Are We Saving Too Much For Retirement?

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piggy bankOne contrarian article deserves another. This one, courtesy of the New York Times is titled “Save Less and Still Retire With Enough”. The main premise is that contrary to popular opinion, most of us are actually doing just fine money-wise. All this talk of impending consumerism-drive doom? It’s a big scam by the investment companies, who have a vested interested in us keeping big balances in our brokerage accounts.

The more realistic amount could be as little as half the typical recommendation made by Fidelity, Vanguard or any number of other financial institutions. For a middle-income couple, that could mean trading $400,000 in retirement money for about $3,000 a year more during prime working years to spend on education or home improvement. ?For a middle-class household, that?s a lot of money,? said Laurence J. Kotlikoff, a Boston University economics professor, who is on the forefront of this research into spending and savings, and is selling his own retirement calculator.

You can read more of Mr. Kotlikoff’s research here. Here is an excerpt from one paper:

TIAA-CREF is recommending a retirement ?salary replacement? target equal to 80 percent of annual labor earnings. For our stylized household [couple earning $125,000 with two kids], this equals $100,000… This is 78.0 percent higher than the appropriate target!

In other words, his “appropriate” target replacement salary is actually only about 45% of their previous income, or $56,000, for a couple earning $125,000 a year. This is due to a number of factors which aren’t explained in detail, but factor in that their house should be paid off and the kids will be gone during retirement. However, I saw no mention of the increased costs from health insurance and other medical costs that increase with age. He also expects the their investments to earn 9% a year (6% real, 3% inflation), which is a bit optimistic to me.

In the end, of course some people are saving too much. I mean, if you’re eating Cup o’ Ramen ten times a week and checking your million-dollar bank balance on the free computers at the public library, sure, maybe you need to loosen up a bit. I’ve never met any of these people, have you? There’s no way that they outnumber the ones that are saving too little.

And how do we even know what will be too much or too little? Every retirement calculator is simply trying to predict the future. Note the huge “we are not liable if this is wrong” disclaimers. I’ve read a lot of articles that also support the fact that the stock market will only earn about 6% annually in the future, and similar ones that say that the long-term expected returns of stocks will be the same as bonds. Japan’s stock market has been in the dumps for more than decade.

A possible personal solution?
I’m trying to come up with what I call the Core Lifestyle, which essentially includes everything that I would personally really want out of life – things like a job that I value, a small house in a specific area, a skiing season pass, and an international trip every year. The idea that this should require a certain amount of money, for example $100,000 a year. (Yes, I am aware that this is a lot of money. I’m also living in a big West Coast city…) My feeling is that after a certain point, any extra spending just ends up on “stuff” like nice cars, gadgets, brand name clothes, and bigger houses that really won’t improve my quality of life.

Anything above that threshold goes into investments. This is opposite of some plans which suggest socking away a specific percentage of your gross income each year. Then, as our wealth builds, whenever it is that we have enough to cut back on working, we will! It could be 39, 45, or 52. There would be no “squandering of youth”. We’ll live well now, and then we’ll live even better after that. Sounds easy, doesn’t it? We’ll see how it goes 😛

Do you feel like you’re depriving yourself now to save for retirement? If your retirement planner told you that you could save less, would you do it?

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  1. Yes, I totally feel that I’m depriving myself about retirement and everything else savings related. *sigh*

  2. K.C. Jones says

    Even though I don’t always agree with Dave Ramsey – this article brought his semi-famous phrase to mind:

    “Live like no one else, and you’ll live like no one else”

    Since the future – especially financially – is so unpredictable, given the chance I would always want to over-save and live better (more freely) in retirement than I had ever while working. God knows we’ll have the time.

  3. I’ve tried what you describe as the “Core Lifestyle” approach and it did not work for me. There just wasn’t a clear boundary between items like ski passes and international travel (in your example core expenses) “extra spending” like nice cars and gadgets. For me the best approach is to pay myself first by saving off the top of my paycheck through direct deposit and then only buying things when I first have the money. I’ve been using credit cards with cash back rewards for those purchases but may switch to cash on the theory that I will spend less.

    This is my experience after more than 20 years of trying FWIW.

  4. I just finished “All Your Worth” by Warren and Tyagi after seeing it recommended by someone online. I think they do an excellent job of helping people find a balance they can sustain life-long.

    I rarely feel like I sacrifice undue amounts, but I also have my finances balanced approximately according to their guidelines. I also don’t look too negatively on sacrifice. Some amounts of sacrifice are positive; character building if you will. My daughter is 5 and I’d really prefer she not think she can buy everything that she wants on whim. That’s not a recipe for long term happiness.

  5. I agree with the article. Sometimes, I think I’m saving a LOT of money as a 25 yr old. Then again, you can’t predict the future and guess how much money you will actually need when you retire.

    I think the key is to retire EARLY rather than wait until your 65 or so. What is a 65 yr old going to do with $2,000,000?!

