Dollar Scholar Asks: Can You Really Save Too Much for Retirement?

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Traveling is my dream. Packing is my nightmare.

The day before a trip — any trip, every trip — I inevitably have the same mini-crisis. Standing in front of my closet, I start to second-guess my packing list. Is it going to rain where I’m going? Better grab my raincoat. Are jeans OK? I should probably bring a dress, too. But what about heels? A bathing suit?? An extra four pairs of underwear???

The problem is that each of these items takes up room in my suitcase, inevitably leaving little space for the things I actually need. In trying to be super-prepared for an imagined future, I end up shooting my current self in the metaphorical foot.

I worry this could apply to the approach I take towards retirement savings, too. It’s been drilled into my brain how crucial it is to save for retirement, so I contribute to a 401(k) and a Roth IRA on a regular basis. But I wish I knew definitively whether I’m putting too much away for my golden years at the expense of reaching other, more imminent savings goals.

Is it possible to save too much for retirement?

Chris Ceder, senior retirement strategist with Goldman Sachs Asset Management, says my question, unsurprisingly, is the opposite of folks’ usual concern, which is that they’ve saved too little for retirement. Workers predict they’ll need a whopping $1.8 million for retirement: a huge sum that requires a whole bunch of planning.

Unfortunately, due to its far-off nature, Cedar says that retirement is often the financial obligation people punt when they're trying to juggle student loan payments, saving for a house, getting a car and so on. Then it never gets picked back up — something like 20% of Americans over age 50 don’t have any retirement savings.

But like I've written before, it’s not an all-or-nothing situation.

Ideally, Ceder says I should have a budget that enables me to make progress toward several goals at once. Even if my retirement contributions are small at first, the power of compounding means I really shouldn't skip them. “Those early savings are really, really important,” he says. When interest generates interest, it allows my savings to grow substantially over time.

To that end, I need to have an overall plan that balances my current lifestyle with my need for future financial security. To determine whether I’m overdoing my efforts to save, Daniel Milan, founder and managing partner at Cornerstone Financial Services, suggests I crunch the numbers on my expected retirement. I should ask myself what my preferred retirement looks like and try to compute how much that lifestyle will likely cost (while accounting for inflation).

Once I’ve pinned down my cash flow needs, I can work backwards and make a year-by-year plan to reach that target, then evaluate how I’m doing so far.

“It gives you some quantifiable analysis to tell you, ‘Am I saving too much or too little?’” Milan says.

There are red flags I should watch out for here. For example, if I’m putting away $1,000 a month for retirement in lieu of paying my rent, that’s obviously a problem. Ditto if I’m digging myself into credit card debt to cover my grocery bill. And I probably should pare down my retirement savings if I don’t have more prescient building blocks, like an emergency fund, in place.

Assuming those are all squared away, though, the real risk is not necessarily saving too much — it’s saving too much in certain types of accounts, says Nicole Garner Scott, a financial advisor with Northwestern Mutual.

This might sound outrageous, given that the IRS allows employees to contribute a maximum of $7,000 to an IRA and $23,000 to a 401(k) in 2024. (Workers 50 and up can squirrel away extra.)

But the issue here is liquidity. Because they’re designed for retirement, I’m generally not able to access the money I put into a 401(k) or traditional IRA until I’m 59 ½ without incurring an early-withdrawal penalty, plus income taxes.

Overloading these accounts could essentially lock away savings I might need sooner.

Scott says savings should be in buckets, of which retirement is just one. Someone in my age bracket, she says, shouldn't solely focus on tax-deferred retirement accounts that lock up money for decades."There are other buckets they can save into that might be more tax-efficient in the future,” she says.

One remedy is a Roth IRA, which lets me withdraw my contributions, tax-free, at any time. (My earnings are subject to similarly restrictive rules as traditional IRAs.) Or I could spread my savings — and, later, my withdrawals — across a 401(k), Roth IRA and a taxable brokerage account, which may afford me a more advantageous tax rate in retirement than if I were to solely rely on a traditional 401(k).

The bottom line

Saving for retirement is crucial, but it's possible to have too much of a good thing.

If I’m saving so much for retirement that it’s negatively impacting other areas of my finances, or if it means a large portion of my money isn’t accessible for shorter-term goals, I may want to pump the brakes. There are ways to meet in the middle.

More from Money:

Americans Now Think They'll Need a Record $1.46 Million to Retire Comfortably

Dollar Scholar Asks: How Can I Catch up on Saving for Retirement?

Why Retirement Savings in Roth IRAs Tend to Outlast Traditional 401(k)s