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Published: Sep 15, 2022 8 min read
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Save early, save often. That's the conventional wisdom on saving for retirement. But if you're overzealous, you might actually be saving more than you need to.

That might come as a surprise. The recommendation to save, save, save is so widespread that today even teenagers are saving for retirement. But new research suggests that some Americans may be overestimating the amount of money they will need for a comfortable retirement. This could mean some people save too much money for retirement.

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How much money is too much to save for retirement?

Is there such a thing as accumulating too much money for retirement? If you are sacrificing your enjoyment of your current everyday life, the answer is yes.

When it comes to estimating retirement expenses, few people actually make detailed, year-by-year budgets. Instead, they go by a popular rule of thumb — plan on spending around 70% of your annual income after you retire, aka the 70% rule. It’s becoming increasingly apparent, however, that preretirement income is far from one-size-fits-all.

How much you earn has a lot to do with what you'll need to live a comfortable retirement. Americans with an annual income of $30,000 replace most of their income on average, mostly because of Social Security benefits, according to J.P. Morgan Asset Management. In contrast, households earning $300,000 replace just 72% of their income after retirement. For some households, replacement rates can be as low as 54%, according to a Morningstar study.

The other main criticisms of the 70% rule are that it assumes a stable annual retirement income, and that your needs and goals will stay the same throughout retirement. If you are lucky enough to retire at age 60, you may have 30 years of retirement depending on your life expectancy, health status and family history.

Your requirements, interests and tastes are unlikely to stay the same throughout those decades. You may develop a passion for Italian sports cars in your 80s. Or your needs might grow humbler as you age. Research on retirement spending suggests the latter: that your financial needs will decrease over the course of your retirement.

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How much money does the average retired person spend?

Let’s look at that research in more detail. A recent study by RAND shows that household spending declines over the course of retirement.

It’s well known that retirees spend less as they age. This study establishes that spending decreases not just for households with modest economic resources — who may cut back on spending because they fear running out of money in retirement — but across all groups. Equally importantly, most households seem to spend less because people experience less enjoyment from spending money on various goods and activities as they age.

In other words, people tend to withdraw lower amounts from retirement accounts as their retirement progresses by choice, not because they’re forced to spend less because of a lack of resources. Other research, including a recent study by the Center for Retirement Research at Boston College, has found that consumption and spending decline over a person’s retirement years.

For example, at advanced ages households spend less on vacations, but not because vacations are expensive. Americans of a later retirement age apparently don’t enjoy vacations as much, perhaps due to health constraints. While health care costs increase with age, for most households this is outweighed by the reductions in other types of spending, so that total spending declines overall.

This is important when it comes to setting goals, creating a retirement plan and calculating the distributions from a savings account. It’s reasonable to expect total spending to decline over the course of your retirement years, explains Susann Rohwedder, one of the RAND study’s authors. Her recommendation is that you should expect to spend 1% to 2% less per year of retirement.

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Is it possible to save too much money for retirement?

At this point, you may be wondering whether it is possible to save too much for retirement. After all, if you overestimate how much money you’ll need in your 90s, your savings will last longer, and you can pass on more to your heirs. Right?

Well, it depends. Saving for retirement is always a compromise. “One of the biggest problems with saving for retirement is we don’t know how long it’s going to last,” says David Blanchett, managing director and head of retirement research for PGIM DC Solutions. “This generally results in people saving too much because you don’t want to go broke at some point during retirement.”

Saving too much for retirement might reduce your financial risk, but if you keep working for many extra years just in case you live to 120, at some point this is going to affect your quality of life. The point of retirement, in other words, is to enjoy it.

It’s not that saving too much for retirement is a risk, Blanchett says. The actual danger for people in retirement, he says, is living a long time after retirement and having to rely on family for financial support. Faced with the possibility of outliving your nest egg, many responsible savers choose to either overestimate their retirement needs and save more than they need to. Then, they are terrified to spend the money. This strategy represents the worst of all worlds — having more than enough for retirement, but still experiencing anxiety and stress.

Scout your retirement spending habits

There are ways to help retirees address this. One is to take a more sophisticated approach to estimate your retirement needs than a simple rule of thumb. For many workers, this will initially mean coming up with a retirement plan: recent research from the Employee Benefits Research Institute found that just 4 in 10 retirees surveyed had identified savings goals for retirement and also developed a written financial plan.

You might consider allocating some savings to products that offer a guaranteed retirement income. Since spending this income won’t deplete your savings, it can lower your stress levels in retirement and allow you to focus on what’s really important: enjoying your well-earned retirement.

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