A "More Realistic Amount"?

It seems the new-era notion that prudence is overrated is wending its way outward from the trading floors of Wall Street and the halls of Congress.

In "A Contrarian View: Save Less, Retire With Enough," the New York Times writes:

Could it be possible that you are saving too much for your retirement?

Such an idea would fly in the face of almost every exhortation to a nation of spendthrifts that saving more is an imperative. After all, even as people are living longer, corporate pension plans and Social Security can no longer be relied on to ease most Americans through their retirement years. Fidelity, the nation’s largest provider of workplace retirement savings plans, says the average 401(k) account balance is only $62,000.

Beyond that, the national savings rate — the difference between after-tax income and expenditures — is actually negative, government statistics show.

Nevertheless, a small band of economists from universities, research institutions and the government are clearly expressing the blasphemy that many Americans could be saving less than they are being told to by the financial services industry — and spending more — while they are younger. The negative savings rate, they say, is wildly distorted.

According to them, the financial industry, with its ostensibly objective online calculators, overstates how much money someone will need in retirement. Some, in fact, contend that financial firms have a pointed interest in persuading people to save much more than they need because the companies earn fees on managing that money.

The more realistic amount could be as little as half the typical recommendation made by Fidelity, Vanguard or any number of other financial institutions.

Hmm, a "more realistic amount"? I wonder, does that total take account of all the craziness that is occurring in today's global financial markets?

I don't think so.

On the contrary, a flurry of recent remarks about the risks stemming from unsustainable excesses and financial imbalances, many of which have been cited in recent posts, suggests this kind of thinking is especially ill-timed.

In "Trichet Worries Risks May Be Underpriced," for example, MarketWatch brings us the latest round of concerns from the movers-and-shakers in Davos.

Europe's top central banker on Saturday warned that the global financial system is underpricing risk in several areas, casting a cloud over an otherwise upbeat assessment of the world economic outlook as the annual meeting of the World Economic Forum prepared to wind down.

European Central Bank President Jean-Claude Trichet, speaking in a panel discussion on the global outlook, warned that credit spreads and risk premiums on numerous financial products appear too low, a phenomenon that "calls for attention" and possible an "orderly re-evaluation of risks."

Trichet also said low inflation rates shouldn't be taken for granted.

"We make the working assumption that central banks around the world are doing their job," he said. "We remain very, very alert ... there is no room for complacency."

The gathering of top corporate and political figures and economists in the Swiss Alps has registered a modicum of concern that several years of strong global economic growth and surging liquidity have seen hedge funds and other investors take on ever-larger positions in credit derivatives and other instruments.

Trichet's concerns were echoed by Montek S. Ahluwalia, deputy chairman of India's Planning Commission.

Ahluwalia noted that banks appear to have pushed off risk to other players. That will likely insulate banks to some degree in the event of a problem, but "I'm not sure [the risk is] held by people who really know what it is," he said

Hopefully, too, a "more realistic amount" of savings also takes account of numerous other developments, such as the fiscal disaster that has been unfolding in Washington and the potentially devastating fallout that will have in terms of future inflation, tax, growth, employment, and interest rates, among others.

Why? Because, as today's Boston Globe notes, "US Fiscal Problems Will Eventually Become Yours."

The federal deficit? Social Security? Medicare and Medicaid?

These chronic fiscal problems haven't been on the front-burner recently, but that could soon change. Democrats, who worry deeply about such matters, now control Congress.

And Federal Reserve chairman Ben S. Bernanke, speaking at a recent Senate Budget Committee hearing, warned of the perils of letting these problems fester.

So gloomy were his projections that ordinary folks like you and me should be reworking our retirement plans. We may need to work longer or live on less than we'd expected....

It's an ugly picture.

Somehow, I don't think these and other catastrophes-in-waiting are factored into the latest financial planning models.

Comments

[oblomov]

Good articles. I am 38, and I don't plan on even getting a dime from SS or similar redistribution schemes. My wife and I save 30-40 % of our gross income simply because we see the crises looming, and believe that they will affect the USD and USD-denominated markets earlier than anyone expects.

[Michael Panzner]

I think your perspective is the right one, and it is good that you are taking the right steps now.