A Rational Limit to Saving

Trawling The Consumerist for something to write about I was excited to find a post entitled An Argument For 401(k) Minimizing. It turned out to be about a post at Punch Debt in the Face that, at most, argues against 401(k) maximizing. Still, that’s something.Blackboard Lecturing Crop

I like Punch Debt in the Face. Although I am clearly at least a generation too  old to fully relate, and the layout still reminds me of a ransom note, the Twitter graphic alone is worth the click. And the blog’s author, Debt Ninja, is endearingly hostile to conventional wisdom and insists on doing his own math. My kinda guy.

Debt Ninja’s post contains what ought to be a mundane discussion of reducing his 401(k) contribution from 8% to 5%. He also contributes to a Roth IRA and makes the argument that being a very rich 60 year-old in exchange for being an impoverished 25 to 59 year-old is not a good deal.

All of which ought to be, as I said, pretty mundane stuff. Saving is really no more profound than delayed gratification, forgoing consumption today in favor of consumption in the future. And there must be some kind of an optimal balance, a rational combination of spending now and spending later. In other words, there must be some level of saving that is too high.

But that is not a concept you are likely to come across in the personal finance mainstream. Working out an optimal level of saving using a spreadsheet, as Debt Ninja did, is not part of the canon of Conventional Advice. That advice is simple and clear: save more.

Because Conventional Advice assumes that everybody under-saves and over-spends. I’m not saying that’s not a decent guess about a randomly chosen American, but it’s not a universal law on which to base advice for everybody. The right advice would be to do some kind of analysis involving lifetime income, saving, investment return, expected longevity, desired spending, and so forth.

Ah, but that would be complicated. And boring. What will sell books, raise ratings, or increase internet traffic is some nice, short, actionable advice. Such as "save more."

Which brings us to one of the fundamental problems with personal finance advice. By its nature it is a mass media endeavor. It’s one guru/writer/blogger talking to thousands, or better yet millions, of people. More personalized one-on-one discussions would work better, but the economics are such that that will only ever be feasible for the relatively wealthy.

And mass advice wouldn’t be so bad if it weren’t for our need to dumb everything down to Twitter-sized nuggets. Ours is not a culture that tolerates ambiguity or complexity. Would-be personal finance pundits who are honest about how complicated it is, who pepper their advice with ifs and buts, are not likely to get very far.


  • By Steve, December 15, 2009 @ 2:50 pm

    It seems like the vast majority of americans have too much debt and too little savings. I’ve certainly known more than one person who couldn’t even muster the effort to get that all-important employer match.

    That said, the funny thing is that the people likely to be reading PF blogs are more likely to be saving enough if not too much.

    Still, some of Debt Ninja’s arguments don’t quite hold water. If he retires early he can take substantially equal periodic payments. If he buys a house he can withdraw some money for the down payment. If he wants money for random stuff at age 45, he can start planning for that now by converting the 401k to a Roth IRA, waiting 5 years and then taking money out. In fact he doesn’t even have to wait 5 years if he’s been maxing out his Roth IRA anyways, since distributions come first out of contributions, second out of conversions, and third out of earnings.

  • By Rob Bennett, December 15, 2009 @ 3:48 pm

    there must be some level of saving that is too high.

    Absolutely. I agree 100 percent, Frank. And, yes, this needs to be said far more often.

    I believe that the failure to point out that saving too much is just as bad as saving too little contributes to our low saving rate. A lot more people would develop an interest in effective saving if it were not portrayed as an activity for misers. Few of us want to be misers. Misers are losers (that’s harsh, but I think fair).

    It’s certainly true that there are more of us who spend too much than there are who save too much. But the way to persuade more to save is not to pretend that there is no limit to how much you should save. The goal should be to help people to learn how to spend and save in the right proportions. To teach people how to spend and save in the right proportions, we must acknowledge that there is such a thing as saving too much.

    It’s possible to spend too much and to save too much at the same time, by the way. You do that by spending on stuff that offers a poor long-term value proposition while electing not to spend on stuff that offers a strong long-term value proposition on grounds that you must save that money instead. Lots of us are in that boat, unfortunately.


  • By Dasha, December 15, 2009 @ 4:07 pm

    Are you writing a book yet? Why not? I wish I was a publisher so that I could convince you, instead I’m just another law student with an overpriced, useless BA in Econ.

