Stable Value Funds, Money Market Funds, and Saving Too Much

5 Comments on Stable Value Funds, Money Market Funds, and Saving Too Much

DJR on August 21, 2009 | permalink

 

This view that we can't plan because there's "simply too much unknown for the future" and expressed also in that Wang article linked in the story takes the fact that the future is unknown and gives people an excuse to ignore planning . Obviously people that say these things still save, they still make plans, they still imagine what they might do some day in retirement, etc. So we shouldn't pit planning vs. not planning. And by "not planning" I mean take the attitude–well we can't really know so we should just save all we can and hope for the best. I do believe that oversaving is not such a different mistake from undersaving. For in the one case you have less than you could now; in the other case you have less than you could in the future.

The argument, of course, is that the first error is not so bad as the latter error. Perhaps not, but all of this talk assumes there's no alternative to guessing how much you need in retirement–and that's what Wang and nearly every other writer assumes–that we must guess or use a rule of thumb about % replacement needed. This approach is what is behind all the cynicism about planning.

At least with ESPlanner http://www.esplanner.com you get consumption smoothing, which basically tells you your sustainable living standard from current age through 100 (factoring in income, taxes, SS, medicare, and any other expense you want to throw at it). That's really the most you can know and all you really need to know. For once you know that smoothest sustainable living standard, then you can just use the program to scale that living standard gradually up or down how your optimism or pessimism leads you. But this is a very different approach (and much more rationale and practical) than just saying, "oh, we don't know the future, better save all we can." For eventually you must make a call–retire, contribute more, postpone SS, etc. The question is whether this call is informed by good technology and economic theory or just by fear.

TFB on August 21, 2009 | permalink

 

DJR – Thank you for your detailed comments. I'm leery of the false sense of security and precision given by the software. Planning is great, but is it actionable? After I plug in a number of guesses on top of another set of built-in assumptions, the software tells me my smoothed consumption should be $56,789.12 a year and that I'm saving too much. I spend $56,789.12 happily this year and I consult my magic software again next year. Years go by and then I find out I'm way off, because my guesses were wrong. Now what? I cannot re-smooth my consumption because there is no time machine.

I remain unconvinced that a precise number from elaborate calculations based on guesses and assumptions way into the future is really better than a simple "save 15% of your income" rule of thumb.

I don't know if you are associated with ESPlanner or not. If you are, please tell the decision makers that the price point is too high. They will be able to sell many more copies and receive a much larger revenue if they lower the price point to $50 range. For a software that'll be used once or no more than a few times a year, $200 is hard to swallow. If it's $50, I'd take a chance, just to confirm I'm on the right track.

ESPlanner may very well be the best planning software. But its price point is limiting its appeal.

Jonathan on August 22, 2009 | permalink

 

Have you tried to e-mail Kolitkoff or one of the ESPlanner folks? Professors seem to be more open to responding to random e-mails, perhaps due to the university tradition of open "office hours". Or he might just refer you to his PR people, he's gotten so much press I'm sure he hired somebody to handle it. Can't hurt to ask, I'd like to see your thoughts on it too.

http://people.bu.edu/kotlikoff/

DJR on August 22, 2009 | permalink

 

TFB:

Yes, I do some website work and documentation for Kotlikoff's software so I guess I'm not "objective" in one sense. But I was a customer for a year before that. I realized pretty quickly that the software was not using an approach that was even remotely similar to the "enter your replacement income %" that dominates the industry. I had use MoneyguidePRO, and three or four of the detailed broker version of software (Schwab, Fidelity, etc.). Again, I'll sound like a sales person here, but the methodology is completely different.

You write: I remain unconvinced that a precise number from elaborate calculations based on guesses and assumptions way into the future is really better than a simple "save 15% of your income" rule of thumb.

Now I'm not referring to the free BASIC program on the web, but in the 149.00 download version, there really are not these crazy guesses about the future. There is a lot of data to enter, but it's not crazy guess data. At least I don't think so. Never does the software ask you to tell it what you need to live on in retirement. I suppose one might say that the assumption that I keep my current job for the next 10 years is a wild assumption, but it's not for me. If I thought it was, I'd create a new profile where I lost my job and see what happens that way. I hope you see my point.

I don't know how to address the point about the future surprising us because we've made the wrong guesses piled on assumptions. I guess that could happen with the save 15% approach too. It could be that you should have saved 35% and that now you are in the poorhouse. That's not far fetched for some scenarios. The world could blow up I guess. But what we need is software that shows our available living standard given what we want to assume about our future earnings. Replacement income (the prevailing methodology) really has absolutely nothing to do with it. See the case study here for an example of smooth living standard only requiring replacement income of 22% for four years–then 53%.

http://www.esplanner.com/case-smoothing-consumption-vs-online-calculators

This case study also shows why the guess work of replacement income or just save 15% or whatever similar kind of guess you want to make can be so far off.

There is a ten-day money-back guarantee on the software, so if you want to purchase, I'll make sure that you can run this is a trial version with no expectation that you will not return the software. I manage that side of the site, so no worries about that. Make a purchase, right a review, and then I'll issue the refund the same day you ask for it. No questions asked. The company doesn't have a crippled version to give out or a standard version that blows up.

I don't make a commission here. I guess I just really believe in the software and like to talk about it. It's helped me a lot, and I realize it's a unique approach.

The website has a lot of case studies and research on this economic's approach. There's an article that Kotlikoff published in the Journal of Financial Planning (available on the http://www.esplanner.com site) that I think makes a clear case for this life-cycle approach that shows living standard as a endogenous solution rather than an exogenous guess. It's the only software that works in this manner.

thanks for the blog and making it possible to have these interesting discussions.

Best,

Dan

DJR on August 22, 2009 | permalink

 

Jonathan:

I didn't mean to ignore your comment. I realize putting up 149.00 to try the software and then asking for a refund is a kind of hassle, but if you wanted to go that route, just let me know and I'll be happy to take care of that too. I'm not shy about asking for a refund in such situations, so if you don't mind doing the same, you can at least try the software for a few weeks.

Dan

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