Optimal Saving?

Some students of mine referred me to an article by Damon Darlin in Saturday's New York Times which merits a Voxy for posing the question:

Could it be possible that you are saving too much for your retirement?

That's a fascinating question, and the article goes on to quote some of the economists who have done very interesting research on it, including Karl Scholz of Wisconsin and Larry Kotlikoff of Boston University. Here's the crux of the matter:

Nevertheless, a small band of economists from universities, research institutions and the government are clearly expressing the blasphemy that many Americans could be saving less than they are being told to by the financial services industry — and spending more — while they are younger. The negative savings rate, they say, is wildly distorted.

According to them, the financial industry, with its ostensibly objective online calculators, overstates how much money someone will need in retirement. Some, in fact, contend that financial firms have a pointed interest in persuading people to save much more than they need because the companies earn fees on managing that money.

The more realistic amount could be as little as half the typical recommendation made by Fidelity, Vanguard or any number of other financial institutions.

Here are the excerpts from the researchers:

The economists answer that people would get more out of their money by using it when they are younger. “There is risk in saving too much,” Mr. Kotlikoff said. “You could end up squandering your youth rather than your money.”

Mr. Scholz said he and his co-authors of a study, “Are Americans Saving ‘Optimally’ for Retirement?” found oversaving across all economic and education levels and most ethnic or racial groups as well. (It found that Hispanics tended to save less.) Those who were not saving enough were usually missing their target by only a small amount.

The one exception to this optimism involves people who enter retirement single, either because their spouse died early, they divorced, or they never married. The studies found this group did not save enough.

I think some of the confusion in the article is due to a focus in the financial planning community on how much people are saving rather than when they do it. I think typical households are forward-looking but very impatient. That they are forward-looking means that they will enter retirement largely without surprise or regret about what they can afford. That they are impatient means that they will delay most of the saving that will get them to that level of comfort until retirement is just a decade or so away.

So if you see a 50-year old with not that much in savings, how do you decide whether that's a 50-year old who is optimally waiting to save a lot over the next 10-15 years or a 50-year old who does not recognize the need to save for retirement?