Saving For Retirement Is A Waste


Is saving for retirement a waste of resources?
Does it make more financial sense to spend your money on living while you are young and healthy?

This might sound strange, but if you run the numbers, for some people this “no-savings retirement” strategy might be smart.

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Podcast Transcript

Daniel Wendol 0:00
Is saving for retirement a waste of resources? That is to say, would it makes more sense to spend your money on living while you are younger, and then relying on social security for your entire retirement income? In other words – live while you are young. This might sound strange coming from a retirement planner, but if you run the numbers, which the people who wrote the study we will reference today did, this “no savings retirement plan” might actually make financial sense.

Hello, and welcome to another dolphin financial radio with me. Dan Wendol, owner of Dolphin Financial Group alongside me is Tony. And Tony, I saw you get visibly shaken by today’s topic.

Tony Shore 1:18
Yeah, that cold open you did there at the beginning of the show, itscared me a little bit.

Daniel Wendol 1:24
I thought you were scared by the fact that I mentioned we’re going to reference a study and there’s going to be math.

Tony Shore 1:28
Yeah, that didn’t make me that didn’t make me happy either.

Daniel Wendol 1:31
You might want to take a minute to wipe the sweat off your brow. We’re not going to go math. We’ll get into some details on it, but we’re going to cover the premise and the philosophy behind this study. So don’t worry.

Tony Shore 1:46
Well, you sent it to me. You emailed me the study ahead of time and I did glance over it. So I think I think I’m prepared and I know you’ve been studying this and thinking about this for a while. So I think it’s going to be a good show and this is a good discussion to have, because conventional wisdom and pretty much every single retirement planner out there says exactly the opposite of what you said in the intro.

Daniel Wendol 2:10
I’m going to explain why that might be the case. For the listeners, what we’re going to do is reference a study called “Can Low Retirement Savings Be Rationalized?” ( https://www.nber.org/papers/w26784 )

Which is an interesting title, I would say. It’s from the National Bureau of Economic Research and it’s written by…and here’s something interesting Tony, I looked at who wrote it…Stanford students, George Mason students, and then there’s a guy that’s at the Stanford Graduate School, but he’s also working for Edelman Financial Engines. So he’s a financial advisor of some sort. Maybe a researcher, maybe a planner, I don’t know. But the premise of the article or the research paper is basically challenging the idea that Americans have a constant rate of consumption as they age. So that as they go into retirement, they’re spending relatively the same. What they’re saying is that this idea of steady relative spending as you go through life is wrong. They suggest that the optimal consumption declines as you age. So as you get older, you will find that you you’re spending less, relatively speaking.

Tony Shore 3:35
Hmm. Interesting. And, you know, that’s something I always thought about, and I always I know, there’s merit to this, Dan, in one sense, or at least, to some extent people save and save and save, and they have all this money saved and they’re 99 years old, and they’ve got a lot of money saved up. I get that you want to leave some for the family and friends but at the same time, they were frugal their whole lives. And at some point you have to ask – why?

Daniel Wendol 4:09
Well, right. I think what it’s a challenge to the conventional wisdom, but not necessarily for what we normally say as a conventional person. Most of my clients this doesn’t apply to, but it applies to most Americans. So that’s where I think this is really going to make a big leap in the conversation for people because you’re used to talking about retirement savings. You’re used to talking about living a living frugally, putting money aside saving for the rainy day. And the abstract of this paper is telling us that’s all wrong. You don’t need to do that. But I still think people do. It just depends on your situation as usual, but I think for many Americans, this paper is pretty accurate. And that does go against what I normally say. I want to read a quote from the abstract, Tony. We’re going to get into this later in the show too about Social Security. This is the quote: “For instance, we find that for many, perhaps most people in the bottom half of their lifetime earnings distribution, it is optimal to spend out their retirement wealth well before death and to live on Social Security alone after that. Very low earners may find it optimal not to engage in retirement saving at all.”

Tony Shore 5:46
Yeah, now this is for a specific person in a specific situation that they’re referring to.

Daniel Wendol 5:52
Well, they’re talking about very low earners or low earners and that’s a lot of people in this country. So it relates to lot of people, maybe not the listeners, but I don’t know for sure.

