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WHY DO SOME PEOPLE save more for retirement than others, even when their income is the same? It turns out that a difference in spending behavior, rather than a larger salary, may separate better savers from those who struggle to set aside funds for their future.
The Employee Benefit Research Institute and J.P. Morgan Asset Management joined forces to examine the spending and saving behavior of 10,000 households. The households, which were analyzed by age cohort, were divided into three groups based on the percentage of salary each contributed to a 401(k) plan. In the bottom 25%, low savers sock away about 2% to 3% of their income. Middling savers—those in the middle 50%—save about 5% to 6%. High savers, in the top 25%, start by contributing about 9% of salary and increase that amount as they get closer to retirement.
The researchers then compared the salaries of low and middling savers, and found that the two groups earn about the same. Yet, even though there’s only a small difference in salary between low and middling savers, at all ages middling savers sock away about three percentage points more toward retirement than low savers. This difference is meaningful down the road, as the two groups approach retirement age. Compared to low savers, middling savers accumulate twice as much by age 60.
What drags down low savers and keeps them from achieving the same results as middling savers, who earn an equivalent salary? The answer is spending. Low savers spend about 2% to 3% more of their salary than middling savers, especially when they’re younger. This difference in spending may account for the additional savings that middling savers set aside for their golden years.
The bulk of the difference consists of increased spending on housing, transportation, and food and beverages. Throughout their working years, low savers consistently spend more on these three categories than middling savers. Spending on other needs, such as education and clothes, is similar, while low savers spend slightly less on travel compared to middling savers.
It seems that, for some workers, spending is the culprit siphoning off money that should be used for savings. But it isn’t clear what’s driving this higher spending. Is it a desire to satisfy today’s immediate wants, such as a fancier car or pricey restaurant meals? Or do the necessities of life just cost more for some people, and therefore hamper their ability to save?
A lot of the comments blame people for their spending. Definitely many people spend a lot more than others. Often this is choice or habit, but a few posts point out that sometimes people are in situations where they have no choice.
Our ability to save was made possible in large part by graduating with no debt, in part by working through college and in large part by family support. If you start with money and your proclivity is to save, saving is far easier.
Also, we were fortunate to have employers with 403(b) plans with matching. So no debt payments combined with opportunity made this possible. It’s really not an option for everyone.
I read the Millionaire Next Door more than 2 decades ago. As I recall the book refers to experiments where certain people exhibit a more frugal inclination and mental power to postpone pleasure.
(We’ve all heard about the experiment where kids are given the choice of a candy bar now or later two if they just waited.)
After I read the book, I was overjoyed because I realized I wasn’t the abnormal one for seemingly not living a life at a level commensurate with my education, place of work and successful friends. Before the book, I thought perhaps I had some kind of abnormal Scrooge-like relationship with money.
So based on the book and my own experience, I want to say that our approach to life and money is probably more nature and less nurture. Here are a few examples from my life.
Nature: I don’t know why, but I’ve never been interested in living a life accompanied by lots of belongings. I have a distaste for things wasted and make do with what I have.Nature: After I started a family, I instinctively began to save a significant portion of my income in order to protect family from job loss and other negative scenarios. At this point, I knew nothing of financial planning, but had the distinct feeling that the ground beneath us could crumble at any time.Nature: If something is important I pay for it in full. Distaste for any type of debt.Nurture: I read the Millionaire Next Door and John Bogle’s books on investing. I normally don’t like to read, but somehow I picked these up and they changed my life.Nurture: I didn’t enjoy my engineering studies and didn’t do well, but somehow I managed to graduate and obtain decent employment. The engineering major my father put me on lead to a career of decent pay with reputable companies.If the inclinations of nature weren’t present, I am not sure the nurture part – implementing what is in those books – would have been as successful, but I am not 100% sure. I wonder how you feel about financial stability as a nature vs nurture thing?
I don’t know how much is nature and how much is nurture, but work ethic, responsibility, empathy, money attitudes definitely have a strong nature component. How nurture in different cultures developes these may vary. That’s my theory of the moment.
