Are You Saving Too Much for Retirement?

Some economists are contending that many Americans could be saving less for retirement than the financial services industry's online calculators are advising them to set aside.

In an article in The New York Times, these economists say that the ostensibly objective online calculators of firms like Fidelity and Vanguard overstate how much money someone will need in retirement '“ by as much as double the amount actually needed.

Reports the Times: "For a middle-income couple, that could mean trading $400,000 in retirement money for about $3,000 a year more during prime working years to spend on education or home improvement."

"For a middle-class household, that's a lot of money,' said Laurence J. Kotlikoff, a Boston University economics professor who is on the forefront of this research and is selling his own retirement calculator."

The dispute revolves around "rules of thumb" used by the financial institutions' calculators, such as what percentage of current income someone will need in retirement and what fraction of assets a retiree should spend each year. Kotlikoff says that calculators need to take into account how people actually spend their income while working to determine how much they will need when retired.

'There is risk in saving too much,' Mr. Kotlikoff said. 'You could end up squandering your youth rather than your money.'

'Even the most casual reading of the popular press will have you convinced that Americans are heading like lemmings over a cliff,' said John Karl Scholz, an economics professor at the University of Wisconsin at Madison. 'Going into this, I had no idea that we'd find any results anything like this.'

Some economists point out that financial firms have an interest in persuading people to save much more than they need because the companies earn fees on managing their money.

But there are others who believe it is dangerous to suggest to Americans '“ who have a negative national savings rate -- that they may be able to get by with saving less. John Rother, policy director with AARP, says the economists are 'not doing anyone a service because of the tremendous amount of effort it takes to get people to save.'

To read the article in the Times, published Jan. 27, 2007, click here. (Free registration required and article is available free of charge for only one week.)