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Retirement Planning > Saving for Retirement

3 Underappreciated Benefits of Early Retirement Savings

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What You Need to Know

  • Even modest amounts of savings can help in emergency situations and deliver substantial peace of mind.
  • Saving early creates discipline that lasts a lifetime and delivers the benefits of compounding.
  • Saving early in a career versus starting in the middle creates a lot less outlay in any given planning scenario.

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.

“By instilling the principal of saving regularly from an early age, if done consistently, it will develop into a habit,” Crider says. “If one, instead, decides that they will begin saving at an arbitrary time in the future when they feel they are able to, one can easily succumb to lifestyle creep and never actually reach a point of ‘having the money to save.’”

Furthermore, savings rates are traditionally viewed as a percentage of income, rather than a flat dollar amount. Therefore, Crider says, establishing a percentage early on, while perhaps being uncomfortable at times, is a more manageable habit than feeling forced to save a specific dollar amount annually.

“This allows for fluidity as earnings rates shift,” he says. “Finally, one must simply consider the role that time plays when considering compounding. Saving, even a modest amount, from the onset of a career, allows for those saved and invested dollars to work for decades, reducing the burden of retirement income to be generated primarily through a higher savings rate later, and shifting it, instead, to the wondrous work of compounding.”

Less Lifestyle Disruption

Jarrod Sandra, owner and advisor at Chisholm Wealth Management, says quantifying an adequate standard of living across all human beings is a difficult thing to do. What one person would insist is a requirement for their standard of living is another person’s optional item, he posits.

“That’s why it’s called personal financial planning,” Sandra says.

In his experience, saving early in a career versus starting in the middle creates a lot less outlay in any given planning scenario.

“When someone starts to save for retirement in the middle of their career, it is likely going to disrupt their standard of living to accommodate that change,” Sandra says. “I think the more impactful route, painting with a broad brush, is to get a younger person to live within their means and have them focus on getting out of debt.”

Once the debt load is manageable, it is then time to start tackling the retirement issue.

“If they go this route, they learn to live on less than they make and reroute previous debt payments to investing for retirement and increasing their standard of living, all within their means,” Sandra says.


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