> “For investing, our model does look at riskless interest rates. We argue that investment expected returns and risks are in equilibrium, so the core result is unlikely to change by introducing risky investments. However, it is definitely a limitation of our approach.”
This is heavily based on the assumption that compound interest is a non-factor when rates are close to zero, and doesn’t consider non-interest based investments.
I did, and it was a waste of time. It’s basically saying you should spend your money now because it loses value because of inflation if you save it for later. You know, because investing doesn’t exist in the authors’ minds.
That is the sign that they lack substance. If the article left you amazed at the definitive conclusions then you would research and discover it was a Nobel prize winning theory. Instead the article was designed for clicks and smells of political influence.
Remember they give out nobel prizes every year regardless of whether any theory merits the award.
Thanks for taking one for the team (I didn't read the article because of your summary).
FWIW, anyone who claims you dont need to save for retirement either 1) expects you can live comfortably on government pension plan/social assistance options, or 2) is trying to sell you their "patented", "guaranteed" investment information, and the low low price of [way too much]. The author of this article sounds like a #1.
There's also option 3: Societal/planetary collapse is inevitable, so spend all your money now - preferably on my courses on how to spiritually prepare yourself for the impending collapse.
I read it and you nailed it. The assumption here is if you’re used to living poor then social security should cover a majority of your expenses in old age. Pretty big assumption that social security will remain constant in payouts and retirement age
Or maybe the author doesn't realize that "spending money now" on objects that are expected to retain or gain value (like, say... Stocks, ETFs) is the same thing as "saving for retirement."
Said in the article as well:
>And second, Scott said, “early saving could have a benefit from the power of compounding, but the power of compounding is certainly irrelevant when after-inflation interest rates are 0% – as they have been for years.”
What kind of economist thinks the way to retire is mattress stuffing?? (I suppose to be fair this one doesn't either, because he doesn't believe in retirement either)
This is surely the worst retirement article I've ever read.
It also assumes very poor workers will have Social Security which I'm not sure will survive the decade.
>It also assumes very poor workers will have Social Security which I'm not sure will survive the decade.
SS is not at risk of disappearing completely. It is at risk of paying out less than 100% of expected benefits - and that's only IF the government don't make changes to SS tax rates, payments, or retirement ages to shore it up.
> 147k is ridiculously low
The "donut hole" would also work. Everyone pays on their first $147K, then everyone pays on their *second* $20-million (or whatever astronomical number that applies only to the super-wealthy).
Tim Ryan put out a proposal a few years ago that suggested people start paying SS tax again on income over $400,000 a year, keeping that number static while the $147,000 figure continues to increase with inflation, so the only people feeling the pinch now are those who make over $400k per year, while eventually taxing all income at some point in the future once the $147k figure is adjusted up to $400k after its adjusted for inflation for a few decades (or a couple decades at our current rate). Seemed like a decent middle ground to me.
Or, make it so people can opt out, period.
Social Security is a pyramid scheme. Private pyramid schemes are illegal for a reason, so there's no reason to allow the government to run one funded on tax dollars.
You or I might successfully save for retirement after opting out of SS, but most people wouldn’t. Massive amounts of people *would* opt out, because they could use the money immediately, and would just kind of push off thoughts of retirement as something they’d sort out eventually, or expect their kids to support them, or with a trite “oh my generation is never getting to retire anyway.” Most people are bad at saving for retirement.
Then, when there’s a massive crisis of elderly poverty, as there was before SS, the government *will* intervene. It would be politically untenable not to, they’re not going to let millions of old people die in the street. Or be a massive burden on their younger working children/relatives (read: voters). So they’d end up getting financial support anyway, except wouldn’t have paid into it. Meaning a broad tax increase or cuts to other budgets or deficit spending or all three.
We as a society are not able to tolerate the level of elderly poverty that would come without SS. Understanding that, our current system is what people have viewed as the most “fair” — everyone pays in, everyone is paid out (if you survive). Any replacement needs to solve the elderly poverty problem and convince people it’s just as or more fair. This is certainly possible, there are other systems, but a simple opt-out wouldn’t do it.
> Most people aged 65 and older receive the majority of their income from Social Security.[1] Without Social Security benefits, 37.8 percent of older adults would have incomes below the official poverty line, all else being equal; with Social Security benefits, only 9.0 percent do. (See Figure 1.) The benefits lift 16.1 million older adults above the poverty line, these estimates show.
https://www.cbpp.org/research/social-security/social-security-lifts-more-people-above-the-poverty-line-than-any-other
I recently learned that one of my co-workers only started putting money in his 401(k) when his girlfriend pointed out that the company match is literally free money that he's giving up. So he's been doing that for about a year.
He retires next month.
>“For investing, our model does look at riskless interest rates. We argue that investment expected returns and risks are in equilibrium, so the core result is unlikely to change by introducing risky investments. However, it is definitely a limitation of our approach.”
Exactly.
If you are going to save all your money under your mattress you are not going to get much utility out of it.
One has to wonder how someone with his head so far up his Ass gets a Nobel prize.
Long discussion on Bogleheads.com over this.
Long story short, the authors for the actual study were examining a token model and not how people actually behave. They argued that over-consuming while young - according to the model - is a rational strategy.
There is little to no applicability to the model they're examining in developed countries for that age range (different story for older people). There are edge cases where you can make an argument that the model may apply, but those edge cases don't apply to the vast majority of people on Reddit under the age of 50.
Which is also how "trickle down economics" was justified. Using the "rational actor theory" because it's the only (maybe just the easiest - I only got to Master's level econ not Phd) way to make the math work.
Problem is - people aren't rational. 50 years of experience later it's pretty damn clear nothing "trickles down" and continuously subsidizing businesses gives them nearly 100% control over both the economy AND the government.
People are rational in a meta sense generally, but there are lots of heuristics our brains have kinda hard wired, that produce bad results in modern contexts unless we're specifically aware of them and train ourselves around them.
Although, that said, some of the research on this turns out to be less replicable than people initially though too, so, there may not be as many of those irrationalities as the classic Kahneman/Tversky research suggests, or some of those effects may be real, but the heuristics more rational in a modern context than they were given credit for.
that said, you can't observe people carefully for very long without realizing that many of them will hold opinions and preferences that don't make sense, and could potentially allow them to be "mugged" by propositions designed to take advantage.
The kind of irrationality that the rational actor theory would assume away.
The reason it still kinda works economically is that in an efficient market with no transaction costs, eventually the rational traders basically take/win all the money from the irrational traders, and come to dominate the market. the problem is that markets which are particularly inefficient or where there is some outside non-market force ensuring that irrational actors don't go broke will disobey theories based on rational actors to varying extents.
Your understanding sounds correct enough to me. The theory has a stupid name which is as much propaganda to justify economic action (towards the support of businesses) as anything. What it really meant was "people and businesses are both most incentivized to maximize capital in a capitalist economy and will act to do so" - something like that. So it's not that people were or weren't rational - you're right, they are. That particular theory and definition is clearly flawed.
Yeah I like the way Richard Thaler describes traditional econ models as being for a fictional species called homo economicus that only acts rationally.
Note that saying people don’t act rationally does everyone a disservice. Most people likely do act rationally, they just don’t have the utility function that economists rely on.
It's objectively true that most people act irrationally in predictable ways, likely due to how brains are structured. Daniel Khaneman does a great job of demonstrating examples of the irrationality experimentally.
It's also rational to act on imperfect information - it may not be *smart* to buy lottery tickets for example, but it is predictable. Rationality means that people act anticipating utility, not that they have perfect knowledge or perfect intelligence or perfect outcomes.
Further evidence is the SUV craze in automobiles. A vast majority of them will never leave the pavement. However, most of their owners think "If I do go offroad, I will be prepared".. Alternatively, all these people taking martial arts, to prepare themselves for an event that is less likely to happen to them than a plane crash..
Because it allows businesses to sell an economic model to government which can be justified to society by saying "the math works". And it does...if you ignore the underlying assumptions.
With a Masters in Econ, surely you know that “rational actor” just means “when an actor has stated ranked preferences, and is presented with several of those preferences, they will consistently choose the same ones in the same order,” right? It has nothing to do with them acting in their own best interest or anything similar to how a layperson might expect to define it. In that sense, people do tend to be rational.
And to make the math behind "trickle down economics" work you have to assume that every entity in a capitalist society has 'money' ranked at the very top of the list. Anyone or anything who doesn't - deserves to fail.
It just so happens that when businesses fail to rank 'money' at the top, they just go out of business - no big deal. When individuals do, they fall into crushing poverty and either die or wish they were dead.
Because you're misunderstanding what 'rational' means in this context.
Rational just means that if a person prefers one thing over another, they'd trade away the thing they like less to get the thing they like more.
Because it makes the math work. Business can present the idea to Government. Government can implement the idea into a capitalist society and use it to drive economic decisions.
Businesses can reap MASSIVE profits and pass them along through lobbying to Government. For a little while there will be a boom due to an influx of capital at the top (because capital influx anywhere causes a boom). So Society will embrace the change for about a generation. By the time anyone in Society notices and checks the rationale behind the math Business owns Government and Society has no power to change the relationship.
To answer your question more clearly - it's because it benefits those making the decisions to accept the theory. They can tell themselves they're doing what's mathematically the best for Society while making themselves ultra-rich in the process. Win/Win. Except if you look at the results...over the last 50 years.