  • By Adam, December 15, 2009 @ 6:01 pm

    I have thought about this topic a lot, and I *really* would rather drive a BMW now (early 30s) then when I’m in my 50s or worse, late 60s and retired.

    But yeah, the idea of eating cat food in my 80s has me convinced to continue to drive my 10 year old Oldsmobile Alero. My pension plan provider gives us a “are you saving enough” sheet every year that looks at my age, my savings rate, what OAS/CPP (Canada) will be when I retire and every year tells me I have way more than I need, but I still seem to save too much (13% gross + max the Canadian Roth equiv) despite myself.

  • By JFW, December 16, 2009 @ 12:22 am

    I was intrigued by the post, but I disagree with it. Mostly, he is too young with far to little saved to think about cutting back. Once he has several hundred thousand dollars in his 401k, and his annual appreciation/dividends are more than he can legally put in anyway; scale back then. I am young as well, and at this age the only way to tell if you are on track is by using linear financial calculators to predict future balances. I am not convinced of their accuarcy. Give it time, build the balances, see how your life pans out into your 30′s; then make decisions that effect your remaning financial life.

  • By Craig, December 16, 2009 @ 1:56 pm

    I hope Adam, who obviously has things together in a very enviable way, will forgive me for picking on him just a little bit. When he says, “I *really* would rather drive a BMW now (early 30s) then when I’m in my 50s,” he is walking right up to the edge of the dangerous falacies that gave us “consumption smoothing” and the like–we think about our savings in terms of luxury goods now versus luxury goods in the future. The overwhelming purpose of “retirement” saving is not to fund luxuries, but to control risk, and the risk of medical bills, nursing home fees, and lost income due to disabilities in particular. Not to die rich, but to avoid dying in penury.

    Adam, in addition to that enviable portfolio, also has the advantage of living in a civilized country, so perhaps this is a bit less of a terror to him than to Americans like myself.

    When I hear someone say, “It is possible to save too much,” well, yes, of course that is true. Every prudence can degenerate into a pathology. But when I hear someone say, “It is just as bad to save too much as it is to save too little,” I start to get twitchy. Unless you are activley _harming_ yourself through saving (foregoing medical insurance to max out an IRA?), the penalty for oversaving is denying yourself goods and services you might otherwise have enjoyed. The penalty for undersaving is destitution. And, especially in this country, destitution equals death, all too often.

    Plus, the oversaver with a legal will has the consolation of knowing that his or her money will go to relatives or charities or what have you. That is no small thing for me–I may have been a miserable SOB in life, but I like knowing that my forturne, if I leave one, will do some real good in the world.

  • By Larry, December 16, 2009 @ 3:07 pm

    I’m of two minds here. Punchdebtintheface is a lot of fun to read and I tend to agree that it is beneficial both for one’s personal well-being and for the economy as a whole to spend as well as save. I think I’m relatively frugal, but I’m never going to regret the trips I took to Europe or some of the concerts and operas I’ve seen. You only go around once, and if you never take advantage of what life has to offer, what do you have then?

    But I’m not sure I agree with Rob Bennett here: “It’s possible to spend too much and to save too much at the same time, by the way. You do that by spending on stuff that offers a poor long-term value proposition while electing not to spend on stuff that offers a strong long-term value proposition on grounds that you must save that money instead.”

    My problem here is, what constitutes a strong or poor “long-term value proposition” and who’s to say? Were my trips to France and Spain, or the upright piano I bought 25 years ago for $4000 so I could bang out Beethoven sonatas, or the occasional orchestra seat for American Ballet Theatre at the Met, poor or strong “long-term” proposition? Rob can correct me if I’ve misread him, but he appears to be making a judgment about what people should buy, rather than saying: here’s how much disposable income you appear to have, and what you do with it is entirely your choice.

    But then I read Craig, who makes very valid points about why saving is necessary especially for retirement. Many years ago,
    before Social Security was enacted, people lived far shorter lives and could be expected to die 2-3 years after being kicked out to pasture in favor of younger, stronger stock. Today, people can easily expect to live into their 80s and just as readily to be tossed into the age-discrimination garbage pail well before the supposed magic age of 65.