  6. I think I saw this article (or a similar one) that send we are saving too much. There was also a free calculator with this one (I think it was a Yahoo Finance article) and it also had an 8% return assumption. I was happy to hear that I have already saved enough for retirement (at 37) and that I no longer need to make contributions. However, I’m a little bit more pessimistic than the calculator, but it did give me some perspective. Since I was out of school I’ve been worried about saving enough and the article made me feel good about my current state. It also made me think of changing my savings style (maybe just for a while). I currently put away about 10K pre-tax in my retirement (and my company puts away more), but I may take the money post-tax now and put it into some other kinds of investments. I guess the article made me think more about diversifying than anything else.

  7. I’m glad you posted this article, as this is something that I’ve been wondering about too. I’ve been saving for a long time and I *think* I have enough now to call it quits (I’m in my 40s) but I’m not sure. And all of the so-called planning software is not great. (I use Schwab’s, which has some monte carlo simulation, so it’s probably the best, but even it is buggy)

    Anyway, I read a book called “Your money or your life” which had another approach: track your spending and then you will *really* be able to forecast your needs. Has anyone tried this?

  8. I came across a summary of the article, and rebuttal somwhere – I forget where though. I haven’t looked at the specific statistics, but I think using average savings is completely the wrong measure. The problem isn’t that on Average that Americans don’t save enough, the problem is that many Americans don’t save enough. It’s a distribution of savings rather than average savings.

    The problem of course is more a spending rather than a savings issue. The people who save enough to replace more than 85% of their income are the people who don’t need 85% of their income. And the reverse of course holds as well, the people not saving enough to meet 85% of their income in retirement need to replace at least 85% of their income to meet their requirement goals. I realize saving and spending are two sides of the same coin, but more financial professionals should be more active in addressing the spending side rather than the investment side. They often tell you to put X away without ever telling you where you should be getting X from.

  9. I agree with the Dr K. I don’t think “we are saving too much for retirement”, but that the calculators set goals which are unrealistic and unnecessary for most people. In the example of the article, a person making $100 a year currently maxing out their 401(k) is not saving enough for retirement (according to Fidelity). They are living off of 80% of their net salary by my calculation (saving 17%). Fidelity initially recommends they save $12,000 per year more, an additional 13%. So now they are living on 70% of their net income. But when they retire, Fidelity has them spending 88% of their original salary? Good times. I think that one message of Dr K that people miss is not that people are saving too much, but that people are so discouraged by unrealistic targets that they may give up, or try risky investments to “catch up.”

    On a personal note, I know that both my parents saved up too much money. There are definitely seniors out there who are living in fear of not leaving an estate to their children, when honestly they should make their kids earn their own way in the world.

  10. Joseph Sangl says

    Balance is GOOOOOOOOD for you! If you save like crazy and have no life, you will live a miserable existence.

    I say you should SAVE for three things:
    1. True Emergencies (Transmission breaks on car)
    2. Known, Upcoming Expenses (Taxes/Annual insurance premiums)
    3. Your Dreams (Travel/Start a Business/Lake House/Retirement)

    My wife and I discuss our future plans regularly and are ensuring that we save to fund our dreams.

    I get no inherent pleasure out of paying the utility bill on time, but I LOVE IT when we get to go on that vacation we have always wanted to take!

  11. Christopher Smith says

    Saving too much is probably not that bad of a problem to have, all things considered. I’d imagine that running the numbers and discovering that you’ve socked too much away would be a good thing.

  12. Interesting article. On that note, I have a question. After having prepare my taxes, it appears that my Roth IRA has been limited to fraction of that amount (phased out). Having contributed the maximum amount already, it appears that to avoid a 6% penalty on the excess contributions, I need to withdraw the excess contributions plus any earnings on that amount, and the earnings must be reported as added income. Has anybody had to deal with this issue before? Any suggestions? Since I need to withdraw the contributions prior to filing my tax returns, if I take a loss (given the market today) can I deduct the loss and any transactions costs?

    BTW Jonathan, this an OUTSTANDING site. Thanks for all your efforts!

  13. Thanks for all the good comments. After thinking about it some more, I think someone who REALLY want to get it right and not “oversave” should closely analyze what their actual spending needs are and track things as they go.

    Things you might not need in retirement:
    mortgage payments
    food/clothing/tuition for kids
    work-related expenses

    Things you might need more of:
    Recreational/Travel money
    Health Insurance
    Enough to cover home repairs and property taxes.

    I mean if you’re saving 30% of your salary now (and thus living on 70%), maybe you don’t need 80% replacement. I think I’m just deathly afraid of being broke, myself.

  14. If I save “too much” I’m just going to retire earlier. I won’t wait until 65 to retire if I’ve done well.

  15. Another thought – who really wants to retire and completely quit work? For some people, with enough hobbies that keep their mind sharp, perhaps they can completely forgo work after retirement. For others, especially those who have the entrepreneurial spirit, why not work 10-15 hrs/week in retirement. That way, you dont have to be too afraid of running out of money. Simply, save a reasonable amount, retire, recalc 5 yrs into retirement if you will have enough, then work a little extra if needed. As a side benefit, you keep up a sense of accomplishment/purpose as well as a social circle.