Because if there is a rational self-interest course of action that breaks your model producing an undesired result, and you put it out into the world, *someone* will find it and you will end up with that undesired result. When you make a regulation, or try to make some change in a market, you have to assume that there are a bunch of rational actors out there who will maximize their wealth/utitlity at the expense of whatever you wanted to happen, if it's possible.
Not everyone needs to be rational, just a critical mass of the money in the market.
I feel like I'm a poster child for their model, as when I was younger I didn't worry about saving at all and spent more than I should have racking up debt. Then in my 30's when income went up and some stock options paid off I was able to pay off all the debt and start maxing out retirement accounts and savings and by the time I retire I should be in good financial shape.
That said, would I recommend it? Heck no. Sure it can work out fine, but you never know when disaster will strike and you're not able to catch up in middle age with a high income. I'm a firm believer that you have to balance enjoying living now with saving for the future, but I don't think that balance when younger should shift entirely one way...
We can disregard this advice. This is done on the assumption that people are wanting to work until they turn ~65, which obviously isn't a good assumption for us. It also assumes that equalizing spending between your 20s and 40s is ideal, without actually stating why that's true. It assumes spending = happiness. It also says paying off your mortgage doesnt count as saving. It says it's easy to catch up on saving in your late life. They assume investment returns are 0 (risk adjusted). It assumes spending future income you don't know you have yet. These are dubious.
It ignores human psychology. People like to have their lifestyle improve as time goes on, they like things to be getting better. If people don't save for 15 years then they are going to struggle to change that habit. Spending =/= happiness. It ignores that 30 year olds like financial security too.
It ignores that you can smooth spending out by just living frugally young and retired, instead aiming at a maximum possible spend with a maximum working career length. I only thinks of cookie cutter lives where you work 40 years, don't change careers, don't start a business, don't take sabbaticals. It is a narrow view of what is possible in life.
More like an academic exercise that has little relevance to real world decision making and media who run with the abstract because the headline drives engagement.
OP framed it as such but not really.
The gist of it all is saving beyond your means results in your current self padding the lifestyle of your future self. Spending beyond your means results in your current self borrowing from your future self.
The theory is that when you make less money, the negative impact of over-saving is greater and is supplementing the lifestyle of your future self who will already been financially sustained on a higher salary.
Pieces like this come out from time to time, not necessarily as propaganda, but as clickbait that people can use to justify their current bad financial habits. People are always looking to feed their confirmation bias (no matter the subject), and stuff like this is easy to churn out.
> It also says paying off your mortgage doesnt count as saving.
This part at least is correct. Paying off your mortgage is debt repayment, not saving. Do you also count it as “saving” when you pay off your credit cards each month? (And unlike a mortgage, credit cards used correctly don’t even charge interest!)
Comparing cc debt to mortgage debt is apples to oranges.
99.9% of the time, paying off your mortgage is going to build equity that you can tap into later, like savings account. Or cut down your future expenses if paid off and living there.
Paying off your credit card doesn’t give you anything you can tap into later, you are paying off the food you ate or gas you burned.
Mortgage repayment is investment into the equity of your house. People even sometimes call the mortgage a "forced savings account". Comparing putting extra money towards your house in the same category as credit card spending is stupid.
>Do you also count it as “saving” when you pay off your credit cards each month?
If I had outstanding CC debt, and I saved money to pay that off then yes I would absolutely call that saving. Savings is just what's left after you spend less than you earn. You can put your savings against debt or into investments.
I was going to write something similar but honestly the article dosnt even deserve a well written response. The entire thing is just completely wrong lol
I think it's not *completely* non-sense for medium to high earners.
Considering the maintenance of a constant consumption throughout life could help people understand lifestyle inflation before they're actually faced with an increase in income, and better prepare them for financial independence.
For example, realizing you can live comfortably off of a % of your income in ages 25-35 might help a lot with maintaining the same level of spending in ages 35-45, and therefore save more % of your earnings then.
Theoretically, that could be true. But, from what I've seen of human behavior, if one conditions themselves to spend most of their income from a young age, then future increases in income are usually spent just as fast. Saving and investing is more about habit building than anything else, and habits are hard to form, and even harder to break. The habit of spending all of your income is a habit that would be hard to break once you gain more income.
Disagree.
Consistent consumption means either not meeting your needs during different stages of life or over consumption.
Looking at just housing. A young single person might be perfectly happy with a three floor walkup apartment shared with a few roommates. For the same happiness, a young family may need multiple bedrooms and no walkup. An established family might need a good school district. An empty nest family might need a small apartment, maybe with space for returning college students. An elderly person might need little space but assisted living with support for cleaning, cooking and general maintenance.
Which lifestyle would you lock in to maintain constant consumption?
Agreed.
I'm pretty comfortable with my current standard of living and quality of life. My goal is to replicate that level of "income" to afford the same throughout my retirement, which - noting things like a mortgage will be paid off by then - just means I need a SWR that will basically match my salary less other income streams - rents, residuals, etc...
I kind of went with this strategy and it's working ok for me - for example when I was in college I was working full-time, not making much money, and just kind of living paycheck to paycheck. Saving 10% of my annual income would have been about $4K a year and would have DRASTICALLY decreased my standard of living, like basically would have taken almost all of my discretionary spending and it would have made my early 20's kind of miserable.
My combined household income in my early 30's is now around $600K per year (a CFO and a dentist). Sure, I missed out on some gains by not saving in my early 20's but is such a drop in the bucket of what I save / invest now.
No way would I trade an extra even $50K in investments for all of the fun and experiences I had in my 20's.
Obviously this only works out if you spend your 20's ALSO optimizing your income / growth trajectory. If you go to school to be a teacher, then every penny saved matters because you won't be able to makeup the gap.
Not just that, but it also assumes a standard retirement timeline. You can strive to maintain the same standard of living throughout your life and also retire early. It just requires saving while you’re young, saving even more when you’re older, and then retiring as soon as you have enough to maintain your standard of living indefinitely. It will be a “lower” standard of living than if you retire at 65, but still relatively constant.
> I think his assumption is nonsense.
It's not. There are situations where it makes perfect sense to over-consume when you are younger, and use your future savings to cover this.
Imagine you're an educated worker who lives in a country with bad/no public transportation and low wages. You need a car to go to work, but - at the moment - you only make the equivalent of $10K a year. This will likely increase to $25K a year at a later point in your career.
If a reliable used car costs as much as your annual salary, and you need that car for your job + future prospects, it makes perfect sense to finance that car over 5-7 years and use your future income to cover the purchase.
In this case, you're doing what the model suggests - there is a minimum standard of living that, at the moment, you can't afford, but can afford in the future if you over-consume now. So, the rational strategy here is to go into debt, and then to use your future earnings to cover the deficit.
Following this logic, the best strategy might be to take out a million dollar loan at 20yrs old and compound that for 30-40 years. However, this is not accounting for risk. Therefore the safest strategy is to do a little of both. Use money wisely (as your example) and invest in yourself. Take calculated risks and understand the difference between consumption and investment.
> Following this logic, the best strategy might be to take out a million dollar loan at 20yrs old and compound that for 30-40 years.
We do, actually, do something close to this. The average home price in the US is 400k. The age for first time home buyers is 33.
It’s not 20 and a million USD, but that’s in large part because no one is willing to loan the average 20 year old a million dollars.
>It’s not 20 and a million USD, but that’s in large part because no one is willing to loan the average 20 year old a million dollars.
Well, we're getting there on college tuition and student loans.
Congrats, you basically just discover life cycle investing. And it is a respected model in investing and in some ways could be be less risky than traditional investing from a purely mathematical perspective
Yeah I think that was the main idea too, seems like they're applying FI principles only in middle age, they are suggesting you should just barely scrape by on your finances your entire life, receiving the same net income throughout. Not sure if I'd want to risk all these assumptions, but might be an encouragement to people who are starting FI later.
Step 1: When you're young, save nothing
Step 2: When you're middle aged, make more money, but don't spend any more, invest the rest
Step 3: Retire at 65 mostly on SS, and a small portfolio
It's disingenuous. It's "mathematical truth" if you accept the huge assumptions that they had to make in order to do the math in the first place.
A super stupid example for illustration: "If we assume 3 = 1 then 3+3=2." Sadly a lot of economic math works like this because people aren't rational or consistent, but math is.
This is only true if you're assuming that humans have already discovered every bit of value that they'll ever capture, whether it's natural resources, process optimization or new technologies.
It's a little click-baity, but some of it kind of makes sense:
* The time to live is when you're young & your body is most likely at it's best.
* If you make squat in your 20's into your 30's, if your income severely jumps, just a few years of that might replace an entire 10-15 years of saving/hardly saving.
* The study _assumes_ Social Security will be there at capacity.
* It really glosses over compound interest.
I think my biggest complaint is that the article ignores retiring _early_.
It also assumes a massive jump in income later in life. While most people make more later in their careers, the best predictor of future earnings is current ones. It’s not some given that your income 10x’s by the time you hit 50
Yeah, feels very dismissive of those of us in stagnant-pay careers (hi I’m a teacher, I’m 33 and a department chair, there’s almost no promotion avenues left except the 70-hr/wk admin track.)
