There are many rules of thumb for retirement investing. Some people say that if you save 10 percent of your income, you’ll be fine. Other people recommend maxing out your retirement plan at work or maxing out your IRAs. Some investment advisers recommend a combination of retirement accounts and additional investments. Rarely do you hear a retirement planner say you are saving too much for retirement, but this is becoming a popular sentiment in some circles.
Can you save too much for retirement? According to some financial analysts, the answer is yes. But before you take that as a license to stop saving, you should look at both sides of the story. Then decide how best to allocate your income among your normal living expenses and investments.
How do you know if you are saving too much for retirement? The first question you have to answer is how much money you will need for retirement. Unfortunately, it is difficult, if not impossible, to know the exact amount of money you will need. There are too many variables to make an accurate assessment, especially if your retirement is decades away. For example, you need to account for investment returns, inflation, rising health care costs, increased longevity, changing financial goals, and fluctuating income during your working years.
Sure, you can plug numbers into a retirement calculator and get a ballpark estimate of your retirement needs. But you have to remember that a retirement calculator is only as good as the information you feed it. So unless you have a crystal ball, you will be raising as many questions as you answer.
You are saving too much for retirement if your current rate of saving causes personal, emotional, or financial hardship. If you are sacrificing your health or quality of life to save for retirement, then you need to scale back. Otherwise, you probably aren’t saving too much for retirement.
Contribute aggressively while you can. You can’t control most of the factors that affect your retirement plans. But you can control how much you contribute, and contributing aggressively while you can gives you more options later. My personal goal is to contribute as much as I can while I am able, and if I have too much money when I near retirement age, then I will have options such as retiring at a younger age, having more money to spend in retirement, or having more money to give to charity or my family. All of those options are more appealing to me than not saving enough and having to scale back.
It’s all about balance. Retirement planning is important, but I think most retirement planners who caution against investing too much are really trying to say you need balance. You shouldn’t sacrifice a decent quality of life just to max out your 401(k). It’s OK to take a vacation, buy a big screen TV, and otherwise enjoy yourself. But don’t forget or ignore retirement planning. That would be both irresponsible and dangerous.