Last year at this time, as college graduates walked out into the world, I wrote a column giving advice on how they could save money.
In droves, parents sent the column to their children. And some of those children wrote to me to vent. What I suggested was impractical, many said. How would you like to try to live on $40,000 a year in Washington or San Francisco, several asked.
What I was proposing was not radical. It was mostly the simple things my mother had drummed into me. It was advice like diverting 10 percent of your income to savings before anything else and ignoring raises and putting them into savings, too. Learn to cook, I said, and never borrow money to pay for a depreciating asset.
I also suggested cutting out the latte habit, which was my symbol for those little things in life that when turned into a habit, add up to money that could have been spent on something worthwhile and memorable.
Other people, my wife among them, pointed out that I may have been too draconian on that point. Consistent savings is a lot easier if there are small rewards along the way; otherwise, life seems as if it is just one bowl of cold grass porridge after another.
Fine feedback, indeed, and my wife’s counsel reminds me that I should have added one other bit of advice: find a partner and stay together. Study after study show that two can live more cheaply together than each alone and that divorce is the great destroyer of wealth.
But, dear graduates, the crux of the advice is still compelling. While there may be a debate among economists about how much 50- and 60-year-olds should be saving for retirement, there is little dispute about how much the young should save: more.
Saving while young is critical. It isn’t just because of the power of compounding. By that I mean that if you start saving now it will build to a larger nest egg by the time you are 65 than if you wait to start at 45. Or to put it another way, you can save a smaller amount now rather than a larger amount later.
Bank $250 a month for 40 years in a I.R.A. or a 401(k) and you will receive about $500,000, assuming a 6 percent return. Start at age 45 and you would have to put in $1,078 a month to generate the same amount by age 65.
But there is another compelling reason to get into the habit of saving. (Here is where this column also turns into advice for the older folks who are giving you this to read.) People who save a lot get used to a lower rate of consumption while working, so less money is needed in retirement.
Stretching to save a little more yields a double dividend. You accumulate more assets and you lower the amount you will need in retirement because you will not have the habit of spending extravagantly to feel fulfilled.
Inevitably though, we return to the question: How can you possibly afford to put away that much? If you are only making $40,000, a not-untypical starting salary for a college-educated professional in a big city, the weekly gross of $769 works down to $561 in take-home pay after income taxes and payroll taxes for Social Security and Medicaid.
Were you to divert 10 percent of your salary to a 401(k) plan, the bottom line becomes $509.
In other words, a regular habit of savings costs you $52 a week. You easily frittered that away last week on things that you cannot even recall this week. A useful exercise that proves the point: For a week, try to list everywhere you spend cash or use your credit card.
Could you save another 10 percent a week, or $50? If you do, you are nearly set for life.
Can you live on $1,950 a month? Rents being what they are in certain cities like New York, San Francisco or Washington, sure, it will be tight. People do it by finding a roommate and watching their expenses (or asking for an occasional handout from Mom and Dad).
There may be another compelling reason to save and that is that while many aspects of retirement savings are predictable, the big unknowable is health care costs. “If you believe in the logic of the life cycle model, then once you get used to peanut butter, all else follows,” said Jonathan Skinner, a economics professor at Dartmouth College who has studied retirement issues and recently wrote a paper titled “Are You Sure You’re Saving Enough for Retirement?” for the National Bureau of Economic Research. “That’s the assumption that I am questioning: Do people want to be stuck in peanut butter in retirement?”
He said he came to the conclusion that a strategy to reduce retirement expenses “will be dwarfed by rapidly growing out-of-pocket medical expenses.” He noted projections based on the Health and Retirement Study, a survey of 22,000 Americans over the age of 50 sponsored by the National Institute on Aging found that by 2019, nearly a tenth of elderly retirees would be devoting more than half of their total income to out-of-pocket health expenses. He said, “These health care cost projections are perhaps the scariest beast under the bed.”
As Victor Fuchs, the professor emeritus of economics and health research and policy at Stanford University, told me, money is most useful when you are old because it makes all the difference whether you wait for a bus in the rain to get to the doctor’s appointment or you ride in a cab.
“Saving for retirement may ultimately be less about the golf condo at Hilton Head and more about being able to afford wheelchair lifts, private nurses and a high-quality nursing home,” Professor Skinner said.
His best advice for people in their 20s and 30s: maximize workplace matching contributions, seek automatic savings mechanisms like home mortgages and hope “that their generation can still look forward to solvent Social Security and Medicare programs.”
Over the last two years I’ve been dispensing advice in this space about how to spend and save more wisely. This will be my last column for a spell as I am taking on editing duties that give me little time for reporting. But before I go, I want to remind the young graduates, their parents who scrimped and saved to get them there, and anyone else who stuck with me this far that are a few other rules of life worth considering.
Among them are the following. Links are available at nytimes.com/business:
¶Never pay a real estate agent a 6 percent commission.
¶Buy used things, except maybe used tires.
¶Get on the do-not-call list and other do-not-solicit lists so you can’t be tempted.
¶Watch infomercials for their entertainment value only.
¶Know what your credit reports say, but don’t pay for that knowledge: go to www.annualcreditreport.com to get them.
¶Consolidate your cable, phone and Internet service to get the best deal.
¶Resist the lunacy of buying premium products like $2,000-a-pound chocolates.
¶Lose weight. Carrying extra pounds costs tens of thousands of dollars over a lifetime.
¶Do not use your home as a piggy bank if home prices are flat or going down or if interest rates are rising.
¶Enroll in a 401(k) at work immediately.
¶Postpone buying high-tech products like PCs, digital cameras and high-definition TVs for as long as possible. And then buy after the selling season or buy older technology just as a new technology comes along.
¶And, I’m sorry, I’m really serious about this last one: make your own coffee.