    Since I just turned 61, I don’t deny I’m concerned about retirement. I’ve been fortunate to survive this long without any
    serious medical, financial, employment, or legal troubles; I have minimal debt; and I have accumulated a good deal more than the average (not just the mean) in my IRA and 401(k) for my age, but I still don’t feel secure. Or rather, some days I feel more secure than others. The problem is, how do you know what you’ll actually need, when you’ll actually have to retire, if you can still get part-time work, how long you’ll live, if you’ll get seriously ill, if you’ll get sued, if Social Security will be around, etc. I’ve tried a dozen on-line retirement calculators, and each one gives me a different result, ranging from “you’re doing fine” to “you may be in trouble.”

    So on balance, PDITF would probably do well to save; at worst he will have more than he needs.

  • By s2kreno, December 16, 2009 @ 3:08 pm

    I’m with Robert Kiyosaki (Rich Dad Poor Dad). Buy assets, not consumable crap, until your assets generate enough income to cover your living expenses. Buy luxuries when you can pay cash for them. And he managed to do this while still young.

  • By Ninja, December 16, 2009 @ 5:35 pm

    Kiyosaki is a lunatic. check out this article where he trys to convince people to cease 401K contributions…



  • By Larry, December 17, 2009 @ 8:44 am

    Kiyosaki is advocating a high-risk, high-reward strategy that most likely exceeds the risk tolerance for all but a tiny handful of investors. Still, in the artile linked to, he is right about some of these points:

    There are four expenses that keep the poor and middle class struggling financially. They are:

    1. Taxes — both apparent and hidden
    2. Debt — mortgages, credit cards, and student loans.
    3. Inflation — rising food and fuel costs
    4. Retirement plans — 401(k) and savings.

    At least by stressing inflation (which cash-based gurus like Orman and Ramsey largely ignore), K is putting his finger on a critical, unavoidable risk factor that can seriously erode the value of anyone’s portfolio.

    But 401(k)s, IRAs, and the like are not necessarily negatives. In my opinion, the biggest problem with the 401(k) especially is that investors are at the mercy of the plan administrator, who is looking to line his own pockets and frequently offers too few choices as well as insufficient impartial guidance as to how employees should best manage their accounts. And hence you get innocent employees putting all their money in company stock or making similar unwise choices.

  • By Craig, December 17, 2009 @ 10:12 am

    Robert Kiyosaki is a fabulist and a salesman. (“Why can’t we let Rich Dad be a myth, like Harry Potter?”) I prefer to take my advice from Robert Malkiel, William Bernstein, Jack Bogle and Andrew Tobias.

    A 401(k) is certainly not automatically a good thing, and it is nowhere near a panacea. But if there is a company match, and there is at least one investment option other than company stock, it is _probably_ worth picking up the match before you start putting money in your IRA. If nothing else, you will probably leave that company–or it will be acquired or the plan will change–sometime before retirement, and then you can scoop up the company matching funds and roll them into an IRA that is under your control. I’ve done that myself a couple of times now.

    Of course, there’s no substitute for doing the numbers yourself. I say that with a sigh because I largely agree with William Bernstein that the overwhelming majority of people lack either the desire or the ability to effectively manage their own retirement savings.

  • By Rob Bennett, December 18, 2009 @ 11:02 am

    Rob can correct me if I’ve misread him, but he appears to be making a judgment about what people should buy, rather than saying: here’s how much disposable income you appear to have, and what you do with it is entirely your choice.

    It’s not my intent to do either of those two things, Larry.

    I am questioning the idea that there is some specified amount of “disposable income” from which we all draw. There’s a judgment involved in saying whether the income is disposable or not.

    I’m not trying to enforce my judgements on anyone else as to how they should spend their money. I am saying that the people earning the money should make these judgments.

    Saying that saving is always good and that spending is always bad takes a lot of questions off the table. I am trying to put those questions back on the table. I am trying to expand the range of possible judgments.

    For example, if you start with the premise that saving is always good, the idea of saving nothing is not even on the table. I am trying to get that one back on the table. I can see circumstances in which that would be a good choice.

    On the other hand, I can also see circumstances where saving 50 percent or more of post-tax income would be a good choice. Which situation applies is for the person earning the money to determine.


  • By Larry, December 18, 2009 @ 3:35 pm

    Well, Rob, you did speak of “poor” and “strong” value propositions (a point that was not addressed in your reply). I would never say that “saving is always good, spending always bad.” But I responded to a distinction that you yourself brought up, and which sounds like a judgment, no matter who may be making it.

  • By cybergal5184, May 6, 2010 @ 7:05 pm

    Isn’t this what “Spend til the End” entail? Consumption smoothing which is easier said than done.

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