Retiring The Experts

by: Douglas Tengdin, CFA

Why don’t people save enough?

Photo: Dika Seva. Source: Unsplash

You’ve heard the advice: “Put enough aside when you’re in your 20s, and you can have millions by the time you’re 60. Just stop drinking a latte, and you, too, can be a millionaire.”

Okay, let’s do the math. Suppose you give up that latte and save $5 four days per week—you can have one latte. And let’s assume you do that 50 weeks out of the year. That’s $1,000. If you do this for 40 years, that’s — $40,000. And if you invest it at 6% per year—the long-run return of the stock market above inflation — you’ll have $172,000. With that retirement account, you can safely spend $6000 per year — after taxes. Congratulations: you’ve turned your daily coffee into a rotisserie chicken and veggies.

This is why people don’t trust retirement “experts.” Regular folks may not have spreadsheet programs to make the calculations, but they’re not stupid. They know that you can’t spin straw into gold, and that you can’t turn a Starbucks latte into a huge nest-egg. Maybe if I had 80 years, then my weekly $20 could grow to $2 million. But in 80 years, I won’t need a retirement account.

Most people have daily demands that keep them from saving very much, especially when they’re young. Rent, health care, child care, transportation—these needs trump entertainment and fancy coffee. And today everyone needs a smart phone and data plan. Try getting hired without quick access to email and a browser. It doesn’t work.

Photo: Victor Hanacek. Source: Pikjumbo

Retirement gurus who suggest austerity as the solution for young people need to look in the mirror. How austere is their lifestyle? How well does it work for them if they drive a cheap clunker to their radio or TV spot, and it breaks down on the way? Are their producers, sponsors or fans very understanding if they show up late?

People don’t save enough because they don’t make enough. The best way for them to get ready for retirement is to grow their careers. And the best way for politicians to improve our retirement system is to grow the economy. Everything else is window-dressing.