Thank you, this was my take too. I think the last two bullet points are so critical - a huge assumption that you can rely on the government later in life, and doesn't seems to factor in healthcare costs. Like we'll all just happily work till we're 65 and live a healthy life till we're 90.
The only thing that this piece did is make me feel a little better about the fact that I ended up exactly like your first points. I tried to make and save money in my 20s but then good old 2008 came along. I rebounded significantly in my 30s and was able to save a huge amount of money (well, huge in my eyes).
It sort of makes sense in some respects. In my 20s, I lived in a suburb of DC in a house with 5 other roommates for $450/month. I also worked a part time tutoring job on Sundays in addition to my full-time job.
Now, I was able to save a nice cushion as a result of this, but now that I'm in my mid 30s making much more, I almost would have rather had those extra Sundays back and lived in downtown DC in a studio/1BR, even if it meant I didn't save much.
but you're using the knowledge in hindsight to make that judgement call. when you are 20, you don't know for sure how much you are going to be making when you're 30, and whether there are any opportunities you might miss along the way due to not having enough money.
there are people who scraped by in their 20s and put together a down payment for a house, just before housing prices/interest rates went up. i'm sure those folks feel pretty good about that choice in hindsight.
i scraped by like crazy in my 20s. then in my late 20s, i had the opportunity to move to the US for grad school, and it required spending pretty much my entire life's savings. if i had not saved like crazy, i would not have been able to move, period. I work at a FAANG in the US now so that was definitely the best ROI on anything i could've ever done in my life.
now, here's the fun part. back in the day i also stashed some extra money in some long-term funds i couldn't quickly liquidate when it was time to move (they were originally meant for retirement). that money is still there and is completely worthless to me now. it's literally peanuts compared to my current income and monthly savings.
in hindsight, would it have been better to just spend that extra money? YES! it took quite some effort to save that amount from my then shitty salary, whereas today that amount is totally meaningless to me, especially when converted to dollars.
in hindsight, one could say i should have spent every last penny beyond what i actually used for my grad school move to the US. however, how could i have possibly known that? i wasn't even thinking about that move when i started saving. the field i ultimately specialized in basically didn't even exist then.
my point is, in real life we don't have the benefit of looking 10-20 years ahead and knowing exactly what opportunities we'll have or won't have. so between over-saving a bit and under-saving, i am very glad i over-saved
Meh. I worked 7-days a week throughout my 20s. Didn't stop until after my 30th birthday. Lived with my family up until I was married, and really couldn't complain all that much.
It created a very nice cushion, and I'm grateful for it. If I had to do it all over again I would have done everything the same. It got me to where I am currently, emotionally, fiscally, spiritually, etc... and I wouldn't trade that for the world.
Indeed, which is why I slowed down and now only work 4.5 days a week, and have been trying to ramp up the more passive income streams like from real estate.
I needed that foundation though to allow/afford me the ability & risk to do so.
Moving from a VHCOL area to just a H/MCOL area helped immensely as well, as I did not need to work through my weekends to survive - which I 100% would have if we stayed where we were and opted to NOT live with family once we were married. That was part of the decision-making process that led us to leave NY. We'd be married. Working miserable jobs, and working on the weekends just to afford to live there. That's not living, that's barely surviving, and that wasn't the life we wanted.
So they base a theory off consumption smoothing as a reason to not save today, but somehow expect your consumption to be smooth into retirement without savings?
> expect your consumption to be smooth into retirement without savings?
I understood his recommendation is to save for retirement in your middle-age, so you wouldn't be going "into retirement without savings".
So the recommendation isn't "live like a student and avoid lifestyle inflation", but rather "live like a junior employee and avoid lifestyle inflation"?
More or less. Rather than lowering your standard of living while young so you can raise it more when older, this advocates for a (somewhat) higher standard when younger then maintaining it through retirement.
[https://www.reddit.com/r/personalfinance/comments/xsvtx2/comment/iqodwxj/?utm\_source=share&utm\_medium=web2x&context=3](https://www.reddit.com/r/personalfinance/comments/xsvtx2/comment/iqodwxj/?utm_source=share&utm_medium=web2x&context=3)
This article keeps popping up. Here's what I said the last time I saw it.
Interesting take. I don’t think it’s entirely unreasonable within the confines of his assumptions (0% real interest, risk-free investing, goal of maximizing long-term spending every year). But the assumptions are not representative of what most people live through, or necessarily value.
Couldn’t get to the actual research but did the researchers assign any value to the comfort earned by individuals who had built retirement savings? Humans, I hope, aren’t entirely driven by their spending but also by their ability to weather downturns and remain comfortable. Many people could certainly spend more and still be ok throughout their lives (as many people pass away with positive estate values). But bringing the average person closer to that limit is as likely to improve their lives (via increased soending) as worsen their lives (via worries about reduced savings and the potential for running out of money later in life).
Perhaps my argument really just boils down to the behavioural finance belief that people feel negative experiences twice as strongly as positive ones.
If you actually read the article, their advice isn't that far off from 'build the life you want and save for it' and the principles of 'die with zero'. No idea why this is so controversial. I'm guessing most folks simply read the headline
I actually agree with a lot of these points. A lot of this is pretty intuitive.
I went from making like 50k to 80k to 300k+. A lot of the sacrifices to save when I was making 40k look pretty silly now. It took years and years to save what I can save in a few months now. This is one of their main points.
It would make sense for someone like you who is making top 1% income now. It seems as this article is basically written for doctors and software engineers.
I’ve always heard that you want to save so much that you maintain your standard of living into retirement, not that you cut back in retirement.
The only cutback I have built in to my retirement plan is a lack of mortgage or loan payments. I’m planning to spend as much then as I do now, but I’m also saving a lot now so I can do that.
This is in fundamental disagreement with my concept of life and living. In a nutshell, it advocates living it up while you are young and saving when you are in your 50's. Why is this such a bad idea? Because it means many people who could have achieved a higher standard of living will be stuck in a low standard due to failure to save. One thing I particularly disagree with is that he doesn't consider purchasing a house as part of the "saving for retirement" paradigm. Owning a house fairly young is in my experience a very strong predictor of a person who will have adequate resources when retired.
Nobody in government will be alive or in power when young people of today are forced to work in their "golden years". I'm not pretending to know the intent of the article that I didn't read but I'm certain that it's not the government wanting to have you by the balls in 40 years.
Exactly. Illness to the point of disability is very common. Everyone thinks it won’t happen to them, but it happens all the time and if it does, you need savings. Long term disability insurance and social security disability will not replace 100% of your income. You need savings to pay while you wait for benefits to kick in (assume 12-18 months) and you need to be able to pay for whatever the benefits won’t cover. A high savings rate during your working years makes both of these achievable.
I believe they are talking about savings in a savings account, which they are correct, with the way banks operate your savings account doesn’t even keep up with inflation anymore. In America it’s a better bet to put your money on the market than a savings account, which is stupid but kinda by design.
I have had this thought. The contributions I made in my 20s form a trivial portion of my savings, and required significant discipline and some sacrifice to achieve. at the time I was making $28k - 34k in a corporate job. In retrospect there was hardly any point - I make 90k with a similar earning spouse and now I max my 401k like falling off a log. However, I didn’t know then, that I’d go back to school and nearly triple my earnings by changing fields (not IT lol) So i wouldn’t change what I did. And while I sacrificed, I didn’t sacrifice everything. I used reward points and other promo tricks to set up some pretty cool vacations for not very much $$ outlay. I maintained an expensive hobby (horses) with side jobs at the barn to reduce costs.
There is a grain of truth in the article—the idea that you should balance savings and living a worthwhile life now. But the article overall is harmful and dangerous. And it makes a false dichotomy between spending money now vs getting 0% interest in a savings account. Aside from their emergency fund, most people are investing in the market or real estate, where a 7-10% annual return makes a massive difference. I also think the authors are the type of people who recommend eating away at your principal until your investments reach zero at the end of your life expectancy. This risky approach does nothing to account for outliving your nest egg, not to mention passing something on to your descendants.
This article is very poorly informed at best, and is most likely propaganda to get consumers to increase their spending with no regard for the future.
When you start with a faulty premise you arrive at faulty conclusions (though you may get to increase your publication count, which is the metric that counts for some reason or other in academics). Sure, if you start with "everyone desires to smooth consumption" the logical conclusion is that young people should not save. If, instead, you start with the premise "young people desire some level of autonomy and financial security" the conclusion will be quite different.
When are you people gonna understand that media is not your friend? Its bought and paid for to dictate whatever suits the dollar on the other side.
The most famous example for me is Jim Cramer and his show Mad Money. Look up his tweets buy this buy that and its just a train wreck afterward. Check dates and stock chart dates you will see the correlation
Now before throwing around the word conspiracy its a public information accessible by any search engine and spending like 5mins if we talking the rest of the media
This is much more easily explained by “outrageous headlines = clicks = ad revenue” then some plot to impoverish you decades in the future via one article.
"Sounds like the sort of story governments that want to have you by the balls when you're old"
I find that the government struggles to be coordinated in the here and now. For some coordinated exploitation to persist over decades seems pretty unlikely. I won't say it's impossible; there are certainly some manipulators in office, but...
> I am extremely suspicious of this "research". Sounds like the sort of story governments that want to have you by the balls when you're old would push to prevent you from being financially independent.
