Instant Gratification Killing Retirements

In Market Watch's post on savers’ impatience hindering retirement goals, they make the following comment:

"Impatience or present-bias might explain suboptimal financial decisions. That is, some people persistently choose immediate gratification instead of taking advantage of larger long-term payoffs.”

Some people? Some people? How about "most" people?

We've seen that almost 70% of the population is breaking even each month (specifically, 54% lives paycheck-to-paycheck while an additional 15% go further in debt each month.) So is it any stretch to believe that the fact that most American's can't delay their gratification is killing their retirement savings? It doesn't seem like a stretch to me.

IMO, people who can't delay gratification are killing themselves in two ways. First, they aren't saving what they should and second they aren't saving for long enough -- and both are required if you want to become wealthy and have at least a decent retirement.

But perhaps the tide is turning. Maybe the recession will get people to save and invest more. Frankly, I'm skeptical that it will. I think most people will head back to their old habits as soon as the fog lifts. Of course, I could be wrong.

What's your take on these issues?

Comments

[Matt]

Being Frugal is a choice and a life style.It is also living with in or below your means. It is not a fad or something temporary that will go away. Given the choice most people will go back to their old ways and some may not.

Only until after this great recession (my opinion depression) is over will find the true hearts of people be seen.

[Rob]

I am pretty sure that the last couple of years have changed a good number of people for the better, but I have to say that I agree with you on this one. Many people will most likely return to their own habits as soon as it feels safe to do so again.

As Matt said, frugality is a life style choice, somewhat like staying fit. We all know that the way to be fit is to eat better and work out more, and many of us have even experienced and enjoyed the effects of doing so, but for those of us who have not made it a part of our lifestyle, fitness has not stayed with us. So it is with money.

[Strick]

The experiences of recessions may reduce the debt people take on (though I believe most of this involuntarily) or even increase the number with an emergency fund.

But I think there is a dangerous assumption by 95% of the people without pensions that they will retire somewhere between 62 and 65 with somewhere between "just enough" and "a little more than enough" money, no matter what they do. If this tiny range is what one sees as the possibilities, of course a 30 year old is not going to be see a benefit in increasing savings.

[AML]

I was watching a show on TV just the other day and it said that we should save 20% of our monthly income. well...true, but is that really possible?

[mdb]

3 years ago had you asked me, I would have said I had lived pay check to pay check. I always had very little left over after I paid my bills. But I was in good financial shape and building my retirement. I was doing what I have since found out is termed paying myself first (forget which book that is in - Automatic millionaire?). Anyway, I wonder if people just aren't familiar with the terms?

[Bogey]

@ AML

Of course it is possible. If you cut out a lot of things that are considered "essentials" nowadays, you will be amazed at how much you can save. My wife and I save in excess of 40% of our take home pay each month for the future, being either extremely long term (our retirement) or medium range (buying a business, more rental properties, etc.). So yes, it is possible, but you have to make some sacrifices. We have had better luck at focusing on income generation rather than being overly frugal. We don't live a sprase lifestly at all, but we try not to increase our lifestyle each time we get raises.

[Strick]

AML - instead of "possible" I assume you really meant "easy". If your income dropped 10%-15% you couldn't survive? (assuming you do already save 5-10%) Really?

When looking at someone from the outside and their lifestyle beside someone who makes 10%-15% less, do you really think you see that big a difference?

[Rod Ferguson]

"I think most people will head back to their old habits as soon as the fog lifts"

I believe that depends on how long the fog is around. My current best-guess for the fog lifting is around 2020, which is long enough for people to develop new habits making a new normal.

[MonkeyMonk]

I think the easiest way to increase your savings is to keep a consistent spending plan for 3-5 years. Any raises or additional money earned during that period should go directly into savings instead of being spent. Then, once you've your percentage right about where you want it make the whole savings process automatic. You'll never "miss" the saved money.

[Jonathan]

AML,

There are pretty much ALWAYS ways to live on less, like the last two posters have pointed out. You could move to cheaper housing, sell your car, NEVER eat out, or countless other things specific to you. The real question, as Strick mentioned, is "is that easy?" and the answer will depend on your specific situation. But Bogey also made the good point that it's a lot easier to save 20% if you are making more. Boost your income without boosting your lifestyle.

[BD]

AML - It depends on your income to a certain extent. What the above posters forget is that they're assuming someone is making a wage that allows them to survive on the bare necessities. If you're making a bare bones wage, you can only cut so much out before you've cut all you've absolutely can. (ie, if you're living on around $5000 net income a year, there isn't much you can do to cut once you've sold the car, moved in with the parents, sold all your furniture and TV, etc.)

The only thing you can do at that point is try to boost your income.

[Paul]

PE If your making 5000 a year it's time to find a real job. The average work week is forty hours at 50 weeks a year that's 2000 hours a year. Time to start looking at working don't you think.

[Paul]

Most people have a disease, called "stuffitis". They buy stuff. Get bored with stuff. Then buy new stuff. Then get bored .... vicious cycle.

[Jennifer Lissette]

I think I've been changed for the better by the recession. My family lives on one income but we've still managed to max out my husband's 401k, I'm 27 and he's 29. Even if we forget everything else we've learned, if we keep this one behavior, we should be able to retire.

@AML - My husband and I save 70% of our net income. We live in a smaller house than anyone we know, our only luxury item in our monthly budget is a set of smartphones that is subsidized by my husband's employer and we engage in any number of frugal practices. We've been teased and poked fun at by friends and family, but I bet they wouldn't be laughing if they saw the way our net worth is growing. So, in my experience, it IS possible, you just have to give up caring what anyone else thinks of you.

