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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.