Conventional wisdom tells us it’s impossible to be saving too much for retirement, but is this really true? We’ve been hearing about the need to save more for retirement, and for good reason. Ask many of the Baby Boomers who are getting ready to retire and you’ll find that many of them have come to the realization that they don’t have as much saved up as they had hoped, or that they may need to even put off retirement for a few years.
So, is it possible to save too much for retirement? Of course it is, but it’s far from the norm. The real issue comes from the sacrifices you need to make today in order to plan and save for a retirement that may be decades away. There is a balance in life.
If you find that you are already contributing the maximum amount to your 401k.
You are contributing to a 403b, if you are able.
You are contributing to your Roth IRA.
You know exactly how much of your paycheck you should save.
You have figured out exactly how much you need to have saved for retirment.
and you are well on your way to becoming a millionaire, than it might be time to rethink that balance.
If you’re busy cramming every last penny you can into your retirement account and don’t have the cash to do some of the things you want to in life today, you’re saving too much.
You have to remember that retirement is just one phase of your life and while it requires a nest egg and a source of income to live comfortably, you can’t put everything else in life on hold. We need to consider the uncertainties that come with retirement—health, longevity, economic conditions, and taxes—which will play a huge role in determining whether or not we’ve saved up enough. You can make some assumptions when planning for these things, but essentially we’re working with a lot of broad assumptions.
Striking a Balance
To make sure you’re not saving too much or too little for retirement you need to strike a balance. Saving a portion of each paycheck, investing the money wisely, and thinking about how to spend that money in retirement are all important. At the same time, you’ll want to look at the things you want to accomplish before you retire. You’re only young once and what good does putting off all of your goals until your golden years do if you end up with poor health and find yourself unable to even do the things you worked so hard to save up for?
This doesn’t mean you should raid your savings account and jet off you Europe or buy an expensive sports car tomorrow, but it is time to sit down and think about the things you want in life. Think about what your retirement will look like, how much money it will take, and how you plan on getting there. Then look at some of the things you enjoy and would like to do before retirement and set aside some money and goals to make sure you can accomplish them without having to put everything off until retirement.
Taking Care of Other Financial Needs First
Finally, prioritize your financial obligations. If you’re like most people, you have other financial items to attend to such as saving for college, paying off credit card debt, building an emergency fund, and so on. If you’re dutifully putting 10 percent of your paycheck into a 401(k) but have $10,000 in high-interest credit card debt and virtually no emergency savings, it’s time to step back and look at what’s important.
Saving 10 percent or more of your pay for retirement is great, but if you’re wasting thousands of dollars a year on finance charges because of lingering debt or don’t have enough money in the bank to last you a few months during a financial emergency you’re just setting yourself up for failure. You don’t have to ditch the retirement savings entirely, but consider scaling back and using some of the money to pay off that debt and begin building a safety net. In a situation like this you can be saving too much for retirement because you’re costing yourself more money than you’re gaining due to interest and setting yourself up for a possible disaster if a financial emergency does arise.
For more on this topic be sure to check out the article I wrote Are You Saving Too Much For Retirement.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.