How Much is Too Much Savings for Retirement?

Saving for retirement is like the Goldilocks effect. Many people don't save enough, some save too much, and others save just enough.

Yet, half of U.S. households‘ retirement savings fall short, so financial experts often encourage people to save more.

But what about the other end of the spectrum? Is it even possible to save too much?

In truth, saving too much for retirement isn't as common. And it isn't a problem if it doesn't affect your quality of life. 

But if you feel like you sacrifice your life today to save in excess for your life tomorrow, this article is for you.

Below, we'll help you determine if you might be saving too much for retirement. And then, we'll explore how a financial plan can help you decide how much savings is right for you.

You might be saving too much if…

You struggle to pay for other things.

Cutting expenses is an excellent way to save money. But if you have a hard time paying basic living costs because you save so much, you might need to adjust.

Your debt is costing you.

Of course, it's sometimes possible to pay down debt and save simultaneously. But if you're saving a lot for retirement and ignoring your debt, calculate what the debt is costing you. Consider the amount and type of debt, interest rate, and fees. 

You skip the things you value most to save more.

For example, you pass up travel, time with loved ones, and meaningful experiences so you can save more.

You don’t have a financial plan.

A financial plan is like a roadmap—without one, it's hard to know where you are or where you're going.

If you don't know how much you have or need, you can't know if you're saving the right amount.

You surpassed your original savings goals.

Maybe you want to save more than you need to mitigate uncertainty. That’s not a problem if you're happy with your circumstances.

Yet if you keep moving your goalpost or continue to work in a job you dislike, try to understand why. Is it necessary? 

You pay tax penalties for excess retirement contributions.

The IRS has contribution limits for qualified retirement accounts. And, if you go over, you could owe penalties. It's great to max out retirement accounts. Still, it's best to stay within your limits. (See the IRS website for 2023 contribution limits.)

What’s the problem with saving too much?

You can't predict precisely how much you need for retirement. Variables like health care, investment returns, and inflation are uncertain, no matter how much you plan and save.

So saving more than you might need might help you feel more confident about retiring.

Plus there's no harm if you can do it without depriving yourself of what you want and need today.

In other words, if you're leading the life you want, saving too much isn't a problem.

But if life feels off-balance because you’re trying to save more, it could be time to reassess. Because having a heap of money is fantastic, but it's pointless if you aren't using it how you want.

There are a couple of ways that over saving can become problematic: 

1) You put off the things most important to you today so you can save more for life tomorrow. 

2) You work too long at a job you dislike, aiming for a super high savings goal (beyond what you need).

Letting values slide to save more.

Maybe retirement is still years away, but you want to retire as soon as possible. Hence, you make retirement savings a priority.

That's a great strategy if you don't sacrifice what's most essential to you right now.

But if you save as much as possible at the expense of living a full life today, it could be too much.

You can't get back time with loved ones and memorable experiences. Those opportunities might not be there later.

“I've had a lot of worries in my life, most of which never happened.” – Mark Twain.

Working too long at a job you dislike to save more than you need.

You might work hard your whole life to build wealth for a worry-free retirement. But there's always some level of uncertainty.

So it's tempting to work longer and save more to address the fear of the unknown. 

Still, you don't live in the uncertain future; you live now. And there’s a tradeoff for working longer than you need to, especially if you dislike your job.

Moving your goalpost and working longer than you need to in a job you don’t like or in a toxic work environment can have consequences.

For example, it can lead to needless stress, missed experiences, and less time with loved ones.

Ergo, you don't want to get to be 90 years old with a ton of money and regrets about what could have been.

Use your financial plan as a guide.

So how do you find that sweet spot between saving and living your best life? One of the best ways is to develop a financial plan.

A financial plan is your guide to retirement savings.

It tracks your finances, defines your money goals, and creates a plan for carrying them out. 

Here’s a summary of what your financial plan should include: 

• Cash flow. Your income and expenses help you understand your cash flow, now and in retirement.
  • Expenses. How much do you spend now, and what will change in retirement? Taxes, housing, and healthcare expenses are especially apt to change in retirement.
  • Income. Consider your current earnings and what income you’ll have in retirement. Include Social Security, pension, and other income sources. 

• Net worth. Net worth is the big picture of your finances. Calculate net worth by taking your assets (what you own) minus liabilities (what you owe). 

• Your timeline, risk tolerance, insurance coverage, and estate plan are other factors to include.

Determine your savings needs

Your financial plan uses actual data to help you devise savings goals. Of course, you can't predict everything, but it's an excellent tool for finding a target.

Plus, it enables you to use your savings most effectively.

A financial plan gives you an accurate picture of your current finances based on your data (cash flow, net worth, etc.). From there, you can project how those factors will change in retirement.

Of course, you'll probably have to make a few assumptions about the future. But the more accurate the details, the better you understand how much you need for retirement.

Once you know what you have now and what you likely need for retirement, you can determine a savings target.

Next, calculate if you currently have too little, too much, or just enough saved thus far for retirement. You can adjust from there.

Also, after completing your financial plan, consider creating an investment policy statement (IPS). An IPS will help you keep your investments and savings aligned with your money goals.

Financial planning takes time and effort, but it's an excellent way to plan for retirement.

It helps you make an informed decision about your savings goals – what you need and how you'll get there. 

Do you need to hire a financial planner?

That’s up to you! Some people prefer to hire a pro, while others create a financial plan on their own. 

Suggested Reading: What Is Your Retirement Number?

Too much or not enough? It’s all about balance.

So, how much is too much savings for retirement? That's up to you to decide. A detailed financial plan is the best way to see if you're saving enough, too much, or too little.  

But it's not all about the numbers. If you're saving so much that it's affecting your quality of life today, it might be time to slow down. Instead, create a plan that balances saving for the future and living for today.

Next: How to Avoid Mistakes in Retirement Planning