Are You Saving Too Much Money?

By Dan Rafter on 9 September 2010 9 comments

You've diligently saved your entire life, contributing the maximum amount to your 401(k) plan or IRA. You've even built a solid emergency fund so that you'll never have to rely on a credit card to pay for unexpected expenses.

But is it possible that you're saving too much?

Sounds implausible, right? How you can save too much money? The financial experts all preach that you need to sock away as much as possible so that you can afford the retirement you've been dreaming of — whether that means traveling the world, relaxing by the lake, or spending more time with your grandkids.

Saving too much money is certainly better than not saving enough. However, in rare circumstances — believe it or not — it might be possible to save too much money.

An emergency fund that's too big

Financial experts recommend that your emergency fund include enough savings to cover daily living expenses for about six months. This way, if you lose your job, you'll have a financial cushion as you look for new employment. You'll also have dollars to draw from if your water heater should suddenly burst or your furnace conks out. With an emergency fund, you won't have to resort to paying for these emergencies with a credit card.

But it is possible to build an emergency fund that is too big. It doesn't make sense to keep depositing money in such a fund if you've already saved up a year's worth of living expenses. The reason? The money in an emergency fund doesn't generate much interest. Generally, you'll deposit money for your emergency fund into a savings account, and it's rare to find a savings account that comes with an interest rate higher than 1 percent.

If you want your savings to earn money, it makes more sense to invest it in retirement accounts or the stock market. You'll usually receive a far bigger return on your money.

Building an emergency fund is a key financial goal. But obsessing over this fund and building it too high can cost you far more valuable returns. (See also: 10 Money Goals All 30-Somethings Should Have)

Stashing away too much for retirement

Can it be possible that you're saving too much money for your retirement years? This is unlikely, but it is possible. It all depends on how much you've already saved and the type of lifestyle you expect to live after you leave the working world.

How much should you be saving for retirement? A general rule of thumb is that you should save 10 to 15 percent of your income every year. Others suggest that you should save enough, and have enough in other income streams, to replace 80 percent of your pre-retirement income, aka the "80 percent rule."

Determining your pre-retirement income

What is your pre-retirement income? A good number to use is the average income you earned during the last 10 years during which you were employed. So if you earned an average of $50,000 during the last 10 years you were working, you'd need to have enough in savings and other income streams to come up with $40,000 a year, or $3,333 a month.

That sounds like a lot. But you do have options for coming up with that money. If you've saved diligently in a retirement savings account such as an IRA or 401(k) plan, you'll get the bulk of that money each month from these accounts. You can also rely on Social Security payments, pension payments, or other monthly income streams.

Expenses you'll no longer have

There is some debate about whether you'll actually need that 80 percent figure. The goal when you reach retirement is to have your mortgage paid off. At the same time, you won't be paying for your children's college tuition. And Medicare should cover a good chunk of your health care costs.

If you've planned well for your retirement, you might not need as much savings as you expected. You might reach the end of your working life with a surplus of money saved up.

Of course, this isn't necessarily a problem. Having more money saved further reduces the stress of retirement. Having more savings can protect you from unexpected costs during your retirement years. It's impossible to predict, for instance, if you'll need emergency medical care or if you'll need to live in an assisted-living home earlier than expected. (See also: 9 Times Life Can Throw Retirement Off Course)

But if you're saving so much money today that you're not enjoying yourself — holding off on a well-deserved vacation, or making do with secondhand furniture — you might consider spending a little more money today. As long as you're meeting your retirement goals, it doesn't hurt to treat yourself before you hit your post-work years.

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Guest's picture
Raina

I'm what some might call a "super saver", but that's probably MOSTLY due to my age and being single with no kids. I save over 2/3 of my post-tax income. I'm definitely "cheap" in a lot of aspects; I don't go out, I usually leave the A/C off, I research products at length before I even think about buying anything, I refuse to ever pay a single penny for a cell phone, etc. But I'm not living like I'm impoverished. I think it's great to find a comfortable balance, especially when you have the financial room to do so.

Guest's picture

Well, there's more to saving than just forgoing spending. You could almost argue that being frugal is the first step to being enterprising. Even super savers have to put their money somewhere, and it's up to the saver to determine whether that's a checking account, a mattress, a mutual fund, or a business venture.

I own a decently-sized house and travel extensively, but I also drive an undistinguished truck and would rather spend the night in a $36 Motel 6 than a $200 Hyatt (that $164 would eat away at my conscience all night.) I spend as little as I'm comfortable with, only because I'd rather put any available cash toward buying assets and selling liabilities.

Guest's picture
Guest

$36 a night? where?

Guest's picture
K.C.

Not all super savers are as compulsive about saving as you imagine them to be. My wife and I retired last year at age 56. We've saved an average of 50% of our income for most of the thirty years we have been married. We live modestly, true, but we aren't lacking anything that is of value to us, even in retirement.

We saved as much as we could, when we could, because we never knew if we would be able to save later on. In reality, no one knows if he has saved too much until he is dead. Old age requires a lot of money. Besides, if we discover that we have saved too much, we can always spend some of it. It's never too late to spend. On the other hand, if we discover in old age that we have saved too little, it's too late.

Guest's picture
Miguel

I really believe in keeping a balance with spending and saving and these balancing will differ from person-to-person.

Guest's picture
Derek

I always enjoy your posts "Silicon Valley Blogger". I am definitely the frugal one between my wife and I. She had to teach me to enjoy life and spend a little money once in a while! It has been great, and I wouldn't trade her for the world.

Guest's picture

Why is it that people always want savers to spend more? It's like telling a fit person that they don't need to work out because they're so fit. They wouldn't be fit (or have lots of money) if they didn't work out (or didn't save money).

Guest's picture

I strongly believe that it's possible to save too much. And the results can be just as bad as the results of spending too much.

The idea should be to get the greatest possible value proposition from the money that passes through your hands. It's what you accomplish with your spending or saving that matters.

The big problem, in my view, is that both too many savers and too many spenders make their money choices on auto-pilot. We should aim to be mindful of WHY we are spending or saving and make the choice only when it furthers our Life Goals.

Rob

Guest's picture
Guest

I'm one of the saver types. I save largely because I don't WANT any of the fancy, overpriced junk out there. If other people like stuff, go right ahead and buy it... but I don't want an extra large house to clean, resuraunts that never make food the way I want it, or extra gadgets I won't use. So I save the cash for a day when I actually need/ want it for something.

Guest's picture

I don’t know anyone who is saving too much for retirement. I only know people who don’t have any saving. It’s silly to say anyone is saving too much for retirement. When the time comes, it’s better to have extra money than to run out. If you have extra, you can give your kids a leg up or get the library named after you or something like that.