Are You Saving Too Much for Retirement?

Quick Answer

Prioritizing retirement savings is crucial for most Americans, but depending on your situation, it could make sense to create a better balance across your financial goals and lifestyle.

A woman in her 60s sitting by the window and using portable digital tablet to check retirement accounts.

Saving too much for retirement may sound like a blessing, especially considering that nearly half of American families don't have retirement savings, according to the Federal Reserve's Survey of Consumer Finances.

But for those who regularly contribute to a retirement plan, there are some risks to be aware of, especially if you're ignoring other important financial goals, such as building an emergency fund or paying down high-interest debt, or missing out on other investment opportunities.

As you evaluate your retirement savings plan, here are some things to keep in mind.

Consider Your Plans for Retirement

To help people determine how much to save for retirement, investment experts provide various rules of thumb to give you some benchmarks.

For example, you may be advised to contribute 10% to 15% of your gross income every year, or aim to have 25 times your projected annual spending when you retire.

But ultimately, retirement planning is a personal endeavor with several variables and assumptions to consider. Here are some factors to consider as you determine how much money you'll need in retirement—and, therefore, how much you should save each year to accomplish that goal.

When You Want to Retire

If you want to retire at, say, 50 years old, you'll need to be more aggressive with your retirement savings plan than someone who plans to work until they're 65 because your savings will need to sustain you for a longer period of time.

Your Work Plans During Retirement

Historically, retirement has been viewed as a permanent exit from the workforce. But in recent years, the FIRE movement—short for financial independence, retire early—has broadened that definition.

If you're willing to work part time or you plan to pursue passive income opportunities in retirement, you may not have to save as much now.

The Lifestyle You Want

While some people may want to live large in retirement, with a lifestyle full of travel, good food and other luxuries, others may be satisfied with simply more time for their inexpensive hobbies. Consider what you want your retirement lifestyle to look like and how much it might cost to achieve it.

Of course, it's difficult to know exactly what you want your future to look like, especially if you're still decades away from retirement. As you change, your retirement goals likely will too. Plan to revisit your retirement plan at least once a year to determine whether to make some adjustments.

Economic Assumptions

Investing your retirement savings gives you the chance to grow your wealth over time. But to get an idea of what your retirement investments might look like when you're ready to retire, you'll need to make some assumptions about your average annual return, the inflation rate and tax rates. You'll also need to estimate how much you might earn in Social Security income.

Financial planners and online retirement calculators can give some guidance, but it's up to you to determine how conservative or aggressive you want to be with your assumptions about the future.

What Are the Risks of Putting Away Too Much for Retirement?

Developing a retirement plan is an inexact science, so it may be tempting to simply sock away as much money as possible, especially if you're feeling a lot of anxiety about the future. But depending on your situation, it may make sense to have a more balanced approach to your financial plan.

Here are some of the risks of focusing too heavily on retirement contributions over other financial goals and obligations.

You May Be Vulnerable to Financial Emergencies

Financial experts recommend having three to six months' worth of basic expenses in an emergency fund to help you weather financial storms. While you don't need to achieve that before you start saving for retirement, neglecting it could result in a financial catastrophe.

While you can technically dip into your retirement plans anytime you want, there may be significant tax consequences if you do it early.

Your Debt Situation May Get Out of Control

The Employee Benefits Security Administration uses 7% as a standard assumption for investment returns on your retirement plan. If you have loans and credit card accounts that charge higher interest rates than that, you may benefit from focusing on paying down your debt first to maximize your effectiveness.

In particular, it's important to prioritize paying off credit card debt, for which the average interest rate is 22.77%, according to August 2023 data from the Federal Reserve.

If you're contributing a lot to retirement while your credit card balances are increasing, you could be in for a financial disaster.

You Could Miss Out on Other Investment Opportunities

The federal government offers tax advantages to people who qualify to contribute to 401(k) plans and individual retirement accounts (IRAs), among others.

But one of the most important rules in investing is to diversify your portfolio, and that can include using more than one approach to invest for your future.

For example, real estate investing doesn't come with the same tax breaks as a retirement plan. But it can provide you with consistent income both now and in the future, and it can help you build wealth through property appreciation. A health savings account can be another great way to save for medical expenses in retirement while also giving you the flexibility to access those funds for medical bills sooner.

You may also consider investing in other passive income opportunities, or even starting a business, which could create more options for you down the road.

You Could Miss Out on Life

While it's important to be optimistic about the future, it's also critical to be realistic. Life is precious, and there's no guarantee that you'll get the chance to live out the retirement you want.

What is guaranteed, however, is the present, and sacrificing time with loved ones and a fulfilled life now in exchange for an uncertain future can lead to regret if life throws you a curveball.

How to Find the Right Balance for Retirement Saving

Your retirement savings plan is just one element of your financial plan, which, in turn, is just one component of your complex life. As such, it's important to take a balanced approach to your financial goals. Here are some tips to help you find that balance:

  • Work toward multiple goals at once. Take a look at your financial plan and determine your most important goals. Then, create a plan that allows you to contribute to all of them instead of focusing on just one or two. For example, it may make sense to contribute enough to a 401(k) plan to get your employer's matching contributions (and ideally a bit more). But after that, consider putting extra cash flow toward high-interest debt, an emergency fund and other pressing objectives.
  • Consider other investment opportunities. If you want more flexibility with retirement investments, look beyond tax-advantaged retirement accounts that place restrictions on when you can use those funds (and harsh penalties for accessing them early). In other words, don't put all of your eggs in one basket.
  • Determine the life you want now. Sometimes, it can feel like you either need to live a spartan existence to save for retirement or enjoy your life now at the expense of your future. But depending on your income and budget, you may be able to find some middle ground. Consider your situation and preferences to find a compromise between your goals and your lifestyle.

As you determine your retirement savings plan in the context of your financial goals and lifestyle, one way to evaluate your progress is to look at benchmarks for how much you should have saved based on your age.

Keep in mind that these are just guidelines—again, your retirement plan is personal to your situation and goals—but they can still give you a general idea of how you're doing.

The Bottom Line

Saving for retirement is an important financial goal, but it's important to avoid neglecting other important objectives and obligations along the way.

While rules of thumb can be helpful, carefully evaluate your situation and goals to determine the right approach for you. If you're having trouble finding a balance, consider consulting with a financial advisor who can provide you with some objective, personalized advice and help you track your progress over time.