Money Management and the Economy

Wednesday, March 26, 2008

Stop Saving for Retirement

You aren't smarter than the market. It really is that simple.

No matter how often the financial services industry repeats the message, it is still a lie. Young people should not be saving for retirement. You have an entire life to live before worrying about what you will do when you have had bypass surgery and no longer have the energy to even go to the grocery store. While the financial services industry needs you, you don't need them.

That doesn't mean you shouldn't be saving money. You should be saving for your wedding and honeymoon, to buy a house, to send your kids to college, to take that dream vacation or to buy a new IPOD. Of course, you can also just borrow money to do those things and pay it off later. For most young people that is more realistic and, frankly, a better idea. You are likely to earn more as you get older and it will be easier to pay off the debt you took on than to save the money now to buy stuff.

Of course, what you buy matters. A house is a pretty good investment. It gives you a place to stay and it will likely go up in value along with all the other houses keeping your housing costs affordable. By some measures your wedding is a good investment assuming it is a once-in-a-life experience. Your college education? A great investment that will more than pay for itself. The latest new Ipod? Well no, because you can almost guarantee you will "need" to buy a new one in six months if you want the latest technology. When you consider credit purchases, think about how long the item you buy might last. The longer it will last, the more sense it makes to buy it on credit. If you are using credit to afford groceries or takeout food, then you need to create a new household budget or find another job.

I have a vacuum cleaner I bought on credit almost 30 years ago that still cleans just fine. I have a cast iron skillet that I still use, bought on credit when I was out on my own for the first time. When I bought it, it was a week's food budget. Today I can spend enough on groceries for a single meal to buy a new one. And that is the fundamental point. As you get older, you will have more money and you will still be getting lasting benefits from the purchases you made on credit when you were younger. Even the money I spent wining and dining my wife is still paying off.

So yes, you will be much more comfortable at 70 if you start saving your money now for retirement. And if you measure your success by how much your estate will be worth, then go for it. But for most of us, money is a means to an end, not an end in itself. You are going to earn a lot of money over your lifetime - spend some of it now to make that lifetime more pleasant, interesting and valuable.

And if you really want a more comfortable retirement, brush your teeth and floss every day.

1 comment:

Curt said...

I agree with you. Too many people start saving in their 401k - only to put everything else on their credit cards. They would be much better off if they just lived on their income and saved money in their bank for emergencies. Forget retirement until you are 50 and have paid for everything else and put the kids through college.