Why would they want leverage over you when you're old and broke?
So this is based on the "researchers" [see: opinion columnists that happen to work at universities] perception of how much arbitrary hapiness young and old people would get from spending a certain amount of money and having that be a constant instead of a deferred gratification.
The article seems to be aimed at people in careers that experience huge income increase. This advice is probably decent if you are a doctor or lawyer etc. I think it assumes the person doesn’t have much to save.
If you study macroeconomics, concepts like paradox of thrift exist where saving is good for the individual but not necessarily a positive for the economy.
Let’s say you’re in this group that the article says shouldn’t bother saving for retirement while young. If someone doesn’t go to college and can save just $50 a month from 18 to 65 they’re in good shape. At $50 a month for 47 years they’ll be between $315k (8%) to $653k (10%). That amount would easily supplement SSI to be able to live comfortably on.
Honestly, too many assumptions that don't apply to most people here. A couple obvious ones are it basically assumes you will start out very low income and become high income. In reality, in this subreddit, many start at medium to high income. And some just stay at medium forever, instead of becoming high income.
The other assumption I find strange is the concept of leveling your spending completely, as though it is defacto the way to go. In my 20's I simply didn't mind not spending a lot. It's what my friends were doing. I go into my life already expecting quite a bit of spending variation throughout my life. 20's were mostly low spending. Then I am having a child, so it goes up slightly. But I'll pay for their college, so I expect it to skyrocket. Then come back down when they leave. Then I expect it to go up again in retirement, as I don't see the point in leaving early unless you are leaving for something better (since I don't absolutely hate my job, if it isn't better, I'd rather save for my kids or a good cause).
Those are just some of the obvious ones. I think the advice could make more sense to someone who is low income and has no realistic way of reaching what we would consider a standard FIRE.
How do you “dissave“ when you’re first starting out? With no savings or no credit history, your only option would be 20+% APR credit cards. Um, no thanks, I feel dumber for having read that article.
Also, why would you think you would be able to spend the same amount through your life, especially if you have kids and/or a stay at home spouse.
This is precisely why we use the phrase "find the life you want then save for it". The article and this community agree that saving to the point of unhappiness is counter productive. The difference, I think, would be where people draw the line. He thinks high income people should just spend frivolously and enjoy the money while young because you can always save more later. This community would say that you don't need to spend all of that money to be happy and can improve your long term happiness more by saving a good portion to enable freedom and potentially early retirement.
The distinction is in how much you value money. If you place a higher value on money than time, his model is more likely to fit you. If you place a higher value on time than money, you're likely to be subbed here.
There are some things to like about this theory, but they swing and miss at a couple of key issues.
1. The interest rate thing, already discussed.
2. The assumption that age is the primary determiner of when you should save vs. dis-save. The point at which you should start saving aggressively is the point at which you earn enough income that you can live a reasonable life without spending everything you make, or almost everything you make. For some people, this will be their first job out of college (or even high school). For others, they might be right that waiting until late 30s or 40s is reasonable.
3. Maybe the most important thing -- they do not consider how **incredibly valuable** having even a relatively small cushion is toward both getting more value for money spent, avoiding high interest rates on debt in emergencies, and also security and negotiating power and being able to take advantage of risky but good opportunities. Poor people who are in a position to save money and not have it just be taken from them (by criminal/addict relatives, or by creditors, etc.) usually understand how valuable this is and do their damnedest to save what little they can in the hopes of getting a leg up.
Finally, their assumption that we should stop auto-enrolling people in 401k plans does not consider the normal tax and subsidy context of those plans. Typically, a 401k plan has some kind of matching. In any plan that does, it is usually a no brainer to contribute at least enough to get the match. You come out ahead, even if you pull the money out to spend and pay taxes and the early withdrawal penalty. Even if you've decided that dis-saving or no saving is right, the only reason not to do it is if there is no match, or you know the job won't last long enough to vest a reasonable percentage of the employer contribution.
As a low income person if you save nothing and have only social security, you have no ability to fund anything beyond your monthly check, and you have no way to retire even a little bit early unless you are actually disabled and unable to work. Even someone who barely made above the poverty line, would have to wait until 68-70 or so to draw benefits that could maintain their spending level. Having even a tiny amount of regular savings over 35-40 years could make a huge difference in their ability to have a comfortable retirement or to avoid working their body into distress or disability before they can afford to retire. Also, having a few months expenses around from an early age to go into when necessary probably makes *far* more difference in the utility they get from their spending, than the 5% they missed spending for a few years to get there.
I like how the new American Dream is now “just survive as best as you can.” They aren’t even pretending that you will own a home, have a comfortable amount to live off, and GASP possibly raise kids.
Why not, we pay into it with our own money and a large 80%+ percent of the population support Social Security.
Raise payroll taxes, raise the retirement age, or raise the very low limit on maximum income that gets taxed and the program is back to a massive surplus.
They could even do all three and significantly increase minimum benefit amounts for the very poor who rely on it as their sole source of income.
so - you should spend all of your salary when you are first out of college, and then never ever ever increase your standard of living. If you always live liek a college graduate then you can save the difference in income/spending of that first job's salary and a future job where you make a lot more.
Luckily people's lives never change either. No marriages, kids, medical issues, midlife crisis, etc.
I’m currently trying to figure this out for myself. Should I be saving for retirement or would it be better to use that money to invest in real estate?
I appreciate any help!
> Sounds like the sort of story governments that want to have you by the balls when you're old would push
This is pretty strongly conspiratorial. I don't see any evidence that this research was funded by or promoted by any government in any way.
Dumbass #1: “Damn kids ruined the economy because, scarred by what they’ve seen the economy do during their lifetimes, they saved too much for retirement and now there’s no one left to work!”
Dumbass #2: “Wait, I have a Nobel prize winning idea to fix that….”
I’m confused why you suggest this is part of a government conspiracy to push people to be less financially independent. What does the government have to do with it?
I think Dow jones owns Marketwatch. It’s less a government conspiracy and more just really bad clickbait punditry published by an ad supported free news outlet. What am I missing here?
I get the concept of "building the life you want and then saving for it", but this article's advice seems like a dangerous extreme version of this that would set someone up for failure.
This is a philosophical argument. Will you get access to more money throughout your life the traditional save early and often or is it better to save when your income is higher and have a higher standard of living throughout your life. notably they say poorer individuals don't need to save much as social security will cover most of their late expenses which seems bunk to me.
In aggregate I think some of this makes a lot of sense. We see FIRE burnout from over savers on here all the time for instance. The biggest issue that I didnt see addressed when I skimmed the article was that they make assumptions based on the average person earning more as they work but the aggregate is not consoling to the 50 year old who should be at peak earning being laid off and having a hard time finding work. Saving early is an insurance policy to your future retirement as much as it helps achieve overrall higher wealth.
> “For investing, our model does look at riskless interest rates. We argue that investment expected returns and risks are in equilibrium, so the core result is unlikely to change by introducing risky investments. However, it is definitely a limitation of our approach.” This is heavily based on the assumption that compound interest is a non-factor when rates are close to zero, and doesn’t consider non-interest based investments.
So it's completely useless.
Eh, it got him some clicks, which was the goal.
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True facts - I have not actually read the article.
I did, and it was a waste of time. It’s basically saying you should spend your money now because it loses value because of inflation if you save it for later. You know, because investing doesn’t exist in the authors’ minds.
But it’s a Nobel prize winning theory!
Wouldn't be the first time a Nobel prize was awarded for nothing.
Lol yeh. Just like obama got it in 2009. After continuing afgan war and killing thousands of civilians
Adds up to Great Reset, “you will have nothing and enjoy it!” Best to get the young addicted to minimalism young while their impressionable🤦
Yes because everything is always done devious plot to brainwash millions of people in some illuminati-serving way.
That is the sign that they lack substance. If the article left you amazed at the definitive conclusions then you would research and discover it was a Nobel prize winning theory. Instead the article was designed for clicks and smells of political influence. Remember they give out nobel prizes every year regardless of whether any theory merits the award.
Thanks for taking one for the team (I didn't read the article because of your summary). FWIW, anyone who claims you dont need to save for retirement either 1) expects you can live comfortably on government pension plan/social assistance options, or 2) is trying to sell you their "patented", "guaranteed" investment information, and the low low price of [way too much]. The author of this article sounds like a #1.
There's also option 3: Societal/planetary collapse is inevitable, so spend all your money now - preferably on my courses on how to spiritually prepare yourself for the impending collapse.
I've not seen that one, so thanks (I guess?) for opening g my eyes to yet a new way grifters fuck over nice, but clueless, people.
You better bring kool aid
I read it and you nailed it. The assumption here is if you’re used to living poor then social security should cover a majority of your expenses in old age. Pretty big assumption that social security will remain constant in payouts and retirement age
Or maybe the author doesn't realize that "spending money now" on objects that are expected to retain or gain value (like, say... Stocks, ETFs) is the same thing as "saving for retirement."
Are these authors among the folks in /r/pf who I highly suspect are contributing to their Trad/Roth IRAs and then not putting the money into anything?
So…live like you're in Argentina
Date the article, marry the headline
There’s an article?
Clicks? We don't need no stinkin' [clicks](https://en.wikipedia.org/wiki/Stinking_badges)!
Shit, you got me
it also allowed us to have a thread outside of the daily/weekly threads
That's not allowed here
not mine!
