Is it Possible to Save Too Much for Retirement?
November 23, 2012
On the surface, this seems like a ridiculous question, but Iâ€˜m going to put on my contrarian’s hat here and dare to raise the question. There are probably far more people who are inadequately prepared for retirement than there are people who are over-funded for it. And yet retirement preparation can be a little bit obsessive at times.
It’s not that being well-prepared for retirement is a bad thing, but more that nothing that we do ever happens in a vacuum. While we’re preparing for retirement other things are happening in life. We could miss them if weâ€™re too focused on planning for retirement.
Are You Forgetting The Near Future?
Retirement planning is about preparing for the final years of life. We can become so focused on preparing for our later years, that we can neglect the present and the many years that will play out between now and retirement.
A factor that is often neglected in the retirement equation is that many people may find themselves in their peak earning years during what we normally think of as the retirement years. If for example, you have a very successful business, you may find that the business increases throughout your life. Many people who have their own businesses never retire. When you work for yourself the desire to retire often doesn’t exist.
If this turns out to be your situation, then retirement preparation will have been mostly to develop an income/asset supplement more than anything else.
Paying Off and Staying Out of Debt
It’s possible to get so caught up funding your retirement that you find other ways to pay the bills in the present. That sometimes takes the form of debt. Your retirement plan rises over time, but so do your debts. Because so much money is going into retirement, less available for routine purchases, for making large down payments on major items (like cars), or even for paying down your mortgage.
If you have $100,000 in your retirement plan but you also have $50,000 in car loans, credit card debt and other loan types, it’s almost like having a margin loan on your retirement plan.
Having a well-funded retirement plan is an important goal, but so is maintaining a debt free position. And getting out of debt actually helps your retirement planning in a major way. The less debt you owe, the more money you have available to put in your retirement plan.
Investing Outside Retirement
It’s not unusual for people to have most of their money sitting in a retirement plan. But as important as retirement is, it’s equally important to save and invest money for other contingencies as well.
You can have an emergency fund that will help you in times of crisis, such as the loss of a job. But what happens if you have a sequence of major expenses or if the job loss is more than short-term? Your emergency fund will be drained in a hurry, and if you have no other savings or investments, you’ll either have to borrow money or consider tapping your retirement plan.
Another situation that’s becoming increasingly common is either forced or voluntary early retirement. It’s important to have non-tax sheltered money available for just such an event. That will prevent you from having to draw down your retirement savings ahead of schedule.
Most of us have a certain amount of discretionary income that will cover non-survival expenses, such as entertainment and travel, paying off debt and funding retirement. Somewhere in there should be room to help others. This is particularly true of those who are close to us, such as extended family and close friends.
How many people you want to help and how far you go with each is a personal decision. But if you have the means, leaving a little extra for just that purpose can enable you to help out where you can.
Building a Business
Itâ€™s possible to be so concerned with building your retirement plan that you’re hesitant to do anything to interfere with the process. You could stay at a job that you don’t especially like because your 401(k) plan is doing particularly well. You may harbor thoughts in the back of your mind of one day leaving your job to start a business in something you really enjoy. But you put that off because it might interrupt or even end your contributions to your 401(k) plan.
The years pass and you never do pursue the business idea. Retirement becomes a self the filling prophecyâ€“you can’t quit your job because you have to fund your 401(k), so that you can retire and get away from your job. Throughout your career however, though your 401(k) is healthy, you’re never truly happy.
But let’s say that you do decide to quit your job and start a business? You’d be doing work that you enjoy while building your business and increasing your income. Soon enough you’ll be able to start a retirement plan through your business and resume increasing your portfolio. But even better, when you do reach retirement age youâ€™ll have a business and that will open up some options.
You can either decide to sell the business to raise extra money for your retirement savings, or you could keep the business into retirement and use it as a nice supplement to your retirement income.
But that kind of opportunity will only happen if youâ€™re prepared to let go of your job â€“ and the 401(k) attached to it â€“ and take a chance on starting the business. If retirement planning is the main force that drives you, you may never take that chance.
As important as it is to save for retirement, it should never dominate your financial situation. Many other obligations and opportunities are developing all around you, right here and right now. Make some preparation for the future, but don’t allow today to be neglected in favor of a retirement that may be decades away.
Are you investing for retirement? Or are you focusing on other financial goals? Leave a comment and let us know!
All posts by Kevin Mercadante