Saving for Retirement: Is Keeping Up with The Joneses a Good Idea?
In much of life, there’s a tendency to compare your lifestyle to others, whether it’s the size of your house, the kind of car you drive, or where you go on vacation. Now, financial firms are asking whether keeping up with the Joneses might actually be a good strategy when it comes to saving for retirement.
Voya Financial, which evolved out of ING Group’s U.S. retirement and investment management operation, conducted a survey in 2013 finding that people felt urged to save for retirement in order to more favorably compare with peers.
More than half (52%) of people surveyed reported they would feel “nudged” into setting aside more for retirement if their savings didn’t match up to their counterparts’, according to a recent New York Times article.
Comparing Can Motivate You
Knowing where your retirement savings stand compared to your peers could be a motivating factor to get up to speed, theorizes Putnam Investments, which recently added a new tool to its online retirement account statements. The new feature, which Putnam calls the ‘Joneses Tool,’ gives users the ability to see how their savings compare to other Putnam account holders who are similar in age, income, and gender. The tool also models how that ranking could change if the account holder sets aside more money from his paycheck.
But seeing an unfavorable comparison won’t necessarily prompt more savings action: Even when confronted with evidence that they were setting aside less than their peers, not many Putnam customers actually changed their retirement saving habits, according to the Times, suggesting that “people might need more of a shove than a nudge.”
Knowing if a peer has more or less saved can certainly have an effect on people, says Life Transition Specialist Nicole Mayer, AIF, partner at Illinois-based financial planning firm RPG. “They absolutely are concerned with how much their peers are saving,” she says of her clients. “They feel compelled to keep up or save more if they know they do not have as much as their peers.”
But Focus First on Your Own Savings Needs
Comparing to others may not be the best strategy, she continues.
“It doesn’t help to know what others are saving when you don’t know if they picked the amount arbitrarily or they actually have a plan and know the amount they actually need,” Mayer says.
The best bet is to start a plan tailored to your own situation.
“Work with a financial planner. Know the amount of money you need to save for your personal retirement goals,” Mayer recommends.
Misery (Bad Savings Habits) Loves Company (Other People with Bad Savings Habits)
This is an area where rules of thumb can help—but aren’t a panacea, agrees financial advisor Robert Cucchiaro, CFP, partner at California-based Summit Wealth & Retirement Partners, Inc.
Comparing your retirement plan to others like you can help, but it can also hurt. “People often ask me how they are doing relative to my other clients, financially. I always respond the same way, which is by asking ‘Why do you ask?’” he says. “The answers are almost always the same: the person feels like on the one hand they haven’t saved enough and wants to justify it by knowing that everyone in their peer group is in a similar boat.”
At that point, Cucchiaro says he explains that everyone’s situation is different, and what matters most is not much you have—but how much you need. One way to get a general idea of how much you’ll need in retirement is to enter your information into a retirement calculator.
Using NewRetirement’s Retirement Calculator, 60-year-old Bill enters his current financial situation along with expected retirement income he’ll receive from Social Security, annuities, pensions, and investments. Bill, a business owner, is divorced and makes $70,800 a year. He has more than $500,000 of assets in the form of a house, his business, savings, and various other assets, but has $110,000 of debt for a net worth of $412,500.
After NewRetirement’s calculator crunches all the numbers, Bill can see that he’s expected to run out of money between age 73 and 79, according to the calculator. He’s also able to get a snapshot of how his finances—income, expenses, assets, debt and net worth—match up to local averages:
When using a retirement calculator like this one, people can safely put a lot of weight on their results, says Mayer, but they shouldn’t be lulled into false confidence.
“If they are ahead, it doesn’t mean they should slow down or be lax with their savings,” she says. “[They should] keep on ahead—and maybe re-adjust their goals.”