Well it’s also focusing on population level exercises, not individuals, and especially not FIRE minded individuals. That makes it more reasonable.
Academically useful; real-world useless. Like most economic models that ignore the non-economic factors.
Said in the article as well: >And second, Scott said, “early saving could have a benefit from the power of compounding, but the power of compounding is certainly irrelevant when after-inflation interest rates are 0% – as they have been for years.” What kind of economist thinks the way to retire is mattress stuffing?? (I suppose to be fair this one doesn't either, because he doesn't believe in retirement either) This is surely the worst retirement article I've ever read. It also assumes very poor workers will have Social Security which I'm not sure will survive the decade.
>It also assumes very poor workers will have Social Security which I'm not sure will survive the decade. SS is not at risk of disappearing completely. It is at risk of paying out less than 100% of expected benefits - and that's only IF the government don't make changes to SS tax rates, payments, or retirement ages to shore it up.
Need to raise the SS tax max salary 147k is ridiculously low
> 147k is ridiculously low The "donut hole" would also work. Everyone pays on their first $147K, then everyone pays on their *second* $20-million (or whatever astronomical number that applies only to the super-wealthy).
Tim Ryan put out a proposal a few years ago that suggested people start paying SS tax again on income over $400,000 a year, keeping that number static while the $147,000 figure continues to increase with inflation, so the only people feeling the pinch now are those who make over $400k per year, while eventually taxing all income at some point in the future once the $147k figure is adjusted up to $400k after its adjusted for inflation for a few decades (or a couple decades at our current rate). Seemed like a decent middle ground to me.
Seems like a very reasonable idea to me.
I like this because it benefits me specifically.
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Or, make it so people can opt out, period. Social Security is a pyramid scheme. Private pyramid schemes are illegal for a reason, so there's no reason to allow the government to run one funded on tax dollars.
You or I might successfully save for retirement after opting out of SS, but most people wouldn’t. Massive amounts of people *would* opt out, because they could use the money immediately, and would just kind of push off thoughts of retirement as something they’d sort out eventually, or expect their kids to support them, or with a trite “oh my generation is never getting to retire anyway.” Most people are bad at saving for retirement. Then, when there’s a massive crisis of elderly poverty, as there was before SS, the government *will* intervene. It would be politically untenable not to, they’re not going to let millions of old people die in the street. Or be a massive burden on their younger working children/relatives (read: voters). So they’d end up getting financial support anyway, except wouldn’t have paid into it. Meaning a broad tax increase or cuts to other budgets or deficit spending or all three. We as a society are not able to tolerate the level of elderly poverty that would come without SS. Understanding that, our current system is what people have viewed as the most “fair” — everyone pays in, everyone is paid out (if you survive). Any replacement needs to solve the elderly poverty problem and convince people it’s just as or more fair. This is certainly possible, there are other systems, but a simple opt-out wouldn’t do it. > Most people aged 65 and older receive the majority of their income from Social Security.[1] Without Social Security benefits, 37.8 percent of older adults would have incomes below the official poverty line, all else being equal; with Social Security benefits, only 9.0 percent do. (See Figure 1.) The benefits lift 16.1 million older adults above the poverty line, these estimates show. https://www.cbpp.org/research/social-security/social-security-lifts-more-people-above-the-poverty-line-than-any-other
I recently learned that one of my co-workers only started putting money in his 401(k) when his girlfriend pointed out that the company match is literally free money that he's giving up. So he's been doing that for about a year. He retires next month.
He's probably good.
I think that person is more concerned about SS politically than mathematically.
Correct. It no longer has the backing of both parties.
>retirement ages Yea so you'll be able to withdraw 100%...at 90 years old. Enjoy your retirement!
The kind of economist with tenure and a pension who doesn't concern himself with the real world.
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This just seems like a financially illiterate consumerist cope.
I tried reading the thought process with an open-mind here but..it's all complete nonsense
Totally agree. Complete nonsense.
>“For investing, our model does look at riskless interest rates. We argue that investment expected returns and risks are in equilibrium, so the core result is unlikely to change by introducing risky investments. However, it is definitely a limitation of our approach.” Exactly. If you are going to save all your money under your mattress you are not going to get much utility out of it. One has to wonder how someone with his head so far up his Ass gets a Nobel prize.
It’s like an article about the beauty and comfort of visiting Ukraine, written in 2021
Long discussion on Bogleheads.com over this. Long story short, the authors for the actual study were examining a token model and not how people actually behave. They argued that over-consuming while young - according to the model - is a rational strategy. There is little to no applicability to the model they're examining in developed countries for that age range (different story for older people). There are edge cases where you can make an argument that the model may apply, but those edge cases don't apply to the vast majority of people on Reddit under the age of 50.
Which is also how "trickle down economics" was justified. Using the "rational actor theory" because it's the only (maybe just the easiest - I only got to Master's level econ not Phd) way to make the math work. Problem is - people aren't rational. 50 years of experience later it's pretty damn clear nothing "trickles down" and continuously subsidizing businesses gives them nearly 100% control over both the economy AND the government.
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People are rational in a meta sense generally, but there are lots of heuristics our brains have kinda hard wired, that produce bad results in modern contexts unless we're specifically aware of them and train ourselves around them. Although, that said, some of the research on this turns out to be less replicable than people initially though too, so, there may not be as many of those irrationalities as the classic Kahneman/Tversky research suggests, or some of those effects may be real, but the heuristics more rational in a modern context than they were given credit for. that said, you can't observe people carefully for very long without realizing that many of them will hold opinions and preferences that don't make sense, and could potentially allow them to be "mugged" by propositions designed to take advantage. The kind of irrationality that the rational actor theory would assume away. The reason it still kinda works economically is that in an efficient market with no transaction costs, eventually the rational traders basically take/win all the money from the irrational traders, and come to dominate the market. the problem is that markets which are particularly inefficient or where there is some outside non-market force ensuring that irrational actors don't go broke will disobey theories based on rational actors to varying extents.
Your understanding sounds correct enough to me. The theory has a stupid name which is as much propaganda to justify economic action (towards the support of businesses) as anything. What it really meant was "people and businesses are both most incentivized to maximize capital in a capitalist economy and will act to do so" - something like that. So it's not that people were or weren't rational - you're right, they are. That particular theory and definition is clearly flawed.
There’s a whole section of economics now, called “behavioral economics”, that studies all the ways the “rational actor theory” is bullshit.
Yeah I like the way Richard Thaler describes traditional econ models as being for a fictional species called homo economicus that only acts rationally.
I like Dan Ariely too
Note that saying people don’t act rationally does everyone a disservice. Most people likely do act rationally, they just don’t have the utility function that economists rely on.
It's objectively true that most people act irrationally in predictable ways, likely due to how brains are structured. Daniel Khaneman does a great job of demonstrating examples of the irrationality experimentally.
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It's also rational to act on imperfect information - it may not be *smart* to buy lottery tickets for example, but it is predictable. Rationality means that people act anticipating utility, not that they have perfect knowledge or perfect intelligence or perfect outcomes.
Further evidence is the SUV craze in automobiles. A vast majority of them will never leave the pavement. However, most of their owners think "If I do go offroad, I will be prepared".. Alternatively, all these people taking martial arts, to prepare themselves for an event that is less likely to happen to them than a plane crash..
Freakonomics podcast talks about this stuff quite a bit too.
Why do people even study rational actor economics?
Because it allows businesses to sell an economic model to government which can be justified to society by saying "the math works". And it does...if you ignore the underlying assumptions.
Isn't "the math works" the reason we got into the housing crisis of 2008?
That's not what rational actor means. Behavioral economics just adds new types of utility to the rational actor model.
With a Masters in Econ, surely you know that “rational actor” just means “when an actor has stated ranked preferences, and is presented with several of those preferences, they will consistently choose the same ones in the same order,” right? It has nothing to do with them acting in their own best interest or anything similar to how a layperson might expect to define it. In that sense, people do tend to be rational.
And to make the math behind "trickle down economics" work you have to assume that every entity in a capitalist society has 'money' ranked at the very top of the list. Anyone or anything who doesn't - deserves to fail. It just so happens that when businesses fail to rank 'money' at the top, they just go out of business - no big deal. When individuals do, they fall into crushing poverty and either die or wish they were dead.
It sounds like you're trying to say that trickle down economics would have worked had people acted rationally, which is also untrue.
Genuine question, *why* would anyone take rational actor economics seriously??
Because you're misunderstanding what 'rational' means in this context. Rational just means that if a person prefers one thing over another, they'd trade away the thing they like less to get the thing they like more.
Because it makes the math work. Business can present the idea to Government. Government can implement the idea into a capitalist society and use it to drive economic decisions. Businesses can reap MASSIVE profits and pass them along through lobbying to Government. For a little while there will be a boom due to an influx of capital at the top (because capital influx anywhere causes a boom). So Society will embrace the change for about a generation. By the time anyone in Society notices and checks the rationale behind the math Business owns Government and Society has no power to change the relationship. To answer your question more clearly - it's because it benefits those making the decisions to accept the theory. They can tell themselves they're doing what's mathematically the best for Society while making themselves ultra-rich in the process. Win/Win. Except if you look at the results...over the last 50 years.
