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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This is the biggest bizarro world B.S. I have ever heard. Saving too much is bad for you as opposed to... saving too little is good for you? Where do they get these columnist to come up with this '1984' Orwelian disinformation propoganda from?
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 [[added: retire early,]] live the life or if you'll take a step back and save more.
Nothing wrong with giving yourself the luxury of choosing when you want to retire.
Problem is when you have been through a couple of episodes of 25-50% market declines, how much is enough. Could easily happen again. Gonna go all cash? Compounding is a fantastic concept except when rates are 0. Bonds?. Inflation is coming sometime. I don't see very many people saving too much; it's a nasty world out there.
There is an old adage measure twice cut once. When I think about saving and retirement plans I believe it is prudent to save as much as you can at an earlier age than have to play catch up at a much older age. No one can accurately forecast what the economic climate will be when the first start working to forty years down the road when they are close to retirement age.
I first started working in my teens and interest rates were substantially higher than they are today. When I was young I invested in CD’s, government bonds, savings and checking accounts, and money market funds. I made good income on my investments because of the high interest rates.
As I grew older the economically climate changed and I became more diversified. I invested in equities, corporate bonds, REITS, mutual funds, and other investment vehicles.
The companies I worked for ended their pension plans established 401K plans. I made sure I invested in those plans and did the best I could to maximize my contributions to the 401K and IRA accounts I had. I felt it was very important to contribute to my companies 401K plan when the matched a portion of your contributions. Throughout the years I tweaked my assets when needed and made sure I was diversified over a wide range of investment vehicles.
I also lived within my means, have no debt, and have a rainy day fund for unexpected events. I have read many articles and watched a lot of financial programs and have heard the average person at my age has less than one hundred thousand dollars in retirement savings.
I am in my fifties and my retirement and savings account are substantially higher than the average person at my age. I do not plan on retiring for another ten years. I sleep better knowing that I am on target live comfortably and securely when I do retire. I much rather save too much than not have saved enough.
Sure, there are people saving too much for retirement. There are also some Playmate of the Month beauties, and folks married to Playmate of the Month beauties. And some others - why, they've got IQs over 200.
But you've probably never met any of these folks, and you probably never will. It's not because you're a shut-in, it's because they are extremely rare.
In any event, if one must err on the side of saving too little or too much, you know what you should do.
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