Dollar Scholar Asks: Can You Save Too Much for Retirement?

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Traveling is my dream. Packing is my dream.

The day before a trip — any trip, every trip — I inevitably have the same mini-crisis. Standing in front of my closet, I start second-guessing my packing list. Is it raining where I’m going? Better grab my raincoat. Are the jeans okay? I should probably bring a dress too. But what about heels? A bathing suit?? An extra four pairs of underwear???

The problem is that each of these items takes up space in my suitcase, inevitably leaving little room for the things I actually need. In an attempt to be super-prepared for an imagined future, I shoot my current self in the metaphorical foot.

I worry that this may also apply to the approach I take to retirement savings. It’s drilled into my head how important it is to save for retirement, so I contribute to a 401(k) and a Roth IRA on a regular basis. But I wish I knew for sure if I was putting too much away at the expense of reaching other, more looming savings goals for my golden years.

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Is it possible to save too much for retirement?

My question, surprisingly, runs counter to people’s common concern that they’ve also saved, says Chris Seder, senior retirement strategist at Goldman Sachs Asset Management. a bit For retirement Workers predict They’ll need $1.8 million for retirement: a huge sum that requires a whole bunch of planning.

Unfortunately, because of its distant nature, Cedar says, retirement is often a financial liability when people are trying to pay off student loans, save for a home, get a car, and more. Then it’s never taken back – like 20% of Americans over age 50 There is no retirement savings.

but As I have written beforeThis is not an all-or-nothing situation.

Ideally, Seder says, I should have a budget that enables me to make progress toward multiple goals simultaneously. Even though my retirement contributions are lower than they used to be, the power of compounding means I don’t really have to give them up. “Those initial savings are really, really significant,” he says. When interest earns interest, it allows my savings to grow significantly over time.

So, I must be one overall plan which balances my current lifestyle with my need for future financial security. To determine if I’m overstating my efforts to save, Daniel Milan, founder and managing partner of Cornerstone Financial Services, suggests I crunch the numbers on my expected retirement. I should ask myself what my preferred retirement looks like and try to calculate how much that lifestyle would cost (adjusted for inflation).

Once I’ve pinned down my cash flow needs, I can work backwards and create a year-by-year plan to reach that goal, then evaluate how I’m doing so far. .

“It gives you some quantitative analysis to tell you, ‘Am I saving too much or too little?'” Milan says.

There are red flags I should watch out for. For example, if I’m putting away $1,000 a month for retirement instead of paying my rent, that’s obviously a problem. Likewise if I’m digging myself into credit card debt to cover my grocery bill. And if I don’t have more common building blocks, like an emergency fund, I should reduce my retirement savings.

Assuming they’re all squared away, however, the real risk isn’t necessarily saving too much—it’s saving too much. In certain types of accountssays Nicole Garner Scott, a financial advisor with Northwestern Mutual.

That may sound outrageous, since the IRS allows employees to contribute up to $7,000 to an IRA and $23,000 to a 401(k) in 2024. (Employees 50 and over can take away extra.)

But the issue here is liquidity. Because they’re designed for retirement, I’m usually not able to access money held in a 401(k) or traditional IRA until I turn 59 ½ without incurring an early-withdrawal penalty., Plus Income Tax.

Overloading these accounts can essentially shut down savings that I may need sooner.

Savings should be in buckets, of which retirement is just one, Scott says. Someone in my age bracket shouldn’t focus solely on tax-deferred retirement accounts that lock money away for decades, she says. “There are other buckets they can save that could be tax-efficient in the future,” she says. .

One solution is a Roth IRA, which lets me withdraw my contributions at any time, tax-free. (My earnings are subject to the same restricted rules as traditional IRAs.) Or I can spread my savings — and, later, my withdrawals — among a 401(k), Roth IRA and a taxable brokerage account, which I may be more beneficial for Tax rate in retirement if I rely solely on a traditional 401(k).

Bottom line

Saving for retirement is important, but it’s possible to have too much of a good thing.

If I’m saving so much for retirement that it’s negatively impacting other areas of my finances, or if it means a large portion of my money isn’t accessible for short-term goals, I pump the brakes. would like to There are ways to meet in the middle.