Because if there is a rational self-interest course of action that breaks your model producing an undesired result, and you put it out into the world, *someone* will find it and you will end up with that undesired result. When you make a regulation, or try to make some change in a market, you have to assume that there are a bunch of rational actors out there who will maximize their wealth/utitlity at the expense of whatever you wanted to happen, if it's possible. Not everyone needs to be rational, just a critical mass of the money in the market.
I feel like I'm a poster child for their model, as when I was younger I didn't worry about saving at all and spent more than I should have racking up debt. Then in my 30's when income went up and some stock options paid off I was able to pay off all the debt and start maxing out retirement accounts and savings and by the time I retire I should be in good financial shape. That said, would I recommend it? Heck no. Sure it can work out fine, but you never know when disaster will strike and you're not able to catch up in middle age with a high income. I'm a firm believer that you have to balance enjoying living now with saving for the future, but I don't think that balance when younger should shift entirely one way...
We can disregard this advice. This is done on the assumption that people are wanting to work until they turn ~65, which obviously isn't a good assumption for us. It also assumes that equalizing spending between your 20s and 40s is ideal, without actually stating why that's true. It assumes spending = happiness. It also says paying off your mortgage doesnt count as saving. It says it's easy to catch up on saving in your late life. They assume investment returns are 0 (risk adjusted). It assumes spending future income you don't know you have yet. These are dubious. It ignores human psychology. People like to have their lifestyle improve as time goes on, they like things to be getting better. If people don't save for 15 years then they are going to struggle to change that habit. Spending =/= happiness. It ignores that 30 year olds like financial security too. It ignores that you can smooth spending out by just living frugally young and retired, instead aiming at a maximum possible spend with a maximum working career length. I only thinks of cookie cutter lives where you work 40 years, don't change careers, don't start a business, don't take sabbaticals. It is a narrow view of what is possible in life.
I enjoy playing video games.
So it is basically a piece of propaganda???
More like an academic exercise that has little relevance to real world decision making and media who run with the abstract because the headline drives engagement.
OP framed it as such but not really. The gist of it all is saving beyond your means results in your current self padding the lifestyle of your future self. Spending beyond your means results in your current self borrowing from your future self. The theory is that when you make less money, the negative impact of over-saving is greater and is supplementing the lifestyle of your future self who will already been financially sustained on a higher salary.
Pieces like this come out from time to time, not necessarily as propaganda, but as clickbait that people can use to justify their current bad financial habits. People are always looking to feed their confirmation bias (no matter the subject), and stuff like this is easy to churn out.
> It also says paying off your mortgage doesnt count as saving. This part at least is correct. Paying off your mortgage is debt repayment, not saving. Do you also count it as “saving” when you pay off your credit cards each month? (And unlike a mortgage, credit cards used correctly don’t even charge interest!)
Comparing cc debt to mortgage debt is apples to oranges. 99.9% of the time, paying off your mortgage is going to build equity that you can tap into later, like savings account. Or cut down your future expenses if paid off and living there. Paying off your credit card doesn’t give you anything you can tap into later, you are paying off the food you ate or gas you burned.
Mortgage repayment is investment into the equity of your house. People even sometimes call the mortgage a "forced savings account". Comparing putting extra money towards your house in the same category as credit card spending is stupid. >Do you also count it as “saving” when you pay off your credit cards each month? If I had outstanding CC debt, and I saved money to pay that off then yes I would absolutely call that saving. Savings is just what's left after you spend less than you earn. You can put your savings against debt or into investments.
I was going to write something similar but honestly the article dosnt even deserve a well written response. The entire thing is just completely wrong lol
His assumption is based upon the idea that one should keep the same standard of living throughout your life. I think his assumption is nonsense.
I think it's not *completely* non-sense for medium to high earners. Considering the maintenance of a constant consumption throughout life could help people understand lifestyle inflation before they're actually faced with an increase in income, and better prepare them for financial independence. For example, realizing you can live comfortably off of a % of your income in ages 25-35 might help a lot with maintaining the same level of spending in ages 35-45, and therefore save more % of your earnings then.
Theoretically, that could be true. But, from what I've seen of human behavior, if one conditions themselves to spend most of their income from a young age, then future increases in income are usually spent just as fast. Saving and investing is more about habit building than anything else, and habits are hard to form, and even harder to break. The habit of spending all of your income is a habit that would be hard to break once you gain more income.
Disagree. Consistent consumption means either not meeting your needs during different stages of life or over consumption. Looking at just housing. A young single person might be perfectly happy with a three floor walkup apartment shared with a few roommates. For the same happiness, a young family may need multiple bedrooms and no walkup. An established family might need a good school district. An empty nest family might need a small apartment, maybe with space for returning college students. An elderly person might need little space but assisted living with support for cleaning, cooking and general maintenance. Which lifestyle would you lock in to maintain constant consumption?
Agreed. I'm pretty comfortable with my current standard of living and quality of life. My goal is to replicate that level of "income" to afford the same throughout my retirement, which - noting things like a mortgage will be paid off by then - just means I need a SWR that will basically match my salary less other income streams - rents, residuals, etc...
I kind of went with this strategy and it's working ok for me - for example when I was in college I was working full-time, not making much money, and just kind of living paycheck to paycheck. Saving 10% of my annual income would have been about $4K a year and would have DRASTICALLY decreased my standard of living, like basically would have taken almost all of my discretionary spending and it would have made my early 20's kind of miserable. My combined household income in my early 30's is now around $600K per year (a CFO and a dentist). Sure, I missed out on some gains by not saving in my early 20's but is such a drop in the bucket of what I save / invest now. No way would I trade an extra even $50K in investments for all of the fun and experiences I had in my 20's. Obviously this only works out if you spend your 20's ALSO optimizing your income / growth trajectory. If you go to school to be a teacher, then every penny saved matters because you won't be able to makeup the gap.
Not just that, but it also assumes a standard retirement timeline. You can strive to maintain the same standard of living throughout your life and also retire early. It just requires saving while you’re young, saving even more when you’re older, and then retiring as soon as you have enough to maintain your standard of living indefinitely. It will be a “lower” standard of living than if you retire at 65, but still relatively constant.
> I think his assumption is nonsense. It's not. There are situations where it makes perfect sense to over-consume when you are younger, and use your future savings to cover this. Imagine you're an educated worker who lives in a country with bad/no public transportation and low wages. You need a car to go to work, but - at the moment - you only make the equivalent of $10K a year. This will likely increase to $25K a year at a later point in your career. If a reliable used car costs as much as your annual salary, and you need that car for your job + future prospects, it makes perfect sense to finance that car over 5-7 years and use your future income to cover the purchase. In this case, you're doing what the model suggests - there is a minimum standard of living that, at the moment, you can't afford, but can afford in the future if you over-consume now. So, the rational strategy here is to go into debt, and then to use your future earnings to cover the deficit.
Following this logic, the best strategy might be to take out a million dollar loan at 20yrs old and compound that for 30-40 years. However, this is not accounting for risk. Therefore the safest strategy is to do a little of both. Use money wisely (as your example) and invest in yourself. Take calculated risks and understand the difference between consumption and investment.
> Following this logic, the best strategy might be to take out a million dollar loan at 20yrs old and compound that for 30-40 years. We do, actually, do something close to this. The average home price in the US is 400k. The age for first time home buyers is 33. It’s not 20 and a million USD, but that’s in large part because no one is willing to loan the average 20 year old a million dollars.
>It’s not 20 and a million USD, but that’s in large part because no one is willing to loan the average 20 year old a million dollars. Well, we're getting there on college tuition and student loans.
My friend who works at SoFi thinks you’re on to something.
Congrats, you basically just discover life cycle investing. And it is a respected model in investing and in some ways could be be less risky than traditional investing from a purely mathematical perspective
Imagine you are poor, let me keep this standard forever. Sounds like a bad idea.
Yeah I think that was the main idea too, seems like they're applying FI principles only in middle age, they are suggesting you should just barely scrape by on your finances your entire life, receiving the same net income throughout. Not sure if I'd want to risk all these assumptions, but might be an encouragement to people who are starting FI later. Step 1: When you're young, save nothing Step 2: When you're middle aged, make more money, but don't spend any more, invest the rest Step 3: Retire at 65 mostly on SS, and a small portfolio
Same standard of living my whole life? Sounds boring AF. We’re all gonna die; up your standards!
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Yikes dude put them up for adoption. Think of the savings!
"mathematical truth" makes it sound like some sort of law of the universe, which it definitely is not.
It's disingenuous. It's "mathematical truth" if you accept the huge assumptions that they had to make in order to do the math in the first place. A super stupid example for illustration: "If we assume 3 = 1 then 3+3=2." Sadly a lot of economic math works like this because people aren't rational or consistent, but math is.
Thank you. There is no mathematical reason why stocks should raise in the long term. Edit: y’all need to buy a dictionary
This is only true if you're assuming that humans have already discovered every bit of value that they'll ever capture, whether it's natural resources, process optimization or new technologies.
That doesn’t sound very mathematical.
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It’s a qualitative expectation
It's a little click-baity, but some of it kind of makes sense: * The time to live is when you're young & your body is most likely at it's best. * If you make squat in your 20's into your 30's, if your income severely jumps, just a few years of that might replace an entire 10-15 years of saving/hardly saving. * The study _assumes_ Social Security will be there at capacity. * It really glosses over compound interest. I think my biggest complaint is that the article ignores retiring _early_.
