The 3 Risks Of Saving Too Much

November 29, 2017

There’s no shortage of headlines in the personal finance world telling us how poor Americans are at saving money, particularly when it comes to saving for retirement. It’s easy for people who have an unhealthy obsession with saving money to justify their habit since it’s culturally supported for the most part. But there is such a thing as saving too much.

Does it pain you to spend money?

One sign that you may be too obsessed with saving money is if it actually causes you pain to pay for things like buying new clothes, a nice dinner out with friends or a gift for a family member, even though you have more than enough money in the bank to pay your bills and then some. You may have a fear that any type of spending that can be classified as frivolous is the beginning of a trend of needless spending that could ultimately leave you penniless.

Are you afraid to retire?

Another sign of an unhealthy need to save money is if you’ve reached an age (and a savings level) where it would be reasonable to retire, yet you insist to friends and family that you can’t afford to take time away from work to travel, even when your spouse or children are begging you to see the world with them. People with a saving mentality like this often only feel relief from their fear of financial ruin when they are actually physically depositing money into their savings.

It’s not about greed

People who over-save are usually doing it out of fear of never having enough or to fulfill some other need that is temporarily met when they see their net worth grow. They’re rarely greedy. Rather, their behavior is more about self-preservation than self-promotion. They have trouble ever enjoying the fruits of their labor, even when logic tells them that they can safely afford to.

You could be hurting yourself more in the long run

The personal finance industry generally supports this unhealthy mindset. The problem is that there are real risks to being overly obsessed with saving money. Here are three:

Poor investment performance due to overly active trading. People who are unhealthy savers tend to pay too much attention to their investment performance, which can often lead to losses due to failed attempts at market timing or investing too conservatively due to a risk-averse orientation. To overcome this habit, resolve to only check your accounts quarterly, and consider using a pre-mixed investment strategy like target date funds, where the asset allocation decisions are made for you. Ask a financial planner to run a few projections showing you different outcomes based on more aggressive versus more conservative investment mixes to show you what you may be missing out on by being too vigilant about market risk.
Inappropriate levels of insurance. You may be tempted to skimp on insurance because the cost of the premiums may seem too high, but being underinsured could easily lead to realizing your biggest fear of losing everything. On the other hand, you may be way over-insured to protect you against any loss at all. Your best bet here is to consult an independent insurance broker and request a review. Obtain a couple of opinions if you’re concerned about being sold or if you have access to an unbiased financial planner through your workplace financial wellness benefit, use it. Some of my favorite conversations with employees are what we call “second opinion” calls.
Deathbed regrets. The mantra of many over-spenders applies here: You can’t take it with you, and it’s true. Too many people who spend their entire lives accumulating cash find themselves at a point when they realize they’ll never see the benefit of all that sacrifice and immense regrets ensue. The best way to avoid this tragedy is to sit down with an independent financial person you trust. Maybe it’s your financial advisor or maybe it’s your accountant, but ask them to help you ease your grip on your money so that you can spend some of it on yourself, family, travel, a vacation home – whatever will fulfill you besides the feeling of saving money.

Look at the numbers

Whenever I have the opportunity to encourage an over-saver to spend, I give them comfort by showing them in real numbers what they need to keep in the bank in order to feel safe. A savings account with enough cash in it to pay six months’ worth of bills is more than enough unless you are the primary income earner with multiple dependents. Next, run a retirement projection to see that you’re saving enough. If it all looks good, go out and enjoy some of that money guilt free.

Don’t get me wrong. Saving money is definitely a necessary aspect of achieving financial security. But there’s a balance that we all need to achieve in order to find that sweet spot of seizing the day while also setting our future selves up for financial independence.

This post was originally published on Forbes.

The Danger of Keeping Things TOO Simple With Retirement Planning

September 14, 2017

With a lot of personal finance, it makes sense to keep things simple or otherwise choose the method that works best for you. Just as the best exercise is the one you’re actually going to do, the same is true for the best budgeting or money management system. When it comes to investing, simple strategies typically work better than more complex ones.

Finding your retirement number isn’t that simple

But while varying money management and investment systems can get you to the same place (saving enough and being properly diversified, respectively), this isn’t necessarily true when it comes to figuring out how much you need to save for retirement. For example, this article I recently read in USA Today called “Simple to complex: 4 ways to find your retirement number” seems to suggest that there are 4 valid ways of figuring out how much to save:

Save 15%
Save $1 million
Save enough to replace 80% of your income
Save enough to fund your projected retirement expense

This advice can be dangerously simple.

Why saving 15% might not be enough

For example, the 15% number is cited in a Fidelity article that uses this as a guideline for someone starting at age 25 and saving until age 67. Let’s put aside all the built-in assumptions about your income, employer match, investment returns, and income needs in retirement. Instead I’m asking how many people reading this article are actually age 25 or younger? 15% may make sense as a default contribution rate for retirement plans since many people getting their first job out of school tend to stick to the default, but it can be dangerously low for someone starting much later.

Why $1 million might not be enough

What about $1 million? Using a 4% withdrawal rate, that would produce about $40k of inflation-adjusted income each year for 30 years. For someone with higher income needs, that may not be enough. For others, it can be such an unnecessarily high bar that they feel they’ll never be able to retire and are discouraged from saving at all.

Taking it to the next level

If you’re going to take the time to calculate how much you need to save in order to reach $1 million, you might as well take just a few more minutes to use a relatively simple but far more effective retirement calculator like this one. If you don’t want to take the time to project your retirement expenses, you can use the third method in the article and simply target an 80% replacement of your current income.

That’s because people typically spend less in retirement on housing (you may have a paid-off home and/or downsize), other debts that may be paid off, children, etc. You also won’t be saving for retirement when you’re retired so you won’t need that income either. While you may need less, few people will absolutely NEED more. (If you’re planning a more lavish retirement, you can always target a higher income replacement percentage.)

Factoring in all the variables

While it takes just a few minutes to use the calculator, it will take into an account variables such as your projected Social Security, pension, and other retirement income, current age, planned retirement age, and current retirement savings balance and contribution rate for both you and your spouse if married. You can also adjust your assumed life expectancy, inflation rate, and investment returns.

By playing around with the calculator, you can see how much any of these variables can drastically affect how much you need to save to reach your goals. You may need to save a lot more or a less than 15% to have a lot more or a lot less than a $1 million in retirement. When it comes to retirement planning, keep it simple…but not TOO simple.

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