Are You Saving Too Much for Retirement?

And now for a little something different. Yes, most of our coverage on Dentist’s Money Digest is encouraging you to put more away now for the benefit of your future self. And for good reason. Studies and surveys consistently point to the sorry state of preparation of most Americans for their coming retirement. But there is another side to the coin as well. It was covered by popular financial blogger Michael Kitces here also. There’s a very real possibility you could be saving too much.

Sounds silly, right? For one, you won’t ever know how much you’ll need in retirement, given that you won’t ever really know how long you’ll live in retirement. Isn’t it better to have too much? After all, that extra money can be given to heirs or donated to charity. It’s not as if it will go to waste. What’s the worry, even if you are saving “too much?” More on that in a moment.

The general rule of thumb in retirement investing is to try to replace 70% to 80% of your pre-retirement income in retirement, with appropriate adjustments for the expected inflation rate. But for most people, their spending will peak in their mid-40s to early 50s. From there, income may still go up, but spending is likely to decline. Perhaps the kids have left college and started earning incomes of their own, perhaps the mortgage is finally paid off, and certainly the dental student loans are but a distant, if not fond, memory. If you base what you need in retirement on what you’re spending now, you may be overlooking an overall dip in your expenses that will be coming as you near your late 50s.

The cost of over-saving?

The cost of over-saving isn’t exactly a monetary cost. It’s more likely to be a lifestyle cost. That is, if you’re saving too much for retirement, chances are that your income is meeting your expenses, and your lifestyle choices are within your budget. But perhaps you’re not necessarily making optimal choices when it comes to activities you might enjoy. Maybe your children are taking on student debt as opposed to graduating with a clean financial slate. Perhaps some of the income you’re putting away could be put to better use.

Or, maybe not. Look, there may be some people who are saving more than they’ll ever need. This is still, on the whole, a much less severe problem than not saving enough. There are other reasons to save as well, even if the saving may fall into what some consider the “too much” category. For one, inflation has been relatively low for several years now, but the economy is notoriously difficult to predict. Inflation could be on the rise at some point between now and your retirement. And Social Security, an additional source of income for most in retirement, really can’t limp along forever in its current under-funded state. Chances are it will be either a defunct or very different program by the time you’re ready to reap the benefits.

Last but certainly not least, retirement savings are not designed to be a contingency fund and shouldn’t be used that way, because there are investments much more suited to this use. But a turn for the worse health-wise, or some unexpected calamity, can be solved, in part, by using retirement savings.

The simple truth is that too much retirement savings can’t hold a candle to too little saved. Keep saving and investing.