David I Gensler, MSPA, MAAA, ACOPA, EA
Everyone would save more for retirement if they only had more disposable income. The Wall Street Journal recently sat down with a group of financial experts, one of whom is a Nobel prize-winning economist. Want to hear their take on why Americans have so little savings and struggle to save anything for retirement? Here it is, but I have to warn you; you are probably not going to like what they have to say.
The experts are: David Bach, co-founder of AE Wealth Management and the author of several books on personal finance, Robert Shiller (he’s the Nobel prize-winner), Danika Waddell & Ellen Weber, certified financial planners, Jonathan Bricker, a psychologist and Soo Kim, an assistant professor of marketing at Cornell University’s Samuel Curtis Johnson Graduate School of Management
WSJ: What are some of the things that people waste money on?
Small-dollar purchases like coffee and bottled water (this one was mentioned more than once by different member of the panel). Combined they can set you back $10 a day. That’s $500 a year (after tax!). We are constantly told how important it is to live a healthy life style so we sign up for subscriptions to health clubs that never get used (guilty as charged). Fad related big ticket health items were also mentioned. A Peloton bike can go for $2,000. Paddle boards can set you back hundreds of dollars. I live near the Long Island Sound and I used to see a lot of folks on paddle boards out in the water. Now, not so much. Those new “super-foods” are expensive. Does anyone actually like kale? And what exactly is quinoa? I looked it up and found that it was categorized as a pseudo cereal. Do I want to eat something that is masquerading as a cereal? Is it ashamed to be something other than a cereal? What ever happened to plain old oatmeal?
The panel also mentioned how parents can unconsciously waste money on their children. It is easy to forget to move your adult children off of your car insurance. Is your 35 year old son or daughter still on your family cell phone plan? By this time, they probably have their own family. Smaller children get signed up for a myriad of activities that they may or may not have any interest in. But no one wants to be the “bad” parent if all of your kids’ friends are signed up for the same activity.
WSJ: Do high-and low-income earners waste money differently?
One member of the panel drew an interesting distinction. He said that there is research that suggests that higher-income people are happier spending their money on experiences, like a first class vacation. Lower-income groups are happier buying things and materials that are tangible and longer lasting, like branded objects.
WSJ: What are some ways consumers can curtail wasteful spending?
The simplest things can make surprisingly meaningful differences. What do you pay for, don’t use but ignore because it is automatically debited out of a credit card? You mentally remind yourself to cancel it, but never quite get around to it. Making some small shifts in your grocery shopping can pay big savings dividends. Try planning out your menu for the week before you go to the grocery store and purchasing only those items on your grocery list. Going to the supermarket without a list almost guarantees that even though you entered the store to buy a container of milk you exited having spent $100.
One of the panelists suggested an exercise that I know would help me save money. Before you buy something, take 30 seconds and just notice the urge to make a purchase. Ask yourself, “Can I let this pass?” He was of the opinion that if you can wait five minutes, you will very likely discover that urge to buy that thing will have come and gone.
It All Adds Up
What you would save annually if you didn’t spend $3.50 daily on coffee: $1,277
What you would earn over 30 years if you instead invested the money monthly and earned an annual 10% return: $211,922
What you would save annually if you didn’t spend $1.50 daily for bottled water: $548
What you would earn over 30 years, if you instead invested the money monthly and earned an annual 10% return: $90,946
Those two items alone accumulate to a bit more than $300,000. And remember that to earn that measly $5.00 (that you were convinced is insignificant but now you know differently), you need to earn $6.67 pre-tax* to net down to that $5.00. Using the above assumptions, if you saved the $6.67 in your 401(k) plan, it would amount to more than $400,000.
So saying that you cannot afford to save for retirement is about as meaningful as that other tired excuse about working out: “I just don’t have time.” Both of them are only true if you think they are.
*Assumes a 25% tax bracket