(SmartAsset) - It may seem like an odd notion, but it is possible to save too much money. You may have financial habits that allow you to sock away tons of money but cause your current quality of life to deteriorate.
As a result, a readjustment can help you stay on track for retirement while allowing you to afford the cost of living while you work. In addition, you may have lingering debts that should receive priority over investing. Here’s how to keep your finances in balance and calculate what you should be saving.,
Signs You Might Be Saving too Much for Retirement You Can’t Cover Your Living Expenses
Your food, housing and transportation are pressing needs requiring monthly funding. Therefore, it’s unsustainable to divert funds from life essentials to your retirement account. If you think your spending is out of control, examine your last few bank and credit card statements. Then, you can make a budget, cutting out unnecessary expenses and prioritizing essentials.
You Don’t Have a Financial Plan
You might save more money than necessary if you don’t have a clear idea of your retirement needs and withdrawal strategy. To create a retirement plan, it’s advisable to consult a financial advisor who can help you consider various factors. Your Social Security income, current retirement portfolio value, future retirement investment return, initial withdrawal amount and the future inflation rate will influence your plan.
For instance, if your retirement portfolio is worth $1,500,000 and you earn an average investment return of 4.5% per year, you can withdraw 4.5% or $67,500 annually without touching your principal. In addition, you would increase your withdrawal percentage by 2% every year to fight inflation. You can also take your Social Security benefit closer to 70 to increase your income.
You Forgo Experiences and Meaningful Opportunities
If you have the financial means to make a desired purchase without jeopardizing your retirement plan, seizing the moment is an excellent idea. Postponing long-held aspirations because you can’t stop imagining the guilt for not saving more money isn’t a sound financial strategy.
Instead, if you’re meeting your budgetary goals and have the money left over for a fancy dinner with your spouse, it’s a good sign that you should go for it. You’ll thank yourself later for creating memories and experiences with those who matter most.
You Have Excess Funds
Once you have established a retirement plan, you may discover you have stockpiled more money than needed to live comfortably. This situation indicates that you are saving above and beyond your lifestyle needs.
Fortunately, the surplus can help cover unforeseen expenses, such as auto repairs or an emergency room visit. You also pass on the reserves to your heirs. If you have amassed cash you won’t need during your lifetime, it can benefit family or charities instead of lying around.
Determining The Right Amount to Save for Retirement
Estimate How Much You’ll Spend in Retirement
Because your expenses in retirement will drive your needed income, it’s helpful to estimate them as accurately as possible. For instance, food and housing will always have a place in your budget, but the details are crucial: will you have your mortgage paid off by the time you retire? Do you plan on cooking at home more often or going out to dinner multiple evenings per week? These questions can help you get specific with your expenses.
Here’s an example of a list of retirement expenses:
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Housing: $20,000
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Healthcare: $10,000
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Food: $6,000
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Clothing: $1,000
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Transportation: $5,000
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Entertainment: $5,000
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Miscellaneous: $3,000
This list adds up to $50,000. Therefore, you would need $50,000 of retirement income to afford your individual cost of living. Remember, understanding if your savings habits will get you there is much easier with a retirement calculator.
Assess Income Streams Retirement Accounts
These include individual retirement accounts (IRAs) of the traditional and Roth varieties, employer-sponsored 401(k) or 403(b) and brokerage accounts. These provide distinct tax advantages throughout your career and retired life. Therefore, an intentional choice can give your plan a solid foundation. For example, a Roth IRA will provide tax-free income during retirement because it solely uses dollars the government has already taxed.
Annuities
An annuity is a contract you purchase from an insurance company. You can get a contract that provides income for a specific amount of time or for life. In addition, it can include a payout to your beneficiaries if you pass away during the payout period.
Beware, annuities can contain high fees and have different tax implications depending on the type (specifically, qualified versus non-qualified), so do your homework before committing to a policy.
Whole Life Insurance
A whole life insurance policy is an interest-bearing account that distributes a payout to your beneficiaries if you die. The income you withdraw during retirement will receive regular income tax rates.
Because whole life insurance interest rates are typically 2% or less, your policy will play an auxiliary role in your retirement plan, with other accounts doing more of the heavy lifting. Therefore, it’s best not to invest the bulk of your cash here.
Bank Accounts
Banks offer high-yield savings accounts with worthwhile interest rates. Specifically, you can get a rate of 4% or more with certain accounts. Since the FDIC insures savings accounts up to $250,000, this is risk-free money creating a solid return.
Social Security doesn’t activate until you’re 62 or older, depending on your preferences. In addition, the older you are before you collect your benefit, the higher it will be. For example, the Social Security Administration reports that a typical retiree who takes their benefit at 65 gets $1,690 per month.
While this amount is helpful for most budgets, waiting another year will boost your benefit by 8%. Furthermore, you can wait until 70 to receive the highest benefit. So, it’s critical to plan your retirement budget around a specific payment at a specific age.
Bottom Line
If you’re wondering whether you’re saving too much for retirement, it’s best to step back and evaluate your finances. Retirement contributions are essential for any financial plan. However, if the amount diminishes your ability to afford the basics or causes you to shy away from meaningful experiences, you likely need to reassess your financial habits. Developing a numbers-based strategy can help you stay on track without feeling guilty about spending on entertainment and other treats.
Tips on Retirement Saving
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Creating a retirement plan can be daunting. Balancing your daily expenses, career income and retirement age mean juggling numbers and accounting for unpredictable changes, such as inflation. Fortunately, you can get help from a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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