable
Life is short and it is unpredictable. That is the main reason why you should put your financial future in your own hands and make a plan starting today. Do not let another day go by where you don’t start thinking about your future.
Do not put yourself or your family in a situation where you will need to rely on the generosity of others (family, friends) or worst, the government. Nobody will take care of you and rescue you over the long-haul of retirement. That is why I have my motto “Your today’s self needs to take care of your tomorrow’s self.”
Sorry Hillary. I do want to thank you for taking the time to write the article. I just think Business Insider shouldn’t have published it as it could potentially be the worse advice ever given to someone; especially knowing our bad habits, historical references on lack of retirement planning, and knowing that most people aren’t savers… so, why would you think they will become savers in their 40s?
Where To Start
First, completely ignore the entirety of Hillary Hoffower’s article. Shame on Business Insider for even publishing this garbage.
Second, I would highly recommend reading JL Collins book. It is a great instruction manual that will guide you and put you on the right path. Here is my book review on The Simple Path to Wealth by JL Collins.
Third, review the other books I’ve recommended at Personal Finance Book Recommendations.
Lastly, have confidence you can do this. Regardless of your current income level and current obligations, start today even if it is a few bucks. Over the course of the next few months and years, aggressively tackle your debt and slowly increase your retirement savings.
In the FI (Financial Independence) Community, they notoriously like to say “the best time to plant a tree was yesterday, the next best time to plant a tree is today.”