The average American has $88,400 in retirement savings, according to Northwestern Mutual. But Americans across all age groups think it’ll take a $1.46 million individual retirement account (IRA) or 401(k) balance to pull off a comfortable retirement. And while even that sum technically doesn’t guarantee long-term financial security, there’s a good chance you’ll enjoy your senior years to the fullest if you retire with a balance that large.
You may decide that you want to save beyond $1.46 million. Is that a bad thing? Is there such a thing as having too much retirement savings?
The quick answer is, no, there’s not. But there is such a thing as sacrificing too much to save for retirement. And that’s a trap you don’t want to fall into.
When you give up too much to save for the future
It’s important to save for retirement so you can pay your bills without stress once you stop working. Technically, you can’t go overboard on retirement savings. If you’re able to save $2.1 million instead of a goal of $2 million, then hey, that’s an extra $100,000 to work with during your senior years. You can use that money to cover medical bills, home repairs, vacations, or anything else you choose.
But while you don’t have to worry about having too large a retirement account balance, you also don’t want to make yourself utterly miserable when accumulating wealth for the future. Yes, you should keep some of your expenses on the low side to allow room for IRA or 401(k) contributions. But you shouldn’t deny yourself certain conveniences or luxuries that make your life better during your working years.
Say you earn $5,000 a month, and you’re already saving $1,000 of that, or 20%, for retirement. That’s a respectable savings rate. But maybe you could be saving more. Maybe you could cancel your cable plan or not meet your friends out for dinner every week and pocket an extra $200 a month as a result.
Allocating that extra money to retirement savings isn’t a bad thing per se. But why should you deny yourself entertainment and time with friends if you can afford it and you’re already saving a good amount for retirement? It would be one thing to save an extra $200 a month due to your salary increasing. But this is a completely different situation.
It’s all about striking a balance
If you’re saving 15% of your income or more for retirement, then you’re most likely saving enough. That doesn’t mean you can’t save more, but if you can’t do so comfortably without denying yourself things you enjoy, then don’t push yourself.
It’s hard to know what the future holds. You might enjoy a 25-year retirement, or your retirement may end up being much shorter. You don’t want to give up things that make you happy and retire with $2.5 million to then only end up needing $500,000 because you don’t live as long as expected. Similarly, you don’t want to give up a yearly vacation when you’re young and healthy to travel more in retirement, because who knows if your health will allow for that.
You should save and invest for retirement as best as you can for as long as you can. But if you are saving and investing consistently, don’t force yourself to live too bare bones a lifestyle for the sake of your future. Striking a balance could be your ticket to retiring with confidence without having regrets once you get there.