Back in late August, a team of academic and professional researchers published a paper in the Journal of Portfolio Management Research in which they question the common wisdom that it is almost always better for individuals to begin saving and investing for retirement as early as possible.
According to the paper's authors, this assumption is so deeply baked into the mind of the typical financial professional that it seems almost beyond dispute. But, according to the analysis, the assumption is often not evaluated against a meaningful benchmark.
The authors suggest a reasonable benchmark would be a lifecycle model, in which rational individuals allocate resources over their lifetimes with the aim of avoiding sharp changes in their standard of living. In running their analysis, the authors conclude that the lifecycle model implies that most young people should not, in fact, be saving for retirement.
The findings raised some eyebrows in the financial advisory industry, such that a sizable group of advisers shared written comments about the conclusions in response to a call from ThinkAdvisor. In addition to questioning the assumptions used in the paper, several advisors also emphasized some of the overlooked benefits that come along with an early commitment to savings, from more stability in an emergency to more frequent vacations.
Even Modest Savings Can Mean a Lot
In the experience of Curtis Bailey, founder and financial advisor at Quiet Wealth Management, the real virtue in early savings is the development of an ability to live below one's means. He emphasizes that it is not always possible for people to save aggressively, especially for young people just starting out, but even a modest commitment to savings at an early life stage can be beneficial.
"Living below your means suggests some level of excess income," Bailey says. "Taking this excess income to build an emergency fund is crucial. Saving $50 per month is $600 per year. Cars break down. You need to move apartments. You get sick. Taking steps to have some cushion can make a world of difference."
Bailey points out that financial planners, given the nature of their profession, tend to work with people that already have excess income and a base level of savings.
"For most of these people, saving more equals more options," he says. "Whether it's taking a vacation, taking time off when you have a child, or accepting a lower-paying but higher-satisfaction job, saving more gives you the freedom to make these choices."
Combating 'Lifestyle Creep'
Jim Crider, founder and financial advisor at Intentional Living FP, argues that developing the mindset of "spending now and saving later" can be a dangerous and slippery slope.