Tony Shore 6:05
I don’t know, I think it broadly relates to a good majority of people in America right now, though.

Daniel Wendol 6:11
It does. The common wisdom right now is that when you retire, you’re supposed to have 65% to 85% of your income replaced. That’s the general gist of it. Now, we’ve done shows on that, where I said, it’s closer to 100%. Right, you remember that I, I’m a big proponent of early spending. What I see is that when people retire, they’re spending about the same that they normally would, except they’re not saving anymore. They spend more in those first few years of retirement than they do pretty much any time in their life. They’ve been working and working, and now they have this free time they want to spend and spend. It totally makes sense. I agree that people spend less as they get older and that this idea of having 100% or 85%, or 65% of your income in perpetuity doesn’t necessarily make sense. One of the other points here is that the study made the suggestion that people attach lower value to consumption during bad health states, like if you get dementia or Alzheimer’s. People don’t value spending during that time, as much as they do while they’re young and healthy. So in other words, what good is a million dollars in the bank if I don’t even know who I am? Right? And that’s becoming even more prevalent in today’s society as people are having mental health deterioration as they age. So the thought is, well, why am I saving money for that? Yes, maybe I can afford to go on that luxury vacation, but I’m not even sure which direction I’m facing, or what my name is. Why would I not take that luxury vacation while I’m in relatively good health? There’s two main reasons why people are spending less according to the study. They say the big problem is interest rates are low. Real interest rates, after inflation are relatively low, they’re zero basically. If you go buy a CD, even a fixed rate annuity, and then you add an inflation, what are you really getting? And so people are nervous that they won’t have enough in retirement, that they’re going to run out. They can’t save anywhere. Where are they going to go? The banks or the insurance companies aren’t offering enough interest to keep up with inflation or just barely. And they don’t want to go to stock market because then you see what happens there. So they’re always worried about that. But in reality, they shouldn’t worry, because the consumption curve should go down. So as you get older, you should be spending less. And in fact, this study suggests that it starts declining at age 45! I don’t know about that especially if you have kids.

Tony Shore 9:31
I think it’s probably a little later for some people. But I have noticed though, I will say, I am getting older. Believe it or not.

Daniel Wendol 9:41
That’s no big deal. We all are Tony, stop! Your bragging.

Tony Shore 9:48
I thought I was the one who wasn’t. I really believe that I wasn’t getting older. Dan, I’ve said to everybody, you know, my birthday was last week…I say to everybody, I don’t feel older. I really don’t. I am spending less, I noticed that. I used to be a pretty big spender, but I just I’m more content with less. I think the older you get, for the majority of people, I’m not saying, you know, stereotypes don’t apply to everyone, but I would agree with the assumption that for most people as they get older, they will spend less.

Daniel Wendol 10:23
Right. So the magic question is, well, how much less? How much do you need to get there and so forth?What this study is suggesting is that Social Security may be enough for those people. Just Social Security. If that’s the case, why not spend it all early and enjoy life? It’s not the same for everyone, right? We have to be general here. But I have some anecdota evidence that I’ve noticed- Just generally speaking, the people I interact with would rather spend early than later. There is a lack of delayed gratification in this country. People don’t like the idea of not doing things and they like the idea of spending when they’re young. And I promote that. If a couple is 62 years old and they just retired and they say, Dan, you know, we want to front load our spending, I’m all for it. I’ll make that work. And then people don’t value spending during the later years of their life. Because they see that old couple…I put it up on Facebook…a picture of that couple. I don’t know if you saw it, Tony. It was a couple on a gondola in, I guess Venice, Italy. They were going through the tunnel and there was a guy…I don’t know what they call those guys. I forget, but the guy with the pole that sings? He was pushing them and someone took a picture and they were both sound asleep on the boat. And the caption was- don’t wait to do the fun things when you’re too old to enjoy them.

Tony Shore 12:02
Right. I may have past that time. I’m just thinking about sleeping. Right? Yeah, that whole story, you know what I took out of that? Boy, I’d be nice to take a nap right now. I was jealous of the couple for being asleep on a river. It sounds comfortable.

Daniel Wendol 12:19
It does sound comfortable. But you know what also sounds great? Rationalizing your lack of savings. And that’s what we’re talking about.