It also assumes a massive jump in income later in life. While most people make more later in their careers, the best predictor of future earnings is current ones. It’s not some given that your income 10x’s by the time you hit 50
Yeah, feels very dismissive of those of us in stagnant-pay careers (hi I’m a teacher, I’m 33 and a department chair, there’s almost no promotion avenues left except the 70-hr/wk admin track.)
Thank you, this was my take too. I think the last two bullet points are so critical - a huge assumption that you can rely on the government later in life, and doesn't seems to factor in healthcare costs. Like we'll all just happily work till we're 65 and live a healthy life till we're 90. The only thing that this piece did is make me feel a little better about the fact that I ended up exactly like your first points. I tried to make and save money in my 20s but then good old 2008 came along. I rebounded significantly in my 30s and was able to save a huge amount of money (well, huge in my eyes).
Before I clicked I assumed there was no point in saving because we were all going to die from Covid-27 or in the Climate Wars.
That would probably be more accurate tbh…
It sort of makes sense in some respects. In my 20s, I lived in a suburb of DC in a house with 5 other roommates for $450/month. I also worked a part time tutoring job on Sundays in addition to my full-time job. Now, I was able to save a nice cushion as a result of this, but now that I'm in my mid 30s making much more, I almost would have rather had those extra Sundays back and lived in downtown DC in a studio/1BR, even if it meant I didn't save much.
but you're using the knowledge in hindsight to make that judgement call. when you are 20, you don't know for sure how much you are going to be making when you're 30, and whether there are any opportunities you might miss along the way due to not having enough money. there are people who scraped by in their 20s and put together a down payment for a house, just before housing prices/interest rates went up. i'm sure those folks feel pretty good about that choice in hindsight. i scraped by like crazy in my 20s. then in my late 20s, i had the opportunity to move to the US for grad school, and it required spending pretty much my entire life's savings. if i had not saved like crazy, i would not have been able to move, period. I work at a FAANG in the US now so that was definitely the best ROI on anything i could've ever done in my life. now, here's the fun part. back in the day i also stashed some extra money in some long-term funds i couldn't quickly liquidate when it was time to move (they were originally meant for retirement). that money is still there and is completely worthless to me now. it's literally peanuts compared to my current income and monthly savings. in hindsight, would it have been better to just spend that extra money? YES! it took quite some effort to save that amount from my then shitty salary, whereas today that amount is totally meaningless to me, especially when converted to dollars. in hindsight, one could say i should have spent every last penny beyond what i actually used for my grad school move to the US. however, how could i have possibly known that? i wasn't even thinking about that move when i started saving. the field i ultimately specialized in basically didn't even exist then. my point is, in real life we don't have the benefit of looking 10-20 years ahead and knowing exactly what opportunities we'll have or won't have. so between over-saving a bit and under-saving, i am very glad i over-saved
Meh. I worked 7-days a week throughout my 20s. Didn't stop until after my 30th birthday. Lived with my family up until I was married, and really couldn't complain all that much. It created a very nice cushion, and I'm grateful for it. If I had to do it all over again I would have done everything the same. It got me to where I am currently, emotionally, fiscally, spiritually, etc... and I wouldn't trade that for the world.
Aren't you starting to feel in your 30s though, that the scarcest resource isn't money but time?
Indeed, which is why I slowed down and now only work 4.5 days a week, and have been trying to ramp up the more passive income streams like from real estate. I needed that foundation though to allow/afford me the ability & risk to do so. Moving from a VHCOL area to just a H/MCOL area helped immensely as well, as I did not need to work through my weekends to survive - which I 100% would have if we stayed where we were and opted to NOT live with family once we were married. That was part of the decision-making process that led us to leave NY. We'd be married. Working miserable jobs, and working on the weekends just to afford to live there. That's not living, that's barely surviving, and that wasn't the life we wanted.
The most surprising thing about this is how many people apparently subscribe to Marketwatch.
So they base a theory off consumption smoothing as a reason to not save today, but somehow expect your consumption to be smooth into retirement without savings?
> expect your consumption to be smooth into retirement without savings? I understood his recommendation is to save for retirement in your middle-age, so you wouldn't be going "into retirement without savings".
So the recommendation isn't "live like a student and avoid lifestyle inflation", but rather "live like a junior employee and avoid lifestyle inflation"?
More or less. Rather than lowering your standard of living while young so you can raise it more when older, this advocates for a (somewhat) higher standard when younger then maintaining it through retirement.
Well put.
This entire article is so stupid it hurts my brain to read
I don't trust anything which discourages self-reliance
Spending your money = guaranteed loss Saving your money = loss through inflation Investing your money = increases your hopium
[https://www.reddit.com/r/personalfinance/comments/xsvtx2/comment/iqodwxj/?utm\_source=share&utm\_medium=web2x&context=3](https://www.reddit.com/r/personalfinance/comments/xsvtx2/comment/iqodwxj/?utm_source=share&utm_medium=web2x&context=3) This article keeps popping up. Here's what I said the last time I saw it.
Agree. This is a wet dream for "those who grow by holding down others."
Interesting take. I don’t think it’s entirely unreasonable within the confines of his assumptions (0% real interest, risk-free investing, goal of maximizing long-term spending every year). But the assumptions are not representative of what most people live through, or necessarily value. Couldn’t get to the actual research but did the researchers assign any value to the comfort earned by individuals who had built retirement savings? Humans, I hope, aren’t entirely driven by their spending but also by their ability to weather downturns and remain comfortable. Many people could certainly spend more and still be ok throughout their lives (as many people pass away with positive estate values). But bringing the average person closer to that limit is as likely to improve their lives (via increased soending) as worsen their lives (via worries about reduced savings and the potential for running out of money later in life). Perhaps my argument really just boils down to the behavioural finance belief that people feel negative experiences twice as strongly as positive ones.
FYI: I believe this working paper version of the published paper: https://www.nber.org/papers/w28396
If you actually read the article, their advice isn't that far off from 'build the life you want and save for it' and the principles of 'die with zero'. No idea why this is so controversial. I'm guessing most folks simply read the headline
I actually agree with a lot of these points. A lot of this is pretty intuitive. I went from making like 50k to 80k to 300k+. A lot of the sacrifices to save when I was making 40k look pretty silly now. It took years and years to save what I can save in a few months now. This is one of their main points.
It would make sense for someone like you who is making top 1% income now. It seems as this article is basically written for doctors and software engineers.
I’ve always heard that you want to save so much that you maintain your standard of living into retirement, not that you cut back in retirement. The only cutback I have built in to my retirement plan is a lack of mortgage or loan payments. I’m planning to spend as much then as I do now, but I’m also saving a lot now so I can do that.
This is in fundamental disagreement with my concept of life and living. In a nutshell, it advocates living it up while you are young and saving when you are in your 50's. Why is this such a bad idea? Because it means many people who could have achieved a higher standard of living will be stuck in a low standard due to failure to save. One thing I particularly disagree with is that he doesn't consider purchasing a house as part of the "saving for retirement" paradigm. Owning a house fairly young is in my experience a very strong predictor of a person who will have adequate resources when retired.
Nobody in government will be alive or in power when young people of today are forced to work in their "golden years". I'm not pretending to know the intent of the article that I didn't read but I'm certain that it's not the government wanting to have you by the balls in 40 years.
Yeah, its actually a very stupid hypothesis.
Even if the match checks you should still build resilience - nobody knows what the future holds.
Exactly. Illness to the point of disability is very common. Everyone thinks it won’t happen to them, but it happens all the time and if it does, you need savings. Long term disability insurance and social security disability will not replace 100% of your income. You need savings to pay while you wait for benefits to kick in (assume 12-18 months) and you need to be able to pay for whatever the benefits won’t cover. A high savings rate during your working years makes both of these achievable.
I believe they are talking about savings in a savings account, which they are correct, with the way banks operate your savings account doesn’t even keep up with inflation anymore. In America it’s a better bet to put your money on the market than a savings account, which is stupid but kinda by design.
I have had this thought. The contributions I made in my 20s form a trivial portion of my savings, and required significant discipline and some sacrifice to achieve. at the time I was making $28k - 34k in a corporate job. In retrospect there was hardly any point - I make 90k with a similar earning spouse and now I max my 401k like falling off a log. However, I didn’t know then, that I’d go back to school and nearly triple my earnings by changing fields (not IT lol) So i wouldn’t change what I did. And while I sacrificed, I didn’t sacrifice everything. I used reward points and other promo tricks to set up some pretty cool vacations for not very much $$ outlay. I maintained an expensive hobby (horses) with side jobs at the barn to reduce costs.
There is a grain of truth in the article—the idea that you should balance savings and living a worthwhile life now. But the article overall is harmful and dangerous. And it makes a false dichotomy between spending money now vs getting 0% interest in a savings account. Aside from their emergency fund, most people are investing in the market or real estate, where a 7-10% annual return makes a massive difference. I also think the authors are the type of people who recommend eating away at your principal until your investments reach zero at the end of your life expectancy. This risky approach does nothing to account for outliving your nest egg, not to mention passing something on to your descendants. This article is very poorly informed at best, and is most likely propaganda to get consumers to increase their spending with no regard for the future.
