Why saving too much for retirement can be a big mistake

Media headlines often indicate that Americans are not saving enough for retirement, but some people may save too much. Although this may not seem like a bad thing, it will actually reduce your quality of life during work and cause excessive financial pressure.

These are some of the reasons why you may save too much and how to strike the right balance.

Key points

  • If you rely on general assumptions to calculate how much you need, you may save too much for retirement.
  • Don’t overestimate your retirement income replacement rate or how much you will spend on housing.
  • In order to save the appropriate amount, please figure out your schedule, do not use standard replacement rates, study living and medical expenses, and calculate your expected retirement income from pension and social security.

Unpersonalized retirement plan

An important reason why you may save too much is that your retirement plan has become too general. With the advent of online calculators and personal finance software, technology providers have established too many general assumptions in their technology.

Not all assumptions apply to everyone. Everyone has different life situations, and these situations cannot be easily packaged into a smartphone application, nor can they be represented by a few numbers you enter into an online calculator.

For example, it is impossible for any automated program to accurately predict how much pre-retirement income (also known as the replacement rate) you will need, as well as the rate of return, inflation, and expenses for the entire retirement year.

Overestimate your replacement rate

Overestimating your replacement rate may cause your savings to far exceed what you need for retirement. In short, the retirement income replacement rate is the percentage of pre-retirement income you need to maintain a retirement standard of living.

The risks of saving too much for retirement include unnecessary financial stress, such as difficulty paying a mortgage or one of the unexpected and costly emergencies in life.

A general rule often cited by researchers is to estimate that you will need 80% of your current income to maintain a comfortable lifestyle after retirement. But David Blanchett, the head of Retirement Research at Morningstar, found that when many other factors are also considered, the replacement rate can vary, including different income levels and life expectancy.

His research concluded that the actual range of replacement rates is between 54% and 87%.If you plan to use 80% and actually only need 55%, then you might end up saving a lot of money that you might not need.

Wrong housing cost forecast

Where to live during retirement is one of the biggest costs you will face. How you plan and manage this aspect of your life will have a major impact on how much you need to save for retirement.

“Housing expenditure after retirement is extremely difficult to estimate,” said Mark Hebner, founder and president of Index Fund Advisors Inc. in Irvine, California. “Most retirees will spend most of their lives in their homes. Retirement time.”

If you plan to stay at home as long as possible, your expenses will be lower than the cost of moving to an assisted living or continuing care facility. This is especially true if your mortgage has been paid off.

According to the US Bureau of Labor Statistics, housing costs account for 30.7% to 35.9% of annual income.Assuming that your family has an annual income of US$50,000 and you spend 30% of it on housing each year, if your mortgage is paid off, your retirement costs will be reduced by approximately US$15,000. If you take more than 30 years of retirement into account, the money you need to save will be much less than you planned.

How much should I save for retirement?

How to save the correct amount

So, how do you know if you save more or less? Taking these steps will help you save the appropriate amount.

Find out your retirement schedule

The first step is to determine how far you are from retirement. If you are more than 10 years old, it is best to save a common percentage. That’s because the further away you are from retirement, the harder it is to get the exact number. Experts usually recommend between 10% and 15%.

If you quit your job for 10 years, you can make some more detailed plans, which will determine how much money you need to save in the years before retirement.

“The simplest starting point is to assume that the standard of living after retirement is the same as the number of years of work,” Hebner said. “It is very likely that most people will not spend that much money because they will no longer need to save for retirement, tax payments may be reduced, and transportation costs will also drop significantly.”

Do not use standard replacement rates

Don’t just use 80% of income as the replacement rate. Calculate your current expenses, subtract the expenses you will no longer have, and add the new expenses that will occur after retirement. For example, you may plan to relocate or travel more in earlier years than you currently do. If you are a parent in your later years, you may still have children in college or just start their career when you are about to retire. Or you may have grandchildren or other relatives you are helping to raise.

Once you have a realistic estimate of your expenses, you can use it to figure out how much you need to save to cover these expenses.

Research and planning of medical expenses

Research and develop a health care cost plan. Since this is the biggest unknown in your budget, knowing your options will help you estimate the correct amount of savings. Research medical insurance, long-term care insurance, assisted living expenses and home care expenses.

Calculate expected retirement income

Finally, calculate the amount you want from pension and social security payments. The more you get from these resources, the less money you need to deposit in your retirement account.

Bottom line

Planning how much pension you need is not easy. There are many variables to consider. With just a little extra time and effort, you can calculate the amount of savings that suits you. Remember: if it turns out that you are saving too much, you can consider early retirement or use some of the money now. Make sure that you also have enough money for emergencies.


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