The idea of saving too much for retirement may sound a little odd. Retirement finance discussions typically focus on how to sufficiently replace a paycheck to afford your desired retirement lifestyle. This may include adding in a dream vacation or other long-held wish, being prepared to cope with long-term healthcare costs and leaving a legacy to your beneficiaries. Logic would indicate it is therefore wise to save as much as possible to be sure you can cover these expenses because they can be so uncertain.
Yet this logic suffers from an often overlooked but possibly significant drawback – by focusing too much on the future, you risk shortchanging your present. So yes, depending upon your situation it is possible to save too much for retirement. Doing so can create unnecessary financial stress now, such as struggling to pay a mortgage, hurting your ability to afford one of life's unexpected and costly emergencies, or needlessly deferring enjoyable activities such as family vacations that diminish your quality of life and can be difficult to recapture later. The question therefore is – how to avoid saving too much for retirement now, while remaining confident that you will still be able to meet your expenses in retirement?
My best answer is it takes careful planning based on your specific goals. This planning should involve detailed budgeting, realistic expectations about your retirement income and expenses and, more holistically, thinking about how you wish to prioritize your finances to best achieve how you wish to live your life. Here are some thoughts to consider:
Customize your plan for you. Everyone’s situation is different. There are many general assumptions about retirement planning typically built into sources such as online calculators and personal financial software, but with the wide variance of personal financial situations depending too much on them may not suit your specific needs or goals. So, when you encounter such assumptions as the “four percent rule,” the “80 percent replacement rate” or the “60-40 asset allocation balance”, remember these are generic guidelines that may, or may not, be right for you.
Don’t focus just on the money, but on what you want to do with it. Often people focus on how to save and invest money or how to minimize their tax burden, yet they have only a vague idea of how, for example, they want to spend their free time as they age. If you don’t think about what you actually will do with your money, how can you possibly know how much to save?
Be realistic with your goals. This can involve some difficult choices as well as detailed research and careful thought to ensure you are able to make well informed decisions. For example, much as you may want it, building your dream home within a few years of your desired retirement may be problematic if an expenditure like this leaves you with large payments that will substantially cut into your retirement income and require you to forgo other desired activities.
Don’t try to cover every worst-case scenario. Chances are you won’t have enough to cover every worst-case scenario on your own, so trying to save for that is a losing game. Maintaining insurance coverages will help provide financial protections but determining the amount of insurance you should carry involves both cost considerations and what you need to maintain for your own peace of mind.
No question retirement financial planning can be a complex process. In summary, I would leave you with this final thought – your ultimate goal should be to maximize your fulfillment in life, rather than simply maximizing your savings.Together, we can work to keep you on-track toward your financial goals.
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