I don’t know how much I should save for retirement and I’m not sure that anyone else around my age knows either. Ideally we would smooth out our disposable income over our adult lives, meaning that we would save enough when working to maintain the same material lifestyle when we retired. But to do this we need a decent estimate of the rate of return our investments will earn. And as the past 20 years have shown, such an estimate is really hard to get.
Let’s do a bit of math to see our problem. If my stocks are going to generate a return of 8 percent per year after taxes and fees, $1,000 invested today would yield around $4,661 in 20 years. In contrast, if you’re going to make only a 2 percent return, you’ll have a mere $1,486 after 20 years.
Uncertainty with government programs compounds the savings conundrum. If the economy does well, chances are the government will protect and perhaps even expand Medicare and Social Security, reducing the need for us to have saved for retirement. If our economy continues to stagnate, however, our aging population, which is increasing the number of retired people per worker, is going to almost necessitate that the government cut back on spending for senior citizens. Of course this means that under the scenario in which you need the most government help, you’ll get the least of it.
It used to be that you could rely on rising home prices to provide some security in your old age. If you knew that the price of your home would keep increasing, you could count on being able to take out a generous reverse mortgage to “eat” your home’s equity in retirement. But the volatile housing market makes it extremely difficult to estimate how much your home will be worth in a couple of decades.
The future of health care adds another layer of uncertainty to our savings decision. There’s a decent chance that medical care will significantly extend the average lifespan, and this is good in every way but one: Your retirement dollars must stretch even farther.
It’s tempting to argue that because we don’t know how much to save for retirement, we should save as much as possible. But you can actually save too much and miss out on the joy you could have had if you had spent more money today or at least had not put in as many hours working so that you could have had more time to spend with friends and family.