Then make provisions for old age when the salary is at its highest
They argue: High-income people tend to get big raises over the course of their careers. Instead of putting away a lot of money at a young age (when they still have a lower salary), they can spend it confidently and have a high standard of living early on. If they later get a salary increase, they can save more money without lowering their standard of living – the researchers calculate that the amount of the reserves is the same when they reach retirement age. At the same time, when you’re young, you don’t have to hold back so much and be satisfied with less than you might like. The research team assumes that at the age of 25 an annual income of 25,000 US dollars meets the requirements and that the same standard of living cannot be achieved with less money at this age: “We assume that a certain sum is more valuable for the poor than for the rich,” Scott said in an interview, according to MarketWatch. What is meant is that 1,000 euros mean more with a comparatively low income at the beginning of your career than with a high income in the middle or at the end of your career. It’s worth spending more money when you’re young than putting it away.
Early saving for retirement makes little sense due to low interest rates
At least that is currently the case. MarketWatch quotes Scott as saying, “Saving early can have a big impact because of compound interest, but compound interest is clearly irrelevant when rates are – as they have been for years – at zero percent post-inflation.” The recommendation not to start saving for retirement at an early age therefore depends heavily on the current environment.
Scott goes on to explain that because of effective social assistance, early investments would not be worthwhile even for employees with very low incomes because they would not significantly improve the standard of living in retirement. He refers to social assistance in the USA. It is therefore questionable whether this research result also applies in general in Germany. The same applies to the research team’s recommendation not to just save money for the benefits of real estate, but to take out a mortgage and build a house.
Salaries cannot be planned – reserves make sense
In the interview, Scott also addresses other models such as that of the economic expert T. Rowe Prize. He says that by the age of 30 you should have savings of half your annual income, by the age of 40 you should have savings of one and a half times your annual income, and so on. Scott thinks this model makes sense, but he is sure that the extended life cycle model works at least as well for certain groups of people. He also recognizes that salaries cannot be planned in advance. MarketWatch concludes by quoting him as saying: “Wages are risky. It could be argued that young people should save to protect themselves against an unexpected drop in wages. However, this would not be saving for retirement.” So you should start saving early, but only really deal with retirement provision later.
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