This is a response to this NPR ‘news story’ I heard the other day. The gist was that this guy was telling us that Americans aren’t saving enough for their retirement. That may or may not be true, it seems like a very personal issue, but I want to address two points here that should concern people like us.

My first point is to address savings. I’ll take it at face value that Americans aren’t saving enough for retirement for this point. Given that I teach finance, I have a fairly good idea of what this means in practice. Say you plan to retire at 65, and then drawn down your retirement savings until death, with no other income. “Saving enough” means contributing to retirement savings plans & investments every paycheck at a high enough rate to accumulate a certain amount of money by 65. That certain amount, the retirement goal if you will, differs for everyone. The more you can save, though, the more money you can accumulate. Note I didn’t say anything about wealth – I’m abstracting away from inflation concerns for now.

The future value a person can accumulate is a function of three things: how much money you can periodically save, how long you have until you need the money (e.g. until retirement), and the interest rate. The higher any of those factors, the more you will have saved in the future. So the statement that people haven’t saved enough (yet) for retirement is a statement that the current pool of savings is short of where it needs to be right now in order to save enough for retirement, given current conditions.

Here’s an example. Say I’m 40, and plan to retire at 65, and currently I have no retirement savings. If I want to have $1,000,000 saved by 65, I would need to save a little more than $24,000/year, assuming annual compounding and a 4% return. If you are going to go completely risk-free, and buy Treasury bonds, then you are looking at a 2% return and needing just north of $31,000/year. Needless to say, coming up with an extra $2,000 – $2,500/month isn’t an option for many (most?) people.

People aren’t stupid, though. They know there are multiple ways to save for retirement: building up a business you plan to sell, building up assets you will sell, having children and mooching off of them, and lest I forget: buying a house which you can sell or do a reverse mortgage on. This idea of building up assets started to make more sense to people as interest rates, which govern lending and borrowing decisions, were driven down. Note how the annual personal savings rate tracks with bond yields in the graph below.


It’s clear to me that savings rates stayed high as yields stayed high, and then wound lower as yields did through the 1980s, 90s, and 2000s. Why did savings behavior change? Rampant consumerism? Sure, but why did people start to consume more? As the yield is driven downward, the incentive to save should actually go up, to compensate for the drop in interest rates and obtain the same amount for retirement in the end. But, people don’t apparently think that way. What actually happened was that credit became cheaper, and asset prices rose, so people thought (perhaps correctly, perhaps not) that a goodly chunk of the money needed for retirement would come from selling assets like houses.

Since the latest financial crisis, though, savings rates have climbed back up. The difference now, though, is that real yields are much smaller than they used to be. Right now, the real yield on the 10-year Treasury is around zero. But what is limiting saving even more? How about all that artificially cheap debt that people piled on either to buy houses or, worse, take on student loans? Given that student loans cannot be discharged through bankruptcy proceedings, that crimp in your cash flows never goes away. The best you can hope for is a deferral.

At any rate, whatever people are saving now has to be invested in higher-risk assets, as real yields are much lower than normal. This along with limp economic growth implies that, whatever the savings you currently have is, it’s probably too low. But you have to live today right? Oh, by the way, of course NPR guy’s solution was to use the government to force people to save more. No surprises there – but it’s comforting to know how little things change.

Believe it or not, that was all my first point.

My second point: who invented this retirement nonsense anyway? After all, if you are a member of hunter-gatherer tribe, or a farmer, if you stop working you…die. Okay, that’s hyperbole, but it makes my point: it’s not natural to stop working before you have to. This modern nonsense comes to us from the 1935 act that created social security, and mandated full retirement age as 65. Of course, at that time, average life expectancy at birth was 61, so retirement would occur well after death… on average. Makes sense.

That retirement age has stayed with us even as life expectancies have increased to nearly 79 years (more for women, less for men). And the idea of a work-free period of time before death has taken hold. The state may never have wanted to impose this on us, with its attendant problems including massive unfunded liabilities, but that is where it came from. I highly recommend you reject it as anathema to a desirable life.

Don’t misunderstand me – I’m not telling you how to live your life. I am, however, telling you to not let the state do it. That should be easy to swallow around these parts. I won’t give any other advice here, but this: don’t let anyone tell you that there comes an arbitrary day in your life when you have to stop adding value. Do what you want. You know, within the bounds of liberty.