Is It Possible to Save Too Much for Retirement?

It probably goes without saying that building a nest egg for your retirement is a good thing. In fact, you may have noticed that we at Lucia Capital Group are in the business of helping people to do exactly that. Having more money in retirement usually gives you more options, less stress, and maybe a better standard of living. 

But believe it or not, there are people out there who may be saving too much for retirement—and you might be one of them! 

So what we are talking about? Is over-saving really a problem? 

In some cases, yes. And one of the contributing factors is the 4% rule that we’ve talked about in the past, which assumes that in order to survive a 30-year retirement, you’ll need to increase your income withdrawals every year by a certain amount (like 2 or 3% or maybe more) to account for inflation.  

But research indicates that people’s rate of spending actually goes down in retirement. In fact, the Bureau of Labor Statistics says that the average U.S. household spent $66,928 in 2021, while average annual expenses for Americans aged 65 and older were $48,872, based on 2019-2020 data – about 27 percent lower. And average spending goes down even when you factor in healthcare. 

And this makes sense. Think about it: a $50,000 income today at age 65, at 2% inflation each year, means you’ll need almost $91,000 per year 30 years from now at age 95. Does a 95-year-old really need almost double the income they had at age 65? Highly unlikely. How much discretionary spending does a 95-year-old really have?  

So with that in mind, how does all this relate to saving too much for retirement? If you’re working a long time to reach a certain dollar amount in your portfolio that’ll give you inflation-adjusted income every year for 30 years (income that you may not even need), you may only be making your heirs happy by leaving them a larger nest egg. 

Of course, that’s not necessarily a bad thing. But working extra years at a job you don’t like to give yourself income that you may never need can take a toll on your health or cause you to miss out on special family events – and who wants to do that? 

The 4% rule says you have to give yourself a raise for inflation each year, meaning that your portfolio has to be that much bigger at retirement in order to supply you with all of that future income well into your 90s. Again – income you may never need. 

This is important to recognize, because if you’re, say, 60 years old and you believe your projected income needs 20 or 30 years from now are far out of your reach, you may be inclined to just toss your hands up and say, “I’ll never be able to retire.”  

Wouldn’t it be nice to know that those future income figures might be wrong and that you just may be able to retire on what you have right now? Why not find out? At Lucia Capital Group, our Bucket Strategy is designed to give you a lifetime of cash flow from non-volatile sources, which can potentially take a lot of pressure off your portfolio.  

Just give us a call. As always, we’re here to help.