[Old Limey]

Matt:
I agree completely with your sentiments. I am a little different from the average poster on this blog in that I am 76, will have been married for 55 years in a few months. I retired in 1992 at the age of 58 after working as an aerospace engineeer for 36 years. We stepped off the ocean liner that brought us from Liverpool to Montreal in 1956 with $400 between us, worked hard, lived frugally, saved steadily, raised 3 children, invested wisely, and are now multi-millionaires with an investment income of about 5 1/2 times my gross salary when I retired. We also both have pensions in addition to our SS checks. It may seem sad to some people but neither of us get gratification from buying "stuff". We like to buy high quality things that we need and then make them last. Neither of us enjoy going to the the Mall. I was also fortunate that I never had a single day of being unemployed.

I just asked my wife what are the main things that she needs to feel very happy. This was her reply.
1) To be in a long term, loving, and trustworthy relationship.
2) To live in a really nice comfortable home in a nice location with a nice climate, full of treasures we have collected during our travels all over the world.
3) To be as healthy as you possibly can.
4) To not have to worry about money, no matter what happens.

[Goner]

I save most of what I earn every month but am punished for it by low interest rates and a volatile and uncertain stock market.

I know that most people have zero in savings and that nothing is going to come along for them to change that.

So what's going to happen? Those people will someday be too old to work but they'll still need food, clothing, and shelter...

Will there be more inter-generational households? Will housing stay low as these folks sell so as to eat? Will stocks stay low as they cash out their 401k's?

My guess is yes to all of the above to some extent, except to cover any shortcomings the government will come to the rescue by expanding different types of welfare to those who truly (or appear to) have nothing. It will differ from state to state (means testing; primary residence; etc.) but in general many will be rescued by government money, either printed/borrowed and thus devaluing everyone else's money, or taxed outright (higher sales taxes, higher property taxes, and lots of new taxes) for a lifetime of poor choices made in the fact of others (like me) who made the right choices.

In general, the trend will be to reward all of the wrong behavior and make those who exhibited the correct behavior pay for it one way or another. This is already happening with the ultra-low savings rates.

The trick will be how to be financially free while remaining under the radar. In other words, you need people you can trust and you need to have an international mindset if you're American and wish not to leave completely...

[Georgia]

When I worked in the S&L in the 70's and 80's, I was absolutely floored that more people weren't saving. I remember with fondness and longing the 5.25% savings accounts which compounded daily. Wouldn't that be great about now. However, my boss informed me that people save the most when times are hard, because they know they have no choice. When times are good, they plan to save but just keep putting it off.

I did not start saving in my 503b until I was nearly 50. At one time I was putting 25% of my gross monthly income into it and we were trying hard to pay off about 30k in cc debt. It got done. Our last debt (our 5 y/o car) was paid off the first month of my retirement with money from the 503b.

I am now living on SS & 2 small pensions (mine and husband's) and making as much money as when I was working. I am managing to save 10-20% of my income. Jan. 1 of this year I set a new budget in order to save 20% and give 20%. I actually made it through the first 2 months just fine and a little ahead. This month I will not be able to save as much because I had to get a new starter for my now 11 y/o car and will only be able to put 10% into savings and the giving will stay the same.

In 19 years I saved $78k in my 503b, much less than everyone says I need. I am lucky, though, to have enough monthly income to use the 503b minimum withdrawals to fix up my 46 y/o double wide trailer. In the first 5 years of withdrawals from the 503b, I have withdrawn almost $19k and yet my account is only down about $5k.

I also have enough in my savings to pay cash if I need another car. I'll try to get one that is 3-5 years old. But this one is still going great. It is a 2000 Ford Taurus Station Wagon that gets 25-33 mpg. It has over 188k miles on it and my average cost for repairs and maintenance in the 10 years we've had it is about $94 a month. If you had to make payments on another car, you could not buy one for that amount of payment. As long as my average is less than $120 a month, I keep the car. I've done this with 3 cars and the first two had 363k and 316k when I got rid of them. And they all got 30 mpg hiway.

Oh, I cannot forget my 3 miracles - I did get a COLA on my pension and my health insurance has dropped for the past 2 years, $10 a month in 2010 and $20 a month for 2011. I know I am extremely blessed and try to use my money wisely.

[Matthew Freedom]

According to Matthew Bandt of Liberal, Kansas:
Gold is a definite short at the moment but he is still quite bullish on oil. Why doesn't social security invest in commodities?

[KMI]

Personally, the recession has prompted me to build a larger emergency fund and examine expenses more carefully. I don't expect the emergency fund to go away, but I'm not sure how carefully we will continue to examine expenses in a few years. (I hope we will, but once we all feel more secure again, I expect we will spend a bit more.)
I think you'll probably see the biggest difference in saving habits after the recession is over from young adults. Each generation has some economic events that hit early in their lives or careers that strongly influence how they see things in the future, even unconsciously.
For my grandparents, it was the depression and rationing during the wars. Saving is VERY important to them. For my parents' generation, inflation in the 70's followed by stock market booms taught them that saving too much money devalues it, and you will always win at the stock market. In my generation, unemployment in the early 90's taught us that a job is a privilege, not a right, and stock market crashes in the early 2000's brought home issues with investing too aggressively. I suspect a lot of the people just out of college, or in their early 30's are learning hard truths about having a cash cushion and employment that they didn't learn from their booomer parents. They have also learned to be very wary of investing.