The Saver's Paradox

The Saver's Paradox

July 21, 2021

Early in our marriage, my wife Brooke came home from work in an uproar. She was just embarking on her journey as a teacher and submitting all the paperwork that comes with a new career. Among this paperwork were Brooke’s retirement benefits, where she was supposed to decide how much to save for retirement. Having financial advisors for a father and a husband, she was determined to aggressively save. She filled everything out, in her classic perfect penmanship, and proudly walked into an HR meeting where someone would review her paperwork.

She did not anticipate a struggle. The well-intentioned HR employee walked through Brooke’s paperwork, pausing at her retirement benefits.

“You are saving too much,” she said. “You should consider saving less.”

Wrong answer. Brooke insisted on keeping her intended savings (20% of her income). The lady continued to push back, but my wife held fast and refused to change her mind. After an ineffective lecture and series of points, the lady relented and continued to process everything else.

Fired up--and more than a little proud that she had stood by her choice--she came home and recounted her experience. The newly minted financial advisor in me joined in with my wife, and together we shouted our victorious warcry from the rooftops.

Years later, I still agree with my wife’s decision; it was the right one for us. However, the slightly more mature financial planner in me (the one who stopped shouting from rooftops) appreciates the perspective of the well-intentioned woman who attempted to change Brooke’s mind. My appreciation comes from what I call “the saver’s paradox.”

As you may know, money saved and invested early on is some of the most powerful money there is. It has more time to grow, and by nature of compound interest it can achieve mind bending growth. A dollar saved that earns 8% every year becomes $21.72 forty years later. Had someone saved that dollar for twenty years instead, it would be $4.66. Naturally, saving sooner and younger is an excellent idea. Right?

The answer is yes...and no. It is true that saving early in life for retirement is incredibly helpful. It makes life easier down the road: saving more early on translates into retiring earlier, spending more, and worrying less about running out of money. It also keeps us from painfully downsizing spending because our lifestyle never became used to spending that money. It is hard to miss what you never technically had. Retirement accounts can also save you money in taxes, so it may not feel like you are saving as much.

However, young adults face an unusual period in their lives. Most people make less early in their careers, so they have less available to save. They also tend to have large expenses: student loans, buying a home, having children, relocating, and getting married all tend to happen early in adult life. This combination creates a high need for spending at the same time income tends to be lowest. It can be difficult to save as high of a percentage of your income with all these things concurrently demanding wallet share.

Some financially disciplined young people are determined to save high amounts of income in an effort to retire extraordinarily early: it is known as the FIRE movement (Financially Independent Retire Early). They may delay having a family or live frugally in order to save 50%, 60%, or more of their income. For most of us, however, there is a balance that should be struck. Barely making ends meet in one’s twenties for a cushy lifestyle in one’s sixties might be doable, but it may not be the smartest way to enjoy wealth. There is such a thing as over-saving.

The HR employee who tried to guide Brooke to save less was thinking along these lines. She knew teachers start with a low salary and gradually make more. She watched other teachers save too much and find themselves in tight situations, relying on credit cards and debt to make ends temporarily meet. Given her limited knowledge of Brooke’s situation, her advice was actually fairly reasonable. Granted, she had no idea what my income might be, but she remembered teachers who were unable to buy homes until later in life because too much money was trapped inside retirement accounts. It was not bad advice--just misguided. Brooke’s experience was an important reminder of why comprehensive planning matters. Advice should not be given in a vacuum.

Balancing spending today and saving for tomorrow is important but quantifying the value of that kind of advice is difficult. How much money is it worth to know how much you should save and where? How much money is it worth to know how much you can afford to spend before and during retirement? How much is it worth to realize you can retire three years sooner than you thought? Or that another year would be the difference between running out or not? I may not have the exact answers here, but what I can say is this: clients appreciate knowing. The peace of mind they receive from working with us appears to be money well spent.

So, the next time you talk to your kids, grandkids, spouse, friends, and colleagues about saving money, remember this: fight for both Present Them and Future Them. They both matter.


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