Saving too much... really, is that a possibility that people are even remotely concerned about? Or is it just a meme used to justify an expensive third decade?
I love Morningstar, I really do. My respect for the company is one of the reasons I had a particularly exaggerated eye-rolling session upon reading Morningstar's report that some Americans, horror of horrors, might be saving too much for their impending retirements.
Woe are the retirees who find themselves with more money than they otherwise would have needed and have to deal with first world problems like end of life planning, large estates, and charitable giving. I kid, but I'm completely serious when I say that the majority of investors should read a piece like that, nod their collective heads, and go back to increasing their own savings rate - saving too much isn't just going to sneak up on you.
Let's explore why that's the case!
The BMI Connection to Saving to Much
Body Mass Index (or BMI for the uninitiated) can be a pretty bad measurement of the overall health status of a given individual. Given an individual's height and weight, BMI is calculated based on a formula and compared to 'bands' of statuses:
- Underweight = <18.5
- Normal weight = 18.5–24.9
- Overweight = 25–29.9
- Obesity = BMI of 30 or greater
You know what BMI's good for?
The average, typical, everyday, normal citizen of the United States.
That also makes it tremendous for comparing health across massive populations such as... the world. BMI correlated with all sorts of diseases - diabetes status and heart health among the most important (with higher BMIs being negative for health).
After reading those two paragraphs, people will have one of two reactions: they will either nod along and say, "hey, that's pretty useful!". Another type of person will instead concentrate on my very first sentence and say "BMI is useless".
You know what? It can be pretty useless for a certain subject of people. Bodybuilders, powerlifters, short distance track athletes, certain professional and amateur team sport players (particularly in football and hockey) and other athletic individuals such as soldiers can get some absurd readings when concentrating on BMI. On the flip side, some rail thin people may never leave the couch and have horrible health! With a grin, other typical everyday citizens love to point out these amazing pieces of health trivia.
In a country with a median male bicep circumference around 13.3 inches (not at all good when you consider a median waist of 39.133"!) BMI is great. If the grinning troll lecturing you about the BMI is a powerlifter or soldier or something, concede them the point - BMI would certainly fail them. I mean, your 5'10" 186 lb author is even overweight by BMI standards - but our 32" waist snaps us back to reality.
Here's the thing. If BMI doesn't apply to you, you already know it. When your doctor performs your annual physical and sees a 6 pack, they're not going to tell you to watch your weight.
Basically, even though a point can be made that some people are poorly served by some rule of thumb doesn't automatically mean that you can toss the rule of thumb out the window. The maybe 5% of people BMI doesn't apply to already know it, and those people aren't going to adjust their behavior to fit the model of the everyday citizens any more than the everyday citizens are going to follow through on their 2014 Resolutions and lift weights past January 31st.
Regular, Everyday Normal Folks vs. Saving Too Much
So it goes with this study on saving too much. (It hurts to just write it!)
The Morningstar piece, just like some of our greatest hits such as our American household food spending or savings calculators uses data from the Consumer Expenditure Survey. You know who makes up that survey? You shouldn't be surprised to learn it's average, typical, everyday, normal citizens of the United States - specifically chosen from a variety of demographics to accurately model the population as a whole.
The average citizen also happens to undersave, plan poorly, get forced into retirement too early, and inaccurately model risks. That means that the data, whether pulled from the Consumer Expenditure Survey, or later in the study from the Rand HRS longitudinal data set is going to comprise people who mostly fit that mold. Saving too much isn't a common ailment for this crew.
Look, I don't know if there is a Peter Principal for money, but with the number of times I read about hedonic treadmills I know that lifestyle inflation is a thing. So too must exist lifestyle deflation - if I cap the amount of money in a typical retiree household from Social Security because a person didn't save enough money during their working career, it doesn't take an advanced degree to expect their spending to drop. It doesn't matter if they were making $200,000,000 a year for their entire career... they will have to adjust to the reduction in cash flow.
And if they don't? Reference Herbert Stein's eponymous law: "Things that can't continue, won't".
Warren Buffett Will Get Over It
So, yes, just like you can name a few people who avoided the general reduction in muscle mass and increase in adipose tissue post-college, there will surely be some people who save more money than the absolutely minimum that they could have gotten away with. Those people will have something horrible happen to them - they will die with non-zero account balances, and do disgusting things like ensure the continued wealth of their progeny and donate to causes that they enjoyed during their lives. Other people will reduce their spending because, hey, less cash is coming in. There are a lot more people in the latter group than the former.
Odds are that BMI applies to you and you're not saving enough for retirement. Come back in a year, tell me how you saved 30% of your net income and worked out the whole year - we can then debate the finer points of skinfold tests, hydrostatic weighting, and DXA analysis along with your portfolio allocation.
Until then, go increase your savings rate; you're not saving too much. See you in 2045.