Under 35? Don’t Save For Retirement Yet, These Experts Say

Talk to any financial advisor and they usually have the same advice: Start saving for retirement when you’re young. According to another set of experts, it’s time to ignore all that. Their take relates to a concept called the “life cycle model,” a theory about consumer consumption as developed by Italian-American economist and Nobel Prize winner Franco Modigliani and his student, Richard Brumberg, in the 1950s. According to MarketWatch, the theory states that people spend over the course of a lifetime while taking into account what their future income might be in order to have a consistent standard of living. A group of financial experts has now taken this model into account, using it to explain why they advise young people to wait on saving for retirement. Jason Scott, managing director of J.S. Retirement Consulting; John Shoven, economics professor at Stanford University; Sita Slavov, public policy professor at George Mason University; and John Watson, lecturer in management at the Stanford Graduate School of Business, spoke to MarketWatch about the research that informed their updated guidelines. First and foremost, they say workers should wait to save for retirement when those wages are at their peak, which usually happens well into a job cycle. “For these workers, maintaining as steady a standard of living as possible therefore requires spending all income while young and only starting to save for retirement during middle age,” Scott said. That would mean lower-income workers, who may not receive the same raises in salary over time, will have comparable Social Security replacement income when they retire, so they don’t need to save as much for retirement out of the below-average wages they currently receive. In fact, he and his research cohorts recommend young people put their savings into buying homes instead of adding to retirement plans. The idea is for them to borrow against future earnings and pay down the mortgage over time as wages increase. At the same time, they’re building equity that also will impact their bottom line and financial value in the decades ahead. Unlike other financial advisors who evangelize saving as early as possible for retirement to take advantage of compounded interest and the “free money” that comes with employer-matched 401(k) plans, Scott and his team have found that most people should begin saving at age 35. While they agree it’s good to have certain attainable goals for retirement savings, the researchers say these finish lines will be easier to meet later in life rather than trying to parcel out an entry-level salary you need to survive when you’re young. Of course, there are many who disagree with this approach and favor the long-touted advice to save for retirement early. For example, economists who are closely watching Social Security reserves worry that, in the future, they will be nearing depletion, resulting in drastic cuts to benefits, unless something is done. If this is the case, the example of a low-income worker that Scott and his team point to above won’t be covered by comparable replacement income. Plus, with the current inflation-era interest rates that have flatlined for savings, it is less advantageous to put away a significant amount of money. If this scenario continues, compounded interest is negligible, say the researchers. There is also the question of whether the average American worker can count on a pay raise. As Forbes noted, per a YouGov survey in 2022, 57% of workers were not given raises due to inflation this year. According to Scott, in spite of those factors, it’s still best to wait to save for retirement. As he told Marketwatch, his theory still applies: “You want to save when you’re relatively rich in order to spend when you’re relatively poor.”