The most fundamental financial advice — to consistently save — is absolutely correct. What’s less obvious, yet equally correct, is that you can also save too much.
Your financial plan should not only help you to live better in the long run — it should also help you live better today.
The truth is, accumulating more in savings than you will need for retirement can be a mistake if it’s preventing you from fully enjoying life today or if it’s causing you unnecessary financial stress.
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In order to strike the right balance between diligent saving and saving too much, you need a blueprint.
When Saving Goes Too Far
I recently met with two of my clients, we’ll call them Larry and Laura (not their real names), age 62 and model savers. They contributed diligently to their 401(k)s, HSAs and IRAs and built a nice nest egg.
But this diligent savings came with a cost. They constantly worried about paying their mortgage, life insurance premiums, living expenses, spoiling their grandkids and, of course, continuing to save for retirement.
With a family history of longevity and Alzheimer’s, Larry and Laura also began to worry about saving for long-term care. Despite their nest egg, a long-term care event would likely devastate their retirement. They knew they needed coverage, but they did not feel like they could afford it.
Without a plan, Larry and Laura were lost.
Pulling Back the Curtain on Retirement Income
When Larry and Laura came to meet with me, we first looked at their current income and expenses. Then, we did a deep dive and looked at how their cash flow would change throughout retirement by detailing how certain types of incomes and expenses started and/or stopped at different times.
Starting at age 67, Larry and Laura would begin receiving Social Security and pension benefits, providing them with a solid foundation. What they didn’t realize, however, is how these income sources, coupled with a reduction in non-lifestyle expenses (e.g., retirement savings and payroll taxes), would generate a recurring surplus to the tune of tens of thousands of dollars each year.
The kicker? This didn’t even include spending any of their retirement savings.
Better Today, Better Tomorrow
The analysis concluded that it made sense for Larry and Laura to free up additional cash flow to enhance their current lifestyle. They continued working, but they stopped making additional retirement account contributions, which allowed them to indulge a bit more when it came to their daily expenses. This sounds easy, but it required Larry and Laura to defy the conventional advice they had so diligently followed for so many years.
Initially, the thought of halting their retirement contributions caused some discomfort. To help alleviate that uneasiness, I worked with them to pay off their mortgage using distributions from their retirement savings. The distributions were spaced out over two years to keep the couple in the 15% bracket.
They canceled their life insurance policies, as the insurance was only owned to pay off the mortgage in the event of premature death. The money that was being used to pay for those life insurance premiums was redirected toward purchasing long-term care insurance.
Larry and Laura came in with three primary priorities: an immediate upgrade to their current lifestyle, financial security against the likely need for long-term care and the comfort of knowing they’d be able to retire a few years early, if they so choose. By analyzing their current and future cash-flow needs, we were able to accomplish all three all by correcting the problem of over-saving.
The Bottom Line
The one-size-fits-all advice to maximize the amount you’re saving may work out in the long run, but it may add undue stress today. Remember, your situation is unique, and your financial plan should be, too.
Ask yourself and/or your adviser the following questions to help you evaluate whether you’re saving too much:
- What percentage of my current income will I need to replace once I retire, and how will that number change throughout retirement?
- How much will I need to withdraw from my savings in order to meet my cash-flow needs in retirement?
Navigating your retirement journey requires that you and/or your adviser has good answers to these questions. If you lack clarity, I encourage you to seek better guidance that ensures you are on track with your financial plan and the pursuit of your long-term goals.
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