Page 37 - Book2E

CHAPTER 4
Retirement: Are You an Ant or a Grasshopper?
It was wintertime, the ants’ store of grain had got wet and they were laying it out to dry. A hungry grasshopper asked them to give it something to eat. “Why did you not store food in the summer like us?” the ants asked. “I hadn’t time,” it replied. “I was too busy making sweet music.” The ants laughed at the grasshopper. “Very well,” they said. “Since you piped in the summer, now dance in the winter.” —Aesop’s Fables
This all-too-familiar tale from childhood can ring unpleasantly in our ears if we start to feel like the grasshopper rather than the ant. In his 2003 paper for the University of Chicago entitled, “Grasshoppers, Ants and Pre-Retirement Wealth: A Test of Permanent Income Consumers,” Erik Hurst states that his research showed “the population is comprised of two types: ‘economic ants’ who follow some sort of optimizing consumption rule and ‘economic grasshoppers’ who do not plan for predictable future periods of low income. While most of the popula- tion is comprised of these economic ants, the remaining 20% of the population who follow myopic consumption rules cannot be ignored. For example, it is these households who would have the largest con- sumption response to a temporary tax cut or who would suffer the great- est welfare loss from the elimination of the social security system.”
Every time an unexpected expense arises, do you ask yourself why you haven’t been saving to prepare for it? Boyce Watkins, a professor of finance in the Whitman School of Management, suggests people are
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