Tony Shore 12:28
So okay. So that’s what this is really about. It’s like a way to rationalize the fact that you didn’t have the discipline to save or didn’t work with a financial professional like yourself. So you can rationalize – I didn’t need to save there’s this study. And you know, Dan, I have to say about the study…any study that has to use, and I don’t even know what you call this kind of math, but there’s a whole section with these formulas with a lot of letters in it. When math with math involves more letters and symbols than it does actual numbers…I’m serious…in this one equation, there’s one one. That’s the only number in this math equation. There’s an O with a line through the middle but not even diagonal, I don’t know what that is. And then a small t to the lower right and a dot and then a U, and then parentheses and then an equal sign. And I’m telling you guys Dan looks at this and goes, Oh, this is great. And I look at this and, and my head starts to hurt.

Daniel Wendol 13:32
I saw that and I thought, oh my god, Tony’s going to say, no, we’re not doing it.

Tony Shore 13:39
That section of the study I skipped. The other parts were great. The conclusion I think is good. Why they chose to include a bunch of letters and symbols. I have no idea.

Daniel Wendol 13:54
It’s called math, but you’re right. I skipped over that too, because I don’t need to know this. The study is challenging conventional wisdom. They are trying to say that it doesn’t make a difference if you save extra for retirement, if all if you don’t have a lot, right? There’s a whole chapter on when to take Social Security in here. And I want to talk about that, because that’s a good way to draw from this study what the real takeaway is for people. If you do the math on Social Security maximization, which I do all the time for people, it does make sense to delay for most people that I interact with. However, most people in this country do not delay Social Security. They take it early. Why is that? The people that I talked to, they’re coming to me with money typically, or they’re coming to me saying I have nothing. Asking what do I do? So Social Security is super important to them. For the low earners, and this is what the math was saying in that study, for low earners, taking Social Security early might actually make sense. The conclusion is to spend down your assets in the first three to 10 years of retirement, and then live the rest of your life on Social Security. Think about it, if you’re retired at 62, by the time you’re 72, for a lot of people, that’s getting old. Not not for everyone. It’s all relative to your health as well, which is why I brought up dementia and longevity. The conclusion is that it’s not necessarily a savings problem that we have in this country, although that’s all we hear, right? No one’s saving enough. I should have saved early. We’ve done shows on it. It’s not a savings problem, but it’s the relative generosity of Social Security, meaning Social Security is so good. And you add really low interest rates, so you can’t get anything else on your own and then that’s a double whammy. Social Security is so good. Interest rates are so low. Where else are you going to get such a great return or a great income stream? And then couple that with people realizing that declining consumption is a real thing…that as you get older, you do spend less, you don’t need this steady spending thing. All of a sudden, it’s opening up this idea of, well, let’s spend it all early and why not?

Let’s talk about Social Security just a little bit more. In the study, they talk about Social Security replacing income for the moderate earner. For the average earner, Social Security replaces 40.5%. For the low earner, Social Security replaces 54% of income. And then for the very low earner, Social Security replaces 75% of income. So if we go into retirement, the person saying hey, I’m going to retire, how much of my current income do I need? And we say 85%. For a very low earner 75% of its already met by Social Security. So how much more do they really need if any? For a lot of people, if they have an extra $25,000 or even $50,000 in the bank, it’s not going to make or break them. That is half a year in a nursing home. You know what I mean? So what’s the difference? If you have $50,000 to your name, or $10,000 to your name? It’s not going to really allow you to do anything more in life. So why not spend it?

Tony Shore 17:52
The only argument against that Dan would be legacy planning or leaving something for kids or grandkids?

Daniel Wendol 18:02
Exactly. And that’s a different set subset of people. If that’s really important to you, then you have to plan for that. And then most people do, if that’s really important to them, they set aside the money. They don’t touch money. But for most people, they want to have their last check that they write bounce. They want to die broke, not be broke and then die. They want to live a full life and then spend their last penny. So if that’s the case for a lot of people, why not spend it early when you can enjoy it and then live frugally late in the life? Most people that have money live frugally. They save up enough and then they retire and do what they want to do. This research paper is kind of flipping that and saying the reverse. Live life to the fullest and then rely on Social Security. You might actually say, well, it comes down to a control, do you want to be in control? Do you want the state to control you? Because that’s really what’s happening with someone that’s relying on Medicaid or relying on Social Security. They don’t have as much control, and they’re kind of out there. But if there’s ever a time to kind of resign to not having a lot of income, would you rather be 85 years old than 45 years old?

