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.

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