Think you're saving too much?

A pension and social security might seem like enough to carry you through your retirement, but you never know what changes life may bring. Better to be safe than sorry.

Question: I’m 38, single and contribute 10% of my $59,000 salary toward my state’s deferred compensation plan. When I retire from state service at 62, I’ll get a pension equal to about 60% of my final salary, plus I’ll have Social Security. I want to be sure I’m on the right track toward retirement, but I don’t want to over-invest. Do you think I’m saving too much? —Tim

Answer: I can see why you might think that you’re saving more than is necessary to have a comfortable retirement. After all, if you figure you’ll be collecting roughly 60% of your salary at retirement from your state pension plan and then throw Social Security benefits on top of that, you’re probably talking about a post-career income equal to 85% or more of your pre-retirement salary from those two sources alone.

Given the often-heard rule of thumb that you can live quite comfortably in retirement on 70% to 80% of your pre-retirement income, it would seem that you’ll have more than enough income after retiring without participating in your state’s deferred income plan.

So why not put that 10% of salary to a better use, like driving a flashier car, having a fancier home, taking nicer vacations or just living larger? Why bother investing that money for retirement if you won’t really need it?

Well, I can think of a few reasons.

To begin with, although I’m big believer in planning ahead and making forecasts, it’s also important to remember that our lives don’t always unfold exactly as we think they will. Life isn’t as predictable as an Excel spreadsheet.

Let’s take your state pension as an example. I’ll assume you’re correct that, based on your expected retirement age, projected number of years on the job and your state’s crediting formula for each year of service, you would qualify for a pension of about 60% of your pre-retirement salary. But how certain are you that you’ll actually end up with that amount?

For one thing, you’re assuming that you’ll stay on the job for the next 24 years. That’s a long time. Is it possible you might decide to change jobs at some point? Or that, in an effort to whittle down its budget, that the state might eliminate your position? Or that you might run into a health problem that could force you to leave your job earlier than you anticipate?

And while I certainly don’t want to be one of those people who claim that we can’t count on Social Security when we retire, I don’t think it’s much of a stretch given the system’s projected deficits to imagine that benefits might be scaled back one way or another, say, by taxing them more heavily than they already are or by changing the benefit formula in some way. (By the way, you may want to check that you actually do qualify for Social Security benefits, as not all state employees do.)

I’m not trying to be an alarmist here or suggest that you shouldn’t figure on getting a pension and Social Security benefits. But my point is that any time you’re planning ahead and making forecasts 10, 20 or 30 or more years into the future, you’ve got to allow for the possibility that things won’t go exactly according to plan. To be prudent, you’ve got to factor a little wiggle room into your planning.

And that’s how I think you should view the 10% of your salary you’re contributing to your state’s deferred income plan. It’s a cushion, something you can fall back on if you don’t end up getting as much as you think you will from your state pension and Social Security.

Besides, even if you get every cent you expect from your pension and Social Security, it may very well turn out that you’ll want more money than those two sources provide. Who knows, maybe your idea of an enjoyable retirement will require that you spend more than 85% of your pre-retirement income. And even if you plan to live rather modestly, you’ll always want to have a stash you can dip into for little indulgences or higher-than-anticipated expenses. As a recent Employee Benefit Research Institute study shows, health care costs alone can easily run to six figures in retirement.

As you get closer to retirement age, you’ll be able to form a better sense of how much you’ll likely receive from pensions and Social Security. (In fact, the Social Security system has just unveiled a new and more accurate tool that allows you to estimate your eventual benefit based on different retirement ages and future earnings estimates.)

So at some point you may very well be able to cut back on the amount you save. But to be sure you can do that without jeopardizing your retirement prospects, I suggest you crunch the numbers using a calculator like our Retirement Planner or (when you’re within 10 or so years of when you hope to retire) Fidelity’s Retirement Income Planner.

But for now at least I suggest you continue contributing that 10% to your deferred compensation plan. Yes, you may end up with a bit more money than you need in retirement. But that’s better than finding out you don’t have enough.