Well, yeah, that makes sense.

I want to make one important point about this research paper. It’s really focused on those with moderate to low to very low income. So the discussions for taking Social Security early or not saving only really applies to people that don’t have a lot to begin with. And the math and all those fancy formulas suggests that for people that have money, have wealth, have a million dollars in the bank and are trying to figure out what to do about it – they have a different discussion. They might take Social Security early because they don’t need it. They might delay Social Security because it makes the most sense. It all comes down to how long they’re going to live at that point. So this is why annuities are not popular. This is why people take the lump sum versus a pension. People don’t like delayed gratification. The people that actually do take the annuity or do take the pension versus a lump sum, they typically live longer anyway. They’ve done the math. So they’re protecting against a long life. So it’s adverse selection. I say to a lot of people, maybe it makes sense to delay Social Security, mathematically, but let’s be real. Life got in the way. Let’s just take it early because that just makes the most sense for your standard of living.

Tony Shore 21:02
Well, and yeah, that’s a good point. I think that, Dan, this was a unique take. A completely different angle to look at it. And I like that. We need fresh perspectives. I think that’s a really good perspective. It can completely change the way you deal with it. So it depends on the person, it depends on how much or little you have and what your plans are and your goals. I think there’s some merit to this, I really do.

Daniel Wendol 21:36
There is. Especially for those that don’t have a lot of assets, which, unfortunately, is a lot of in this country. Sometimes it makes sense to realize saving that extra money for when I’m really old doesn’t make much sense. If it’s not going to make a big difference later, but it will make a world of difference today…. I don’t want vilify those people and say, oh, they’re leeches or they’re the “ant versus the grasshopper.” This is the grasshopper laughing. No . It’s not that. It’s also a tilt of the hat to Social Security. Maybe the program is really good. Maybe we should start beefing it up and requiring more money to go into it. More should be put into Social Security because it’s forcing savings, and it’s a good savings vehicle.

Again, that’s a different conversation. But I think this is really interesting. It’s changing the way people might approach retirement planning, especially for those without the huge bundles of money. And unfortunately, much of the research and much of the focus in my industry has been on those with huge chunks of 401k or bundles of IRAs. But in reality, most of the people I talked to do not have a lot of money. They’re looking for that help and guidance, and maybe this math formula will force us to look more closely at spending a little early and not feeling so bad about relying on Social Security. In actuality, people don’t have a choice. A lot of people don’t have a choice. And maybe this is just rationalizing it. So that’s why the title comes back. Are they just rationalizing, not having anything? Or is it financially smart? If you do the math, it makes sense. I don’t have any savings, but if we do the math, I did the right thing. I don’t know which way to take it. I’m using it, but I’m not using it to justify anything. I’m still going to do the math, and I’m still going to have these conversations with people. It’s no longer enough to just vilify someone for taking Social Security early and saying, Oh, you should have delayed. Maybe not. Maybe not.

Tony Shore 23:56
Interesting. Yeah, and that’s true. I’m glad it gets us thinking about this. And I think what you really do still need though is a plan regardless, right?

Daniel Wendol 24:08
Absolutely. So if you to get a Social Security Maximization Report or come up with an income plan, and you’re worried, I don’t have enough, that’s okay. I could still do the math for you and get you on your way. Yes, maybe you won’t sign me up as your advisor or you don’t have any assets for me to manage or anything like that. But I can at least give you some direction and make you feel good about your decisions so you’re not living in fear or in disgust. Sometimes the math will work to your advantage and you can go on your way. The only way to find that is to have a conversation with someone that’s willing to listen, and I’m willing to listen to anybody and talk to people and help anybody. I’m not at a point where I turn people away. At least have that conversation. Start thinking about it. Even if you don’t think you have enough.

Thanks for listening to Dolphin Financial Radio based in the Clearwater, Tampa area.