Saving too much money can be a bad thing. Doing anything to the extreme always has unexpected or even expected consequences that can leave a lasting negative effect. If you are a natural saver like myself, then you know exactly what I am talking about. Just like wracking up debt over time can create serious financial and emotional stress, saving too much too quickly requires a great deal of sacrifice and if not done correctly, can cause other problems and stresses. For the average American retirement savings are a huge cause of anxiety – here’s a list of things to keep in mind whether you’ve started saving for retirement at 30 or worrying about how to save for retirement in your 50s.
Can You Over-Save for Your Retirement?
One of the ways I keep myself in check from over saving is by compromising with my husband. Although we are both savers, my husband tends to gravitate more towards a balance of saving and spending money. Like with any relationship, he keeps me in check when I decide to go crazy with our savings rate. At first it was a difficult adjustment to make, however, I found that spending a little more on the now had benefits that I also enjoyed, especially since we typically agree on what to spend our money on. For example, in 2017 we decided to loosen our savings rate from 30% to 25% of our take-home pay (we also contribute to our respective employer’s retirement matching program but don’t include that in our rate calculation) so we can take more vacations. Our goal is to take 4 vacations this year, 3 of them outside of the continent. So far we have 1 vacation down, 3 more to go. Spending money this way is something both he and I can enjoy with no regrets.
If you think you might be over saving or worrying too much about your retirement plans, here are a few ways to find out:
Living Paycheck to Paycheck with Double-Digit Retirement Savings
If you are saving more money than your household income can afford, that may signal a few things. It might mean that you need to cancel a few subscriptions, sell a vehicle or downsize certain areas of your life. However, it might also mean you need to re-evaluate the amount of money you’re putting towards your retirement each month. Sometimes we may want to ‘run before we walk or jog before we stretch’ but like physical exercise, this can leave us fatigued and burned out very quickly. Instead of rushing to save more by cutting back expenses, scale back your savings rate and strive to increase your income instead. Than, make sure to be mindful of lifestyle inflation as your income increases. By focusing on increasing your income, you can still achieve your retirement savings goal over time without having to sacrifice as much now.
Delaying What You Need to Save More Money For Retirement
Do you need to update your wardrobe for work but you are putting it off so you can save more money? Are there home repairs that you are putting off for so long that they are going to cost you more to fix once you get to them? Do you generally get annoyed when you must spend money on anything in the home? Having a pleasant and inviting place to come home to is good for the mind and can affect your overall mood long term. Also, buying clothes that make you look and feel good boosts morale and confidence. Be sure to find balance on saving for your retirement and spending money on things you need now.
Avoiding Social Activities to Avoid Spending Money
A part of socializing and building lasting relationships requires spending money. Of course, the occasional potluck is a huge money saver, but some experiences require engaging in activities that cost more. Do you find yourself disengaging with your friends whenever the topic of doing something together that costs money comes up? Do you hangout with your friends less or have they complained that you don’t do anything with them anymore? Spending money every time your friends have an activity in mind is not good for your budget. However, shying way from spending money on any activities may cost you lasting friendships over time and those are relationships you’ll want when you retire. Unlike a short-term goal like paying off debt, or saving for an emergency fund, saving for retirement can take decades, if not longer, to achieve. As we get older, it is important to treasure the friends we do have because it gets harder to make new lasting relationships as we age. If done in moderation, spending money on activities with friends is a great investment.
How Will A Government Pension Plan Affect Your Retirement Savings
Government pension plans are not meant to cover all the expenses incurred during retirement. Rather, they should serve as one source of retirement income in your portfolio. As much as it is not good to overestimate how much you may receive from government pension (use average statistical values when retirement planning not maximums). It may also be unwise to underestimate. If you are a decade or less to retirement age, you should research and find how much you may expect to receive from government pensions as that will impact your retirement saving plans.
You rely entirely on saving and not investing your money
Gone are the days where you can put your money in a Certificate of Deposit (CD) or Guaranteed Investment Certificate (GIC) and expect to receive a 4% to 5% return on your savings. If you are not investing your money long term, then you will always find that you are not saving for retirement as robustly as you could be. Maybe not right away, but overtime, you will find that you can’t save enough to cover the expenses you will incur when you retire. This is because the cost of living typically goes up each year due to inflation. The average inflation rate each year is around 1.5%- 2%. So, if you put your long-term money in anything that is not getting you at least a 2% return on your investment each year (after taxes & fees), you will have less money in the future than when you started. To compensate for this loss, you will need to save more now to have the same purchasing power when you retire as someone who saved less but invested their money. Learning how to invest your money is an investment in your present and future financial well-being. You can always start by micro investing.
