4/22/2014 4:15 PM ET|
Are you saving too much for retirement?
Retirement planning can be extremely stressful, and outliving your finances is a real worry. Those concerns spur some people to save more than they need.
A lot has been written about retirement and how people should be saving more to live comfortably in their old age. But is there such a thing as going overboard with retirement savings? Are we becoming obsessed with retirement, so worried about the future that we deny ourselves many of the things we should be enjoying right now?
In a new nationwide survey conducted for TheStreet by GfK Custom Research, 85 percent of respondents said "it is important to be prepared for the future by sacrificing and saving today."
It would seem that even if they could afford to go on vacation, buy their dream home or upgrade to a nicer car, many would choose to put more money toward their retirement accounts instead.
Carrie Schwab-Pomerantz, president of Charles Schwab Foundation and senior vice president at Charles Schwab, says that isn't necessarily a bad thing, especially if one is playing catch up on retirement savings.
"If you started saving 10 percent to 15 percent of your income in your 20s, you should be on track for a comfortable retirement," says Schwab-Pomerantz. This could mean you will have some extra money now to spend on the things you'd like to enjoy.
But if you're in your 40s and you haven't even started a retirement account, Schwab-Pomerantz says you may need to set aside up to 40 percent of your income. Saving that much could indeed lead you to make sacrifices today.
Of those surveyed by GfK for TheStreet, 75 percent said they currently do not live beyond their means. Even then, 51 percent said they still find it hard to save for retirement, and 44 percent reported worrying that they aren't doing enough financially to prepare for retirement.
Austin Nichols, a senior research associate for the Urban Institute's Program on Retirement Policy, believes many people are paranoid about retirement because of constant reports that Americans are just not saving enough.
"There is a lot of hand-wringing about the state of Americans' retirement savings, particularly in the wake of large wealth losses during the recent recession," Nichols says. "But the concern is based in part on implausible targets for expenditures in retirement."
Nichols warns of the dangers of saving too much, saying the traditional rule of thumb advocated by many financial planners -- replacing 80 percent of preretirement income -- is misguided. Instead, Nichols suggests lowering target spending in retirement.
"If one aimed to replace four-fifths of preretirement income in retirement, and saved two-thirds of income for 20 years to hit that target, spending would more than double at the moment of retirement, which is clearly not optimal," Nichols says. "Who wants to double their spending the day they retire?"
Let's say you're 50 years old and you have the money to spend on a trip around the world that you've been meaning to take with your spouse. Should you postpone that trip in order to put more money in your retirement account?
"If you're focusing on replacing a large percentage of your retirement income, and in doing so you make uncomfortable and unnecessary sacrifices now, you could lose out," Nichols says. "You don't want to be saving excessively for a future that may never come."
A 2009 report by the Brookings Institution and University of Wisconsin-Madison found that most Americans are generally saving enough for retirement. This is in stark contrast to discussions in the popular media and in policy circles that Americans are doing a poor job preparing for retirement.
But when you factor in large and unexpected out-of-pocket medical expenses, David Rosell, president of Rosell Wealth Management and author of Failure is NOT an Option, says he's more inclined to believe that most Americans are not prepared for retirement.
In the survey conducted for TheStreet by GfK, 52 percent of respondents -- between the ages of 50 and 64 -- worry about facing major unexpected medical expenses.
Apart from medical expenses, retirees should also consider the cost of long-term care. Rosell says, "Sadly, the escalating costs associated with long-term care during retirement can make the possibility of outliving one's retirement income a reality for many."
Research shows that at least 70 percent of people over 65 will need long-term care and help with basic daily activities at some point in their lifetime. According to Genworth's recent study, the cost of long-term care services has been steadily increasing.
In 2008, the median annual rate for a private nursing home room was $67,525, compared with the 2013 median annual rate of $83,950. This means Americans can expect to pay approximately $16,425 more per year today for a nursing home than they had to pay in 2008.
"The fact is, retirement could be very expensive," says Schwab-Pomerantz, who wrote The Charles Schwab Guide to Finances After Fifty, out in April. When deciding whether or not to put more money toward retirement or spending on other things today, Schwab-Pomerantz suggests these saving fundamentals:
- If your company offers a 401k plan that will match your contributions, save in your 401k up to the company match. Depending on your age, you may need to add more funds to your 401k or supplement your retirement savings with an IRA account.
- In your bank account, make sure you have enough money to cover at least three to six months of essential expenses.
- Pay off non-deductible, high-interest loans.
When these areas have been covered, Schwab-Pomerantz says, one can then start thinking about spending on other things such as a vacation, new car -- or even paying for a child's education.
College Fund vs. Retirement Account
In the survey conducted for TheStreet by GfK, only 29 percent of respondents said they worry about having enough money to send their children to college.
When it comes to saving for retirement vs. paying for your child's education, Rosell insists saving for retirement should come first. "Just as you would put an oxygen mask on yourself first before helping a child in a plane emergency, your retirement should be your priority."
Nichols, however, believes it's important to also invest in your children. "Again, you want to make sure you are not excessively putting money toward retirement that you won't pay for your child to go to camp or if you could afford it, pay for college tuition."
For many parents, education is an emotional issue. Some believe it is the best gift they could give their children -- parents would sometimes take out loans or borrow from their retirement accounts to pay for college.
On the other hand, some parents believe that it is better to not be a burden on their children later in life. They think that having financial independence -- taking care of medical and long-term care bills themselves -- is in fact the best thing they could do for their children.
The decision to spend more on children's needs -- and on other enjoyable things today -- often depends on how comfortable one feels about retirement. Whether you choose to hire a financial planner or run the numbers yourself using published reports and the Social Security benefit calculators, it's important to have a plan.
"It doesn't matter whether one report says Americans are saving enough for retirement and another says they aren't. What matters is how you are preparing for your golden years. Do you have enough, too little or too much saved?" says Rosell.
Once you have a plan in place, and after seeing how much you already have set aside for retirement, you can then decide if it's time to live the life or if you'll take a step back and save more.
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I don't think you can save enough people. The economy sucks. Products are terrible. I take care of my sutff and I still breaks down. Nothing is made to last anymore. It's all about manufacturing cheap goods and selling them constantly. I have been in my home for almost 20 years. Only two people houshold and I have been through 3 sets of washer and dryers. One big screen TV and the recent one I bought in 2007 for $2000 that should last 20 years is acting up a little. My truck has 104,000 and I have never pulled with it, plowed with it. Just haul some mulch and wood a few times a year. Just spend $3,200 for a new transmission. Nothing is made to be repaired. It is made to be replaced. Service calls cost too much and that trade is going away.
The retirement age keeps going up. Medical costs gets more expensive each year.
I figure I will die standing at Walmart saying "welcome to Walmart" and "Have a Nice Day"
Have you noticed how employers are laying off older employees? It's becasue of cost. They want to rid themselves of the 25, 30, 35, 40 year employees because they are at the high end of their pay scale and are old enough now that they are costing the company more $$$ in medical coverage. It will be hard in this day and age to work at one place and actually retire. They can hire college grads that can't wipe their butts yet for half price or more. The CEO's can't get enough $$$$$
Thank you for the advice. I think I will stop saving for retirement now and will go travel around the globe!
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