Are You Saving Too Much for Retirement?

One boring little word seems to be the key to many personal finance quests: Save. Want to buy a new home? Save for a down payment. Send your kids to college? Save from the day they're born. Retire on an island retreat? Save, save, and save some more.

The problem with all this saving is that it's not nearly as much fun as spending. That brings us to a headline-grabbing theory from many academics, economists, and authors who argue that many Americans are actually saving too much for retirement.

Some in the saving-too-much camp blame the financial services industry for promoting excessive saving so it can profit from managing all those assets. Considering the industry's history of customer relations, this theory has a certain appeal.

Why You Shouldn't Save

While many experts say retirees need 70% to 80% of pre-retirement income to meet their spending needs, the critics argue this number is inflated. They can point to a study showing people spend about 20% less in retirement than those benchmarks assume, and another suggesting most retirees live below their means. They may also note that many retirees will have their mortgage paid off and kids raised, that Social Security will provide some income, and Medicare will cover the bulk of their healthcare costs.

Uncertainties about retirement have given retirement savings a new role as an all-purpose security blanket, a personal insurance policy for life's risks. As a result, over half of the retirees surveyed say they have only taken the required minimum distributions, and "only 21% feel confident about drawing down their assets."

If the retirement nest egg has turned into the key measure of how well prepared we are for a future with few guarantees, little wonder many want to grow it beyond what they are likely to need, while some, like those in the Financial Independence, Retire Early (FIRE) movement, race to do so.

Now there's "Die With Zero," which argues that the FIRE crowd's savings zeal will cause it to miss out on some of the best investment opportunities in life—the extraordinary experiences that can bring happiness again and again as we revisit their memories. Its message is that persistently deferring consumption is often not the path that maximizes long-term happiness.

Why You Should Save

The trouble is, persistently deferring savings is much easier and also unlikely to end well. About 48% of the workers surveyed for the annual retirement survey from the Transamerica Center for Retirement Studies had household retirement savings of less than $50,000 in 2023, including 21% with less than $10,000 and 8% with none.

Meanwhile, Social Security benefits provide more than 50% of retirement income for more than half of those over 65, and more than 90% for nearly a quarter of retirees. While the average monthly Social Security payment to retirees is set to increase in 2025 by the 2.5% cost-of-living adjustment (COLA), that's unlikely to provide lasting comfort to those struggling to make ends meet on the benefits. Nearly 12% of those aged 65 to 69 and more than 18% of those 80 and older report living in or near poverty.

Social Security trustees project the program's main trust fund will run out of reserves in 2033, at which point payroll tax receipts will cover 79% of scheduled benefit payments. A funding fix by Congress is likely to include higher taxes, benefit cuts, or both.

Medicare is also at risk, with the program's hospital insurance trust fund projected to deplete reserves in 2036 at which point payroll tax receipts will cover 89% of scheduled benefit payments.

By 2024, more than half of people eligible for Medicare were enrolled in a Medicare Advantage supplemental policy. (These are regulated private insurance plans. Medigap is another type of supplementary coverage used by some consumers.)

Varying Circumstances

Not all Americans reach the age of 65 or 70 with the mortgage paid off and the kids grown and gone. For starters, many adult children are moving back home long after tradition suggests they should be independent. Many older Americans are saddled with their children's student debt. They may have other debt eating into their income as well. And about 36% of Americans were renters, not homeowners, and rent is a cost that can keep on growing.

The key questions then become: Does anyone really know with absolute certainty how much money they will need to finance retirement? Would you be willing to bet your financial security on that calculation?

Educated Guesses

In truth, financial planning—and saving for retirement—requires plenty of educated guessing. A projection of required retirement income is based on the expected costs and your planned lifestyle. Like all financial forecasts, it is no sure thing.

For instance, consider the sharp increases in housing costs during the late 1990s and 2000s, and in healthcare spending over recent decades. In 2019, Medicare enrollees' out-of-pocket drug costs totaled 12% of the population's median income, and that's not counting the escalating cost of supplemental Medicare coverage.

The rising cost of living, in general, must also be a cause for concern since your retirement income from personal savings won't get a COLA bump annually.

Retirement Reality Check

So, is the "saving-too-much" theory flawed? For many Americans not saving anything at all, it's not even applicable. You need a calculator, not a financial pundit, to figure out whether you're saving too much, too little, or just enough for your needs. You should consider the following:

• How much you have saved to date
• How much you plan to save each month
• Your desired retirement lifestyle
• Your projected rate of return on your savings

You'll need to consider factors that apply to all retirees and those specific to your situation. For instance, will you need to purchase long-term care insurance because of your health profile? In addition to your savings, what income can you expect from sources such as royalties or investment properties? Are there others relying on you for financial support?

The answer to these questions will help you decide whether you can afford to save less and spend more.

Spend or Save?

Most of us would prefer to enjoy our hard-earned money now rather than save for retirement. At the end of the day, saving for retirement is like paying for an insurance policy. You might not need it, but if you do, you'll be glad you have it.

Of course, saving for the future may be even better than an insurance policy, because if you don't need the amount you saved, you are free to spend it on life's little luxuries, leave it to your offspring, or donate it to charity.

If retirement is still on the distant horizon for you, take a look at your own personal circumstances rather than focusing on the theories and trends advanced by experts.

Keeping your money out of the clutches of the financial services industry won't do you much good if you end up poor in the process.

The Bottom Line

Saving is important. It allows you to be prepared for emergencies, stay out of debt, and purchase assets, such as homes, that will increase your net worth. Knowing whether or not you're saving too much can be a difficult question to answer, as it varies for every individual. Assessing your finances, making budget projections, particularly for retirement, and knowing what kind of lifestyle you intend to live in retirement will help you determine how much you need to save and where you can spend.