Robert Powell's Retirement Portfolio: Many young people shouldnt save for retirement, says research based on a Nobel...

Most financial planners advise young people to start saving early and often for retirement so they can take advantage of the so-called eighth wonder of the world the power of compound interest.

And many advisers routinely urge those entering the workforce to contribute to their 401(k), especially when their employer is matching some portion of the amount the worker is contributing. The matching contribution is essentially free money.

New research, however, indicates that many young people should not save for retirement.

The reason has to do with something called the life-cycle model, which suggests that rational individuals allocate resources over their lifetimes with the aim of avoiding sharp changes in their standard of living.

Put another way, individuals, according to the model which dates back to economists Franco Modigliani, a Nobel Prize winner, and Richard Brumberg in the early 1950s, seek to smooth what economists call their consumption, or what normal people call their spending.

According to the model, young workers with low income dissave; middle-aged workers save a lot; and retirees spend down their savings.

Source: Bogleheads.org

The just-published research examines the life-cycle model even further by looking at high- and low-income workers, as well as whether young workers should be automatically enrolled in 401(k) plans. What the researchers found is this:

1. High-income workers tend to experience wage growth over their careers. And thats the primary reason why they should wait to save. For these workers, maintaining as steady a standard of living as possible therefore requires spending all income while young and only starting to save for retirement during middle age, wrote Jason Scott, the managing director of J.S. Retirement Consulting; John Shoven, an economics professor at Stanford University; Sita Slavov, a public policy professor at George Mason University; and John Watson, a lecturer in management at the Stanford Graduate School of Business.