New Study: Don't Start Saving For Retirement Until Middle Age

(SmartAsset) - Per most experts, there’s one seemingly unquestionable pillar of personal finance advice: start saving for retirement as early as possible.

But not so fast.

According to new research published in The Journal of Retirement — an academic journal focused on economic studies around retirement — for some young people, starting to save for retirement early is actually not the best idea. While this certainly seems counterintuitive — how could saving money be bad?! — the report presents evidence that for both high- and low-wage earners, the optimal use of money is to spend it rather than to save.

A financial advisor can help you figure out the best thing to do with your money. For help finding one, use SmartAsset’s free financial advisor matching service.

Study’s Findings on Retirement

First off, a small disclaimer — this is just one study. Please make sure to examine your own situation and perhaps talk to a financial advisor before you decide to forget about saving for the future, liquidate your 401(k) and buy a Bugati.

That said, the study uses a theory that won a Nobel Prize to present a reason why saving for retirement is ultimately not in the best interest of many workers. It essentially boils down to something called the life-cycle model, which was developed in the 1950s by economists Franco Modigliani and Richard Brumberg, according to reporting from MarketWatch.

The quick-and-dirty version of the life-cycle is this: people tend to tailor their spending naturally based on where they are in life. This means that young people spend without much regard to their future, middle-aged people start to save a lot and older people spend the money they’ve saved.

Typically, low real interest rates also make spending more money early in life optimal (though that’s not necessarily the case in this rising-rate environment).

How it Works for High-Income Workers vs. Low-Income Workers

The first subgroup the study looks at is high-income workers. While in theory a high-income worker could save a lot of money while young, the paper presents a compelling argument for why the person doesn't have to.

“High-income workers tend to experience wage growth over their careers,” the study reads. “For these workers, maintaining as steady a standard of living as possible therefore requires spending all income while young and only starting to save for retirement during middle age.”

Low-income workers also benefit from spending early in their career, according to the paper’s findings.

“Low-income workers, whose wage profiles tend to be flatter, receive high Social Security replacement rates, making optimal saving rates very low,” it reads.

The Bottom Line

A recent paper published in an academic journal states that while conventional wisdom stares workers should start saving early, it is actually beneficial to wait to start saving until later in life. Remember, though, that this is just one academic paper — don’t take any drastic steps until you’ve analyzed your situation, perhaps with the help of a financial advisor.

Retirement Tips

  • financial advisor can help you make the best decisions about your own retirement plan. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • To see how much money you’ll need for retirement, use SmartAsset’s free retirement calculator.

By Ben Geier, CEPF®


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