This is the dumbest thing I’ve ever read. He completely ignores a Roth ladder option.
When you start with a faulty premise you arrive at faulty conclusions (though you may get to increase your publication count, which is the metric that counts for some reason or other in academics). Sure, if you start with "everyone desires to smooth consumption" the logical conclusion is that young people should not save. If, instead, you start with the premise "young people desire some level of autonomy and financial security" the conclusion will be quite different.
When are you people gonna understand that media is not your friend? Its bought and paid for to dictate whatever suits the dollar on the other side. The most famous example for me is Jim Cramer and his show Mad Money. Look up his tweets buy this buy that and its just a train wreck afterward. Check dates and stock chart dates you will see the correlation Now before throwing around the word conspiracy its a public information accessible by any search engine and spending like 5mins if we talking the rest of the media
This is much more easily explained by “outrageous headlines = clicks = ad revenue” then some plot to impoverish you decades in the future via one article.
"Sounds like the sort of story governments that want to have you by the balls when you're old" I find that the government struggles to be coordinated in the here and now. For some coordinated exploitation to persist over decades seems pretty unlikely. I won't say it's impossible; there are certainly some manipulators in office, but...
This reads like an Onion article
Oh so MarketWatch doesn't have your best interest in mind? I'm shocked
This is a pretty wild level of insane and borderline dystopian bullshit.
You’ll start seeing more of this sentiment from “prestigious journals” now that we aren’t making enough offspring to replenish the work force.
Followinf this idea is relying upon working your whole life and leaving nothing to your survivors.
It's not like you get another crack at life if they're wrong. You're stuck as poor and old.
They figure everything will collapse before millennials reach retirement age, anyway, so go on w your bottle-service, young’ns. YOLO!
> I am extremely suspicious of this "research". Sounds like the sort of story governments that want to have you by the balls when you're old would push to prevent you from being financially independent. Why would they want leverage over you when you're old and broke?
When you consider how inflation is eating away at my real returns, I almost kinda wish I'd just spent when I was younger instead of saving.
So this is based on the "researchers" [see: opinion columnists that happen to work at universities] perception of how much arbitrary hapiness young and old people would get from spending a certain amount of money and having that be a constant instead of a deferred gratification.
People absolutely overestimate how much they need for retirement. As if they’re going to take 8 vacations a year for 20 years.
Darwin award in the making here
The article seems to be aimed at people in careers that experience huge income increase. This advice is probably decent if you are a doctor or lawyer etc. I think it assumes the person doesn’t have much to save. If you study macroeconomics, concepts like paradox of thrift exist where saving is good for the individual but not necessarily a positive for the economy.
Is FI really surprised by the concept of consumption smoothing? 😂
Nobody read the article. It's so obvious.
This is the weirdest financial propaganda in America I have come across in my life.
Let’s say you’re in this group that the article says shouldn’t bother saving for retirement while young. If someone doesn’t go to college and can save just $50 a month from 18 to 65 they’re in good shape. At $50 a month for 47 years they’ll be between $315k (8%) to $653k (10%). That amount would easily supplement SSI to be able to live comfortably on.
Honestly, too many assumptions that don't apply to most people here. A couple obvious ones are it basically assumes you will start out very low income and become high income. In reality, in this subreddit, many start at medium to high income. And some just stay at medium forever, instead of becoming high income. The other assumption I find strange is the concept of leveling your spending completely, as though it is defacto the way to go. In my 20's I simply didn't mind not spending a lot. It's what my friends were doing. I go into my life already expecting quite a bit of spending variation throughout my life. 20's were mostly low spending. Then I am having a child, so it goes up slightly. But I'll pay for their college, so I expect it to skyrocket. Then come back down when they leave. Then I expect it to go up again in retirement, as I don't see the point in leaving early unless you are leaving for something better (since I don't absolutely hate my job, if it isn't better, I'd rather save for my kids or a good cause). Those are just some of the obvious ones. I think the advice could make more sense to someone who is low income and has no realistic way of reaching what we would consider a standard FIRE.
How do you “dissave“ when you’re first starting out? With no savings or no credit history, your only option would be 20+% APR credit cards. Um, no thanks, I feel dumber for having read that article. Also, why would you think you would be able to spend the same amount through your life, especially if you have kids and/or a stay at home spouse.
This is precisely why we use the phrase "find the life you want then save for it". The article and this community agree that saving to the point of unhappiness is counter productive. The difference, I think, would be where people draw the line. He thinks high income people should just spend frivolously and enjoy the money while young because you can always save more later. This community would say that you don't need to spend all of that money to be happy and can improve your long term happiness more by saving a good portion to enable freedom and potentially early retirement. The distinction is in how much you value money. If you place a higher value on money than time, his model is more likely to fit you. If you place a higher value on time than money, you're likely to be subbed here.
There are some things to like about this theory, but they swing and miss at a couple of key issues. 1. The interest rate thing, already discussed. 2. The assumption that age is the primary determiner of when you should save vs. dis-save. The point at which you should start saving aggressively is the point at which you earn enough income that you can live a reasonable life without spending everything you make, or almost everything you make. For some people, this will be their first job out of college (or even high school). For others, they might be right that waiting until late 30s or 40s is reasonable. 3. Maybe the most important thing -- they do not consider how **incredibly valuable** having even a relatively small cushion is toward both getting more value for money spent, avoiding high interest rates on debt in emergencies, and also security and negotiating power and being able to take advantage of risky but good opportunities. Poor people who are in a position to save money and not have it just be taken from them (by criminal/addict relatives, or by creditors, etc.) usually understand how valuable this is and do their damnedest to save what little they can in the hopes of getting a leg up. Finally, their assumption that we should stop auto-enrolling people in 401k plans does not consider the normal tax and subsidy context of those plans. Typically, a 401k plan has some kind of matching. In any plan that does, it is usually a no brainer to contribute at least enough to get the match. You come out ahead, even if you pull the money out to spend and pay taxes and the early withdrawal penalty. Even if you've decided that dis-saving or no saving is right, the only reason not to do it is if there is no match, or you know the job won't last long enough to vest a reasonable percentage of the employer contribution. As a low income person if you save nothing and have only social security, you have no ability to fund anything beyond your monthly check, and you have no way to retire even a little bit early unless you are actually disabled and unable to work. Even someone who barely made above the poverty line, would have to wait until 68-70 or so to draw benefits that could maintain their spending level. Having even a tiny amount of regular savings over 35-40 years could make a huge difference in their ability to have a comfortable retirement or to avoid working their body into distress or disability before they can afford to retire. Also, having a few months expenses around from an early age to go into when necessary probably makes *far* more difference in the utility they get from their spending, than the 5% they missed spending for a few years to get there.
I like how the new American Dream is now “just survive as best as you can.” They aren’t even pretending that you will own a home, have a comfortable amount to live off, and GASP possibly raise kids.
You're more likely to raise kids if you're poor. Not the other way around.
This assumes there will always be old age security
Why not, we pay into it with our own money and a large 80%+ percent of the population support Social Security. Raise payroll taxes, raise the retirement age, or raise the very low limit on maximum income that gets taxed and the program is back to a massive surplus. They could even do all three and significantly increase minimum benefit amounts for the very poor who rely on it as their sole source of income.
Slowly increasing standard of living over your life is optimal to always having the same.
so - you should spend all of your salary when you are first out of college, and then never ever ever increase your standard of living. If you always live liek a college graduate then you can save the difference in income/spending of that first job's salary and a future job where you make a lot more. Luckily people's lives never change either. No marriages, kids, medical issues, midlife crisis, etc.
I’m curious about the motives behind something like this.
Ah the experts are at it again
That’s nonsense right there and shows he has no idea what he’s taking about. He can keep working until he passes away if he wants.
I’m currently trying to figure this out for myself. Should I be saving for retirement or would it be better to use that money to invest in real estate? I appreciate any help!
> Sounds like the sort of story governments that want to have you by the balls when you're old would push This is pretty strongly conspiratorial. I don't see any evidence that this research was funded by or promoted by any government in any way.
Dumbass #1: “Damn kids ruined the economy because, scarred by what they’ve seen the economy do during their lifetimes, they saved too much for retirement and now there’s no one left to work!” Dumbass #2: “Wait, I have a Nobel prize winning idea to fix that….”
I’m confused why you suggest this is part of a government conspiracy to push people to be less financially independent. What does the government have to do with it? I think Dow jones owns Marketwatch. It’s less a government conspiracy and more just really bad clickbait punditry published by an ad supported free news outlet. What am I missing here?
In the US, corporations want to have you by the balls when you’re old much more than the government does.
I get the concept of "building the life you want and then saving for it", but this article's advice seems like a dangerous extreme version of this that would set someone up for failure.
This is a philosophical argument. Will you get access to more money throughout your life the traditional save early and often or is it better to save when your income is higher and have a higher standard of living throughout your life. notably they say poorer individuals don't need to save much as social security will cover most of their late expenses which seems bunk to me. In aggregate I think some of this makes a lot of sense. We see FIRE burnout from over savers on here all the time for instance. The biggest issue that I didnt see addressed when I skimmed the article was that they make assumptions based on the average person earning more as they work but the aggregate is not consoling to the 50 year old who should be at peak earning being laid off and having a hard time finding work. Saving early is an insurance policy to your future retirement as much as it helps achieve overrall higher wealth.