Never Retire - New Research Supports Pretty Much Everything The Never Retire Newsletter Stands For
Thanks to Never Retire newsletter subscriber, Margaret, for passing this story along—
It supports pretty much everything Never Retire—as an idea and strategy—stands for.
I disagree on one point. We shouldn’t limit not saving for retirement to young people.
Many of us are better off focusing our savings on:
Achieving and maintaining a sense of and actual cash security.
If you can do these two things—alongside adequate cash flow into relative old age—you’re likely to live and end up better than the millions of people who struggle to save for traditional retirement despite writing on the wall that clearly indicates they’re unlikely to succeed.
Anyhow, here are the key points direct from the story Margaret sent.
I interject my thoughts in between the bullet points.
New research based on the life-cycle model says that people should strive for a consistent standard of living through their lives.
This is almost exactly what we discussed last week—
The idea that it makes little sense—practically, physically, psychologically, professionally, financially—to start from the ground, work your ass off to hit a personal and financial peak, then slowly but surely draw yourself and your savings down until you die.
The reason has to do with something called the life-cycle model, which suggests that rational individuals allocate resources over their lifetimes with the aim of avoiding sharp changes in their standard of living.
We often refer to doing some aspect of life—work, spending, traveling—evenly across the lifespan.
Put another way, individuals, according to the model which dates back to economists Franco Modigliani, a Nobel Prize winner, and Richard Brumberg in the early 1950s, seek to smooth what economists call their consumption, or what normal people call their spending.
According to the model, young workers with low income dissave; middle-aged workers save a lot; and retirees spend down their savings.
Evenly across the lifespan!
In the life-cycle model, we are assuming you are getting the absolute most happiness you can out of income each year," said Scott. "In other words, you are doing your best at age 25 with $25,000, and there is no way to live 'cheaply' and do better," he said. "We also assume a given amount of money is more valuable to you when you are poor compared to when you are wealthy." (Meaning $1,000 means a lot more at 25 than at 45.)
Makes so much sense.
From there, the research suggests young workers might be better off buying a house rather than saving for retirement.
While I’m not a big proponent of home ownership for the sake of home ownership, the Never Retire model focuses on eliminating your housing payment/expenses as soon as possible and definitely as you enter relative old age alongside an all-around low cost of living. If you can get this done via home ownership, beautiful!
If you can lay the groundwork to do this while young, more power to you.
However, as we also discuss often, it’s not always possible—in fact, for many people, it’s improbable—to buy a house, service a mortgage, and save for retirement simultaneously:
Scott and his co-authors also show that the "welfare costs" of automatically enrolling younger workers in defined-contribution plans--if they are passive savers who do not opt-out immediately--can be substantial, even with employer matching. "If saving is suboptimal, saving by default creates welfare costs; you're doing the wrong thing for this population," he said.
Welfare costs, according to Scott, are the costs of taking an action compared to the best possible action. "For example, suppose you wanted to go to restaurant A, but you were forced to go to restaurant B," he said. "You would have suffered a welfare loss."
In fact, Scott said young workers who are automatically enrolled into their 401(k) might consider when they're in their early 30s taking the money out of their retirement plan, paying whatever penalty and taxes they might incur, and use the money to improve their standard of living.
"It's optimal for them to take the money and use it to improve their spending," said Scott. "It would be better if there weren't penalties."
Exactly.
And even more spot on—
And what about workers who are automatically enrolled in a 401(k)? Are they not creating a savings habit?
Not necessarily. "The person who is confused and defaulted doesn't really know it's happening," said Scott. "Maybe they're getting a savings habit. They're certainly living without the money."
What does this last part effectively bring us back to?
The drum we constantly beat in the Never Retire newsletter. The importance of cash security.
The stronger your perceived and real cash security, the more freely you can spend. The more freely you’re able to spend to live a full life, the more comfortable you feel saving.
This is how it rolls and has rolled in my experience. It partially inspires my decision to write this newsletter. And this excellent piece of research nicely echoes our sentiment.
From Valletta, Malta. More Never Retire travel installments coming soon!