Are You Saving Too Much For Retirement?

In my line of work, I meet a lot of people who are concerned they haven’t saved enough for retirement. But interestingly, I’ve also heard the opposite.

“If I have seven figures in a retirement account, is it possible I’m saving too much for retirement?”

Is a million enough?

If you’ve been saving for retirement and you hit that seventh figure, first of all, congratulations. That took a lot of hard work and patience and you should be patting yourself on the back.

But are you done saving? I’d say no.

Being a millionaire, while it may be fun to say, does not come with the financial freedom it may have in the past. Retirement used to be a period of just a few years, so having a million dollars in assets to live on was cause for celebration and possibly buying a boat or fancy sports car.

But now, retirement can last for thirty years. The biggest risk that retirees face is outliving their money.

The 4% rule

When converting your assets to income, we try to fall below the 4% rule, meaning withdrawing no more than 4% of your total assets each year to use as income.

If you have $1 million today and plan to retire tomorrow, that would mean living on $40,000 a year or less. Even adding in Social Security benefits, that’s probably not going to afford you the retirement lifestyle you were hoping for.

How much should you have?

Your retirement savings goal depends on many things, including your current lifestyle. If you’re accustomed to living on $100,000 a year, and you feel that you will be comfortable with that amount in retirement, you need $2.5 million in savings in order to maintain your lifestyle with a 4% withdrawal rate.

Can you still retire before you hit that mark? That depends on your idea of retirement.

Retirement versus graduation

If your definition of retirement is never having to work again, you’re going to want to hit that full savings goal before you turn in your papers. Or, you need to change your definition.

I like to look at retirement not as an end of working, but as a graduation into your next stage of life. Act Two can look like many things: going from full-time to part-time, switching to a consulting role, turning a side hustle in a main hustle or any other method of bringing in an income that requires less time and focus than your career did.

This way you still bring in some kind of income in addition to the maximum 4% retirement savings withdrawal to make up the difference.

Where are you saving?

For some, the concern is that they may be overfunding their 401(k) at their job and are going to have a huge balance they’ll need to pay taxes on. Instead of giving up on saving all together, use different types of accounts. You don’t need to keep your savings all in one place.

If you want to diversify, you can use non-qualified brokerage accounts, savings accounts and even insurance vehicles to allow for tax diversification in retirement. This will allow you to save and invest in a way that may not cost you as much in future income taxes. Any type of long-term savings will help you reach financial independence even if “retirement” isn’t in the name.

Don’t save it all

So, with all that being said, can you save too much for retirement? Yes, though it’s unlikely.

The key is to balance your savings with living your life now. You don’t want to put every penny you have into a retirement account so that someday you have more money than you’ll ever be able to spend. Do the math and work with an advisor to figure out what balance you’ll need in order to live on 4% or less of your nest egg each year, how much you’d like to leave to heirs or charities and what life events might require access to additional capital in the future.

But in the meantime, enjoy some of the money you’re earning. I’ve seen far too many people save all of their money for a rainy day that never came. They put off traveling until retirement and are no longer healthy enough to go or to enjoy the experience. They work their whole lives to build their wealth and forget to enjoy their abundance.

The lesson:

You’re probably not saving too much for retirement. But instead of blindly saving money and hoping it’s enough when the time comes, work with an advisor to determine how much you actually need in savings to retire at your desired comfort level.

And as you’re putting money away in long-term savings, put a few dollars in your pocket or towards a short-term savings goal and have some fun while you’re young and healthy. You can’t take it with you.