You visit your budget daily trying to find ways to trim expenses so you can save more
I have been guilty of this one in the past. Although my husband and I decide on the family budget a year in advance, I typically do the week to week bill payments and tweaking of numbers to make it all work. In the recent past, I found myself obsessed with how much we were putting towards retirement each paycheck and obsessing over ways we can cut back even more. Most of the time the changes were minuscule because our budget was solid, but for some reason I felt like if just looked at it one more time I could find “extra” money that I missed. There is nothing wrong with tweaking your budget every now and then but moderation is key.
You insist on staycations each year to avoid spending money
Staycations can be great and relaxing. However, every once in a while, it is nice to venture out of the city, country or continent and explore other cultures, experience new things and gain a different perspective. Vacations (not financed with debt) are a great way to unwind and distress allowing you to return to work more productive than before. They also offer great memories and experiences for a lifetime.
You have a defined benefits plan or your employer contributes substantially to your pension
If you are a government employee or work for one of the less than 20% of employers that still offer a defined benefits plan AND you also save for retirement, you may be over saving. Government employees and defined benefits recipients are typically guaranteed a fixed amount of retirement income for the rest of their life regardless of how the markets perform. Of course, the amount to be paid out each month depends on years of service and salary while employed, but having that assurance takes a lot of the financial pressure out of retirement planning. If you are unsure, discuss with human resource what type of retirement package(s) your employer offers and how contributing outside of these plans may affect your contribution limits and taxes.
You have a sizable debt load but refuse to allocate more than the minimum payments towards your debt so you can save more money
Focusing entirely on saving money without factoring in debt is looking at one side of the equation only. If you have a sizable amount of consumer debt (i.e. student loans, credits cards, car loans, personal loan, line of credit etc.) and you don’t want to stop saving so you can pay off the debt, it is still important to make sizable payments so you can minimize your monthly interest costs. Over time, high-interest costs eat away at your wealth, especially those incurred on consumer debt. Be sure to address your debt situation before deciding to aggressively start saving money.
You compromise too much time away from your family and friends to make more money so you can save it
Working multiple jobs to increase your income and spending long hours at work or home to make more money can be a great short-term strategy to boost savings or get out of a financial hole, if everyone affected by this decision is on board. The problem arises when this becomes a new way of life and there is no end it site. Money can be replaced but the time lost from not being with family and friends is gone forever. Another way of looking at it may be assessing what would matter to you when you are on your death bed, the people that come visit you at the hospital, or how your investments are doing. For most people, it’s the former, because we can’t take our money with us, it has no value to us when we are dead. Be sure to allocate time for the people closest to you.
You like the idea of having an ambitious retirement nest egg and you are striving to reach that goal, but can’t explain what you will use that money for when you retire
Having $5 or $10 million dollars saved by retirement sounds nice, right? But as you’re looking at how to save for retirement, have you ever asked yourself what you would do with all that money? If you have and you have concrete answers to this question, then that is great! You are well on your way. Many people however, like the idea of retiring with $10 million dollars but don’t have a strategic plan on how they would spend all that money. Evaluate the reasoning behind the dollar amount you chose for your retirement goal. Are the reasons in line with your values? Are you willing to make the sacrifices necessary to reach the goal? If so, at what cost and can you live with the consequences? $5 or $10 million may not be too much money for one (or two) people to retire with. Rather, it is the why behind the amount that is important.
You are afraid of any uncertainty (especially financial) and hedge your risk by saving even more money for your retirement
Some people are more risk averse than others, but there is only so much we can plan for, the rest we just need to let be. Do you have double what you need for your emergency fund and still feel like it’s not enough money? Even after carefully reviewing the numbers with your financial planner/accountant, do you still worry that you aren’t saving enough for retirement? Do you create funds for every expected or unexpected expense? Having an emergency fund and various savings accounts to save for big ticket items is prudent, but planning and over saving in anticipation for the worst can be distractive. Have an emergency fund in place, regularly recommit to saving for retirement, stay within your budget and learn to live comfortably with uncertainty.