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Are You Saving Too Much?

It’s possible, of course, but is it really common? From a number of recent articles, you’d conclude that we are now a nation of savers. In early December, I read, “Could You Be Oversaving for Retirement?” on Yahoo Finance. (To give you a hint as to how rare I thought this was, the word oversaving wasn’t in my speck check dictionary till now.) A couple weeks later, Jean Chatzky wrote You may be saving too much for retirement for CNN Money.  I like Jean’s writing, and she was kind enough to cite the source for this wave of ‘saving too much’ articles that have sprung up. It was a paper by the Head of Retirement Research at Morningstar, David Blanchett. Estimating the True Cost of Retirement dispels, sort of, the notion that one will need 80% of their pre-retirement income post retirement. I say ‘sort of’ because one’s earnings aren’t linear, nor is one’s lifestyle, and there are too many variables to project 40 years out with any level of confidence. The 80% number is as good a rule of thumb as any especially when considering the alternatives. If, instead you plan for 60, and as you near retirement, realize that in those final years your lifestyle has crept up a bit, more vacations, a second home, any number of things, it will be tough to catch up to where you should be. But if you plan for 80%, and, with 5 years to go till retirement, you realize you have more than you need, it’s a simple matter to retire early, or just enjoy the fact that you have an extra cushion.

David’s paper makes excellent points, and is a worthwhile read, but it doesn’t discuss one thing, the amount we are actually saving. The average retirement savings for those 55-64 is $69,127. If you understand how averages and median compare, you know that for every saver with a million dollar retirement account, a hundred people will be $10K less than that average to balance out. This forces the median, the halfway point, far lower than the average. In fact, the same report cites that 39% of those age 55 and older have less than $25,000 in their retirement accounts. To be clear – No, we are not saving too much, not by a longshot.

There’s a point to be made that a reasonable retirement goal might be more motivating than one that appears so far out of reach. It’s also safe to say that retirement spending is better correlated with preretirement spending than with preretirement income. This is tougher for a younger person to analyze. I got married at 32, bought my first ‘real’ house at 34, and became a dad at 36. At 40, I had a real grown up budget, 20% to the mortgage, 10% to the college account, 15% to retirement, etc. Not tough to see the math show that 45% of our income was budgeted to things that would be gone when we retired.

In the end, the question isn’t about averages or rules of thumb, it’s about you. Only you can calculate your Number.

  • Chris W. Rea January 28, 2014, 11:01 am

    Thanks for the link to the Morningstar paper — will make interesting bedtime reading. 🙂 I’ll add: w.r.t. the retirement goal example, it may get even better. If one figures in terms of pre-tax/gross income, then:

    1. one could subtract employee contributions to Social Security, which will stop in/near retirement, and

    2. if some portion of contributions to savings were non-deductible, then tax paid to realize the net contribution amount can also be subtracted.

    i.e. consider also what portion of taxes go away when one retires. The difference may be significant.

  • Joe January 28, 2014, 7:37 pm

    Excellent points, Chris, thanks for the comments! We agree, the target may be too high according to rules of thumb, but most of us are still not saving enough.

  • Steve January 31, 2014, 7:55 pm

    I think you shouldn’t measure your retirement need on the percent of income. It should be based on your expenses. If you make $200,000 a year, in most cases you don’t need $160,000 per year to retire on. Expenses are more accurate, in many cases, as opposed to the income you bring in. If you are living hand to mouth, than you may need 100% of your income in retirement.

  • Joe February 11, 2014, 8:13 am

    Steve, exactly. As I see it, the issue is that for a younger person, just getting started, income is at a relative low, and spending is not anything like it will be in later decades let alone at retirement. So, from 20 right up to even 40 or so, the numbers are still fuzzy, and the rules of thumb might be as good a target as we’ll get. At 30, I wasn’t married, and had no kids. At 40, a wife, a 4 years old, two incomes, house.
    The retirement budgets I wold have had in mind at 40 vs 30 were like night and day. Fortunately, at 30, I was just using the ‘save 15%’ rule of thumb and that put me on the right path even though the goal was a moving target.

  • andrew March 2, 2014, 9:08 pm

    What is a good percentage for someone 24 years old, single and no children to save for retirement? I am currently setting aside $1200 per month, is that too much?

  • Joe March 3, 2014, 6:55 am

    There’s no ‘too much’ at your age, I’d suggest 15% as a minimum. Live like a student, save all you can. When you hit the next phase of your life, partner, child, house, you’ll have a different spending pattern, and will have given yourself a great head start.

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