You’ve been advised to save, save, save for as long as you can remember, and you’ve done a great job of saving diligently thus far. But now someone (me) comes along and questions if you are saving too much? How is this possible, when Fidelity recommends having at least 10 times your annual salary saved by age 67, knowing your salaries will continue to increase and this 10x rule will continue to elude you?
Many people tend to think of being wealthy and having a lot of money as one and the same. But what is the purpose or reason for accumulating a bunch of money? Being wealthy, as termed by Brian Portnoy in his book The Geometry of Wealth, is funded contentment. Essentially you are wealthy when you have the means to live your ideal lifestyle and be content in your endeavors. This is where the savings rules of thumb should be taken lightly. Someone who anticipates cruising around the world (post-Covid, of course) for eight months out of the year will certainly need a larger nest egg than someone who wishes to simply maintain their current lifestyle, with a paid-for house and self-sufficient children, and who would like to take 2–3 trips per year.
To illustrate, let’s use this back-of-the-napkin-type example. A dual-income couple, Jack & Jane, is expecting to retire next year at age 67. They each make and have averaged $50,000/year in income, or $100,000 combined. According to Fidelity, they should aim for roughly $1M in retirement savings, but currently they are far short with just $500,000 in savings. They’re doomed right? Not quite. Jack and Jane were very disciplined in their finances and while they did not save according to industry recommendations, they still saved diligently. They also lived within their means and did not accrue debt, allowing them to pay off their home. Their children have graduated college and are living on their own. Jack and Jane can live comfortably on $5,000 per month, which includes increased travel and time with their future grandkids.
How much will Jack and Jane need from their investments to support their lifestyle? According to AARP, with their average earnings they will each receive about $1,850 in monthly income from Social Security at full retirement age (after tax, assuming a 12% effective tax rate), or $3,700. This leaves them $1,300 short. Traditionally, a 4% withdrawal rate has been sufficient in sustaining a retirement portfolio (though this has been challenged in the past), and so only needing an additional $1,300 per month from their $500,000 portfolio puts their withdrawal rate at 3.12%, much less than the standard 4% which only enhances their portfolio sustainability. So even with 50% of the “recommended” retirement balance, Jack and Jane will be able to retire and be wealthy.
Of course, there are a multitude of arguments which could be made here. Some financial planners assume expenses remain the same in retirement and tend to increase every year due to medical expenses, and are subject to annual inflation. Others feel that expenses in retirement plateau after about five years, then drop precipitously, though still accounting for inflation. For those who are younger, you may not believe Social Security will be around when you retire, or that muted equity returns will require higher retirement balances. This example is not meant to be a substitute for a retirement cash flow projection, but rather the example above shows that your savings rate should not be compared to your peers. The amount you save, how you save, and your lifestyle are unique to you and your goals.
How Do I Know If I Am Saving Too Much?
Much like the Lewis Carrol quote “If you don’t know where you’re going, any road will get you there”, the first step in determining if you are saving too much or too little is to understand what you are trying to achieve—both pre-retirement and in retirement. What are you working for? Take some time to determine your goals, and be sure if you are in a relationship, both of your goals are stated. Just like you need to know your destination before heading out on a road trip, try to make financial decisions within the context of achieving your goals. Once you understand where you are headed, then you can begin to plan and fund your unique goals.
The purpose of this article is not to discourage saving, but to prevent people from sacrificing too much today for something they may not need in the future. I’ve had conversations with people who are essentially bypassing enjoyment and time with their families for the sake of saving for a “goal” they have not even identified yet. Yes, saving is extremely important. But if by saving too much you limit your ability to share experiences with your kids and family, have you really accomplished your goal?
Andrew Langdon is a CERTIFIED FINANCIAL PLANNER™ and the founder of VetWorth, a fiduciary fee-only financial planning firm dedicated to serving the unique needs of veterinarians and their families.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Andrew Langdon, and all rights are reserved. Read the full Disclaimer.