How saving too much money could actually backfire


The most fundamental financial advice -- to consistently save -- is absolutely correct. What's less obvious, yet equally correct, is that you can also save too much.

SEE ALSO: 5 Considerations to Help You Retire Wealthy

Your financial plan should not only help you to live better in the long run -- it should also help you live better today.

The truth is, accumulating more in savings than you will need for retirement can be a mistake if it's preventing you from fully enjoying life today or if it's causing you unnecessary financial stress.

In order to strike the right balance between diligent saving and saving too much, you need a blueprint.

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10 retirement savings goals for 2017
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10 retirement savings goals for 2017
If you get a raise in 2017, aim to put at least a portion of it in a retirement account. "If you receive a raise or cost of living adjustment, increase your savings by that amount," says Justin Rush, a certified financial planner and founder of JGR Financial Solutions in Canton, Ohio. "Up until this point, you've not received that money anyway, so don't get used to living on it. Instead, save it."
When you receive a windfall of cash such as a bonus, tax refund or inheritance consider investing for the future instead of immediately spending it. "Try to complete all of your financial goals out of your salaried income, and have the bonuses go straight into savings," says Dave Grant, a certified financial planner and founder of Retirement Matters in Barrington, Illinois. You can even directly deposit part or all of your tax refund in an individual retirement account.
Saving for retirement in a traditional 401(k) or IRA can help to reduce your tax bill, or you could save in a Roth account to eliminate the need to pay taxes in retirement. "Put an extra $100 into a Roth IRA or 401(k) each month in 2017 to make sure the savings happens," Grant says. Low-income retirement savers might be able to additionally claim the saver's credit.
Saving for retirement is easier when your employer chips in. If your company provides a 401(k) match, make sure you deposit enough in a retirement account to claim the employer contributions.
Saving in a 401(k) plan can qualify you for tax breaks and employer contributions, but there are also good reasons to have an emergency fund outside your retirement accounts. "Just because you are saving for retirement doesn't mean that your money has to be in a 401(k) or IRA," says Pamela Horack, a certified financial planner for Pathfinder Planning in Lake Wylie, South Carolina. "You can invest in a traditional mutual fund or through a brokerage account for funds that work as emergency funds and retirement savings."

A small increase in retirement account contributions can add up to a substantial amount by the time you get to retirement. "Increasing your retirement contributions can be overwhelming, so try to make it more manageable with smaller but regular increases," Horack says. "Increase your contributions by $10 every six months. Every little bit will help you reach your goal."

It's difficult to know if you are saving enough or are properly diversified when you have 401(k) accounts with several different employers. "Locate any old 401(k) accounts or pensions from previous employers to be sure you have an accurate list of all your funds," Horack says. "The first step in increasing your savings is to know what you already have."

When you finally pay off your student loans, credit card debts or other past purchases, consider putting the amount you used to spend on debt payments into a retirement or savings account. "If people are paying off debt in 2017 that held a monthly payment, divert that same monthly payment into retirement savings," Grant says. "Your budget won't feel the difference, but your long-term savings goals will."
If a low income prevents you from saving, consider starting a money-making project on the side and using that income to save for retirement. "Forget skimping on lattes. Find a side job in your passion project and have all that income go into retirement savings," Grant says.

If you aren't earning enough money to invest a respectable amount for retirement, you may want to start acquiring the skills that will allow you to negotiate a higher salary. "It may be necessary to spend some money and time on yourself before you are in a position to increase your retirement savings," Rush says. "Perhaps that means taking a class to learn a new skill or maybe going back to school and earning a new degree all together that enables you to secure a higher paying job."

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When Saving Goes Too Far

I recently met with two of my clients, we'll call them Larry and Laura (not their real names), age 62 and model savers. They contributed diligently to their 401(k)s, HSAs and IRAs and built a nice nest egg.

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But this diligent savings came with a cost. They constantly worried about paying their mortgage, life insurance premiums, living expenses, spoiling their grandkids and, of course, continuing to save for retirement.

With a family history of longevity and Alzheimer's, Larry and Laura also began to worry about saving for long-term care. Despite their nest egg, a long-term care event would likely devastate their retirement. They knew they needed coverage, but they did not feel like they could afford it.

Without a plan, Larry and Laura were lost.

Pulling Back the Curtain on Retirement Income

When Larry and Laura came to meet with me, we first looked at their current income and expenses. Then, we did a deep dive and looked at how their cash flow would change throughout retirement by detailing how certain types of incomes and expenses started and/or stopped at different times.

Starting at age 67, Larry and Laura would begin receiving Social Security and pension benefits, providing them with a solid foundation. What they didn't realize, however, is how these income sources, coupled with a reduction in non-lifestyle expenses (e.g., retirement savings and payroll taxes), would generate a recurring surplus to the tune of tens of thousands of dollars each year.

The kicker? This didn't even include spending any of their retirement savings.

Better Today, Better Tomorrow

The analysis concluded that it made sense for Larry and Laura to free up additional cash flow to enhance their current lifestyle. They continued working, but they stopped making additional retirement account contributions, which allowed them to indulge a bit more when it came to their daily expenses. This sounds easy, but it required Larry and Laura to defy the conventional advice they had so diligently followed for so many years.

SEE ALSO: Do You Have the Right Tools to Navigate Your Retirement?

Initially, the thought of halting their retirement contributions caused some discomfort. To help alleviate that uneasiness, I worked with them to pay off their mortgage using distributions from their retirement savings. The distributions were spaced out over two years to keep the couple in the 15% bracket.

They canceled their life insurance policies, as the insurance was only owned to pay off the mortgage in the event of premature death. The money that was being used to pay for those life insurance premiums was redirected toward purchasing long-term care insurance.

Larry and Laura came in with three primary priorities: an immediate upgrade to their current lifestyle, financial security against the likely need for long-term care and the comfort of knowing they'd be able to retire a few years early, if they so choose. By analyzing their current and future cash-flow needs, we were able to accomplish all three all by correcting the problem of over-saving.

The Bottom Line

The one-size-fits-all advice to maximize the amount you're saving may work out in the long run, but it may add undue stress today. Remember, your situation is unique, and your financial plan should be, too.

Ask yourself and/or your adviser the following questions to help you evaluate whether you're saving too much:

  • What percentage of my current income will I need to replace once I retire, and how will that number change throughout retirement?
  • How much will I need to withdraw from my savings in order to meet my cash-flow needs in retirement?

Navigating your retirement journey requires that you and/or your adviser has good answers to these questions. If you lack clarity, I encourage you to seek better guidance that ensures you are on track with your financial plan and the pursuit of your long-term goals.

SEE ALSO: 5 Ways to Create Retirement Income That Will Last

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Copyright 2017 The Kiplinger Washington Editors

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