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Investing for a Lifetime: Managing Wealth for the "New Normal" by Richard C. Marston

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CHAPTER 5 What Rate of Savings?

We find so many different ways to spend our income. There are necessities like food and clothing and shelter and health care. Education, as noted earlier, costs a lot. Then there are luxuries like travel and fancier cars. Savings is one item that is easy to neglect.

There is a life cycle to savings. Everything else being equal, investors find that it is easier to save in the years prior to the arrival of children. And it’s easier to save after parents have become “empty nesters,” at least once college tuitions are paid. But for the moment, we will assume that savings is steady throughout the working years. That’s not a bad approximation for savings within retirement plans. When workers first enter 401(k) or other defined contribution plans, they set their rate of contribution at some rate. Then they leave it alone. Before long, they find that they have contributed a lot to their pensions.

Sadly, some workers elect not to contribute at all. That used to be particularly easy. Until reforms instituted during the Clinton Administration, 401(k) plans depended on workers electing to contribute. They had to sign up. We know enough about human behavior to know that automatic signups increase participation. Why? The reason is most people are lazy when it comes to making decisions, especially those that have no immediate payoff. People fail to sign up for 401(k) contributions even in cases where the employer matches their contributions. If they have to ...

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