    I used to work at a large aerospace company. The running observation over the last 20-yrs was that an inordinate number of 60-65 year olds died within a year of retirement. For some, it is detrimental to leave an environment that keeps you busy with a purpose in life and completely hit the brakes.

    Finally – if you have the extra money, it is a much better proposition to save more now and have too much in retirement than too little. Even better, save more at 25 and taper off at 45 if it seems you have an over-supply. Ha – an oversupply of money in a Hummer loving society!

  16. dpjax and mike,
    to me, the question is *when do you have enough*? I mean, how do you know you can retire early or start to taper off, as you wrote?
    the way i see it, if you don’t know how much you need, you will probably just keep plodding along until the “normal retirement” age of 67 (or whenever SS kicks in).
    any thoughts on this?

  17. I’ve often thought that financial planners try to get people to save too much – I remember a friend of mine who is a financial planner being shocked when I told him I think I could live on 50-60% of my current income. He acted like this was completely impossible…

    The only thing that I’d caution people about is not to overlook that health insurance cost – which can easily be around 12,000/ year for a 60 year old couple purchasing their own insurance. This will probably increase. You might as well assume that even though your house will be paid off you’ll still have the equivalent of the mortgage payment if you want health insurance…

  18. Jessica is right on with her estimate. Actually, with long term care insurance, the number is closer to 15K per couple. Two big unknowns, health care costs and your own longevity. I think most people, that are saving for retirement, are doing it at a reasonable pace. The bottom line, is that you want to have choices in your 60s. Its one thing to want to work and a completely another to have to work. My wife and I will enjoy our 60s and beyond, not because we saved too much, but because we invested wisely and lived a bit below our means.

  19. How is it possible to save too much? I think it’s impossible to truly deprive yourself of necessities during working years. You will always spend on things you truly consider needs; of the other “luxuries” you could buy but don’t, clearly you’re choosing to save instead. I think the key to a happy retirement and even simply living happily is living within your means. As long as your means always exceed your needs and a few of your wants, life will be good. And you can set those threshholds largely. A person with a large income can have more “needs”, and what he considers “needs” could be complete luxuries for someone else. As long as people set and maintain appropriate lifestyles happy stress free retirement seems easy.
    What’s the downside of saving too much? I plan to save until I can comfortably live off of investment income while still growing those investments and ideally never spending principal. There’s a point where investment income exceeds needs and wants, and that’s a truly magical spot. Enough money to meet your expectations while growing principal to pass to kids. All it takes is expectations in line with means and diligent savings.

  20. I don’t really care about saving too much. If I have too much and I have kids, it goes to them. If I don’t have a family, I will give it all to charity. What loss is there to that. I probably will live longer because not having stress from worrying that I will be eating dog food in my retirement.

    My question is, can you talk more about the articles that says we will be earning only 6% in the future? I have never heard anything about that.

  21. anonymous says

    I’m worried I might be in the over-saving category. Here’s a data point to consider. I am self-employed. I have to fund my own retirement plan. I have a Roth Solo 401k plan which lets me contribute $15k as the “employee” contribution (Roth style) plus an additional 20% of earnings as the “employer” contribution (tax-deferred). I am also eligible for a Roth IRA. Assume a gross income of $95k. Also consider I live in California where taxes are high, the cost of living is high, and house prices are through the roof. By my calculations, maxing retirement contributions and paying taxes due, takes about 70% of my total income. That means I only have 30% of that to live on and save for non-retirement things. Now consider that the median home price in the Bay Area is over $700k (closer to $800k by newer numbers I’ve been seeing). After considering just basic living expenses like food and rent, not to mention other things like medical insurance, I don’t think I will be ever able to save enough money to buy a home (until I am 59-1/2 which is a long way off for me).

    In theory, instead of putting all this money into retirement accounts, I could just save it in normal accounts. But this is the sick thing about our tax code. It makes saving a punitive action. You can save in a retirement account, but you can’t touch it until you’re retired (or a few other conditions). But if you try saving in a regular taxable account, you are taxed yearly at your highest rate for interest, taxed for capital gains, taxed on dividends, and the amount you’re taxed isn’t even adjusted for inflation. So if you made 5% interest in a savings account and inflation got bad and was also 5%, you still get taxed and you lose in the end. (This also means the people who spent the money and didn’t save look smart.)

  22. Heather says

    From Money: “Researchers recently published a study in the Journal of Financial Planning that provided guidelines for how much you need to save for retirement based on your age and income. The percentages they provide assume you will want to replace 80 percent of your pre-retirement income, except – and this is important – that 80 percent is after deducting the amount you save for retirement.

    “you can check out the What You Need To Save Calculator we built based on the study:

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