Some folks are blessed with trouble-free lives, lucky if you will, and others are beset with problems not of their own making necessarily. In many cases it is not lack of will to save, but lack of good fortune such as children or selves with illnesses or disabilities, car repairs, major house repairs (or no control over rent increases), the usual litany, that prevents or minimizes saving for many people.
So true, Dick. Some just don’t have the ability to handle the complexity of independent living, but for the rest of us it comes down to choice. And for us, many lack the vision to imagine our lives decades down the road, to our detriment.
“Or do the necessities of life just cost more for some people, and therefore hamper their ability to save?”
The Cost of being Poor
https://finmasters.com/cost-of-being-poor/
I don’t understand why this post and the linked article should be getting so many down votes. I get the feeling readers are reacting with the mindset that this is yet another excuse for bad financial behavior.
It’s not, and if read with an open mind, I think most folks can see the issues the article explores are real ones for the poor.
Okay, maybe it’s a little off topic. As Dick Quinn caveated his comments, for the real poor, ability to save is another story. Likewise, I doubt Edmund Marsh had the truly poor in mind when making the statements in his article either. So maybe the linked article isn’t the most relevant to the discussion, but it describes a serious concern for our society and is worth a read.
In these type of discussions I think it’s a given, we are not talking about the poor. That is a separate issue when it comes to spending and saving. As I said in my post the bottom 20% income wise are the exception.
Started saving at 26. Took buyout at 60…bored still so back to work. Money isn’t everything that’s for sure.
Good article Edmund!
I am retired but was formerly IT Director for a large organization. When they started a 5% match on our 401k, I told my staff in a full staff meeting that this was the best deal in town and they should take advantage of it. The immediate response from several was “we cannot afford it”. They were well paid workers and I did not understand that response, and still don’t. Unfortunately, that mindset seems to fit so many workers.
Thanks, Jerry!
I was amazed to find out that my coworkers at an engineering firm were living paycheck to paycheck.
Definitely “necessities” are different for different people.
We’ve always spent really well, and until this year have earned less than lots of our friends and have still always been able to give and save more than most.
Certain things are never on the can afford list Saving is one, a health care co-payment another, but at the same time there is money for many other things that clearly are not necessities. Just think of the many things people feel should be “free.”
Every time I see someone complaining that wages are too low, they can’t possibly save or fund a distant retirement….they are carrying an expensive cell phone with a data plan, have a manicure, expensive dyed/styled hair, and a Starbucks coffee in hand. If we want to change mindsets, they should bring back Home Economics and/or household finance classes in high school, or even Jr. High. Making smart financial choices needs to be taught at a much younger age! My parents were blue collar and I never even heard the term “stock” until I was married–they thought investments were for “rich” people. A little bit of financial education could have really helped them. Unfortunately, the generation behind me is eyeing MY savings/thrift to make up for their lack of savings!
I regularly read the blogs of high savers, FIRE folks mostly. With incomes solidly in the middle class, sometimes upper middle class they save 50-70% of their gross incomes. I frankly can’t believe it, but they claim to do so via being extremely frugal in all aspects of spending.
One such blogger “retired” at 33 nine years ago, lives in NC with a family of five and lives on a budgeted income of $40,000 or less all while taking the family on five to six cruises, road trips or European vacations per year. Of course, income based heavily subsidized health care, college, even free cable helps.
IMO spending is the culprit not for some workers, but the vast majority of workers along with how they define necessities. I’m sure the cost of basic living expenses varies across the country, but they generally reflect the incomes in the same area.
If Americans at all income levels above the lowest 20% would save 10-15% of gross income and then set their standard of living accordingly based on what’s left, many retirement issues in the future would be taken care of.
The Cost of being Poor
https://finmasters.com/cost-of-being-poor/
This is Chris. In our experience, when we moved from a high cost of living area to a lower one, we were finally able to get traction and save more. We were also able to save even more a couple of other times in our lives: when the kids grew up, and when we paid off our house.
We did pay as we go for our daughter’s college education. She got married a month after graduation, and we paid for the wedding up front. Her older car broke down and we bought her a new one her senior year. I paid the car payments until she got a job. After all of that was done, eliminating all of those expenses resulted in the biggest pay increase I ever experienced! But I would gladly do it again.