Can You Oversave for Retirement?

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Saving for retirement is a career-long commitment. As the chart in this companion article shows, though, the amount you wind up with can vary wildly, based on how much you sock away and how much you earn on your investments.

If you max out your 401(k) or other employer-sponsored retirement plan throughout your career, you'll likely wind up with somewhere between $1.0 million and $8.7 million (depending of course on your contribution amounts). The difference would be driven entirely by the long-run rate of return you earn on your investments. While potentially a nice problem to have, it does make it somewhat more challenging to plan.

What kind of retirement do you want?
Based on the 4% rule, a $1.0 million portfolio can generate $40,000 a year in income, while an $8.7 million portfolio can toss out a very comfortable $348,000 annually. The former may allow you to live a decent life in a low cost part of the country, while the latter would today put you among the top 5% of all income earners throughout the United States.

It might be nice to fantasize about retiring rich, especially if you're starting from modest means. Still, if your retirement portfolio generates significantly more income than you earned during your working years, you likely sacrificed a lot of living along the way to get to that point.

On the flip side, though, you have no real assurances that your investments will actually deliver double-digit returns throughout your career. When you consider that the downside to undersaving is to run out of cash when you may no longer be in a condition to work, winding up with too much may not seem like a bad option.

Start aggressively, then taper down
With no functioning crystal ball to accurately predict your future, your best bet is to start saving for retirement as aggressively as possible, then taper down in the future if conditions allow. After all, it's easier to cut back on your savings target to improve your lifestyle than it is to cut back on your lifestyle to increase your savings. Plus, if "life happens" and you find yourself taking care of aging parents or college-bound children, it's wonderful to have savings to redirect to their aid.

Of course, if your returns do provide you with enough cash to retire early, what exactly would be holding you back? Consider that as the gift of time. The thing to remember, though, is that the same market gyrations that put you ahead of target can also take your cash away if you let it. As a result, should you choose to either taper back your savings rate or retire early, you'll likely want to dial back the aggressiveness in your portfolio.

Be careful with the balancing act
Conventional strategies may not be the best move given current market conditions. Interest rates are abysmally low; you need to get past 10 years on Treasury bonds before your money even keeps pace with current inflation. If rates rise in response to inflation, prices on existing fixed rate bond prices fall, pulling down the value of bond exchange-traded funds like Vanguard's Total Bond Market (NYSE: BND  ) .

Instead, to protect against inflation-driven rising rates, consider inflation-protected bonds like those offered in the iShares TIPS Bond Fund (NYSE: TIP  ) . Alternatively, one of the new adjustable rate bond ETFs like Market Vectors Investment Grade Floating Rate (NYSE: FLTR  ) may also help protect your principal against rising interest rates.

Or, if you're looking for investment income with a potential inflation hedge and are willing to put up with a bit more risk, there are equity-based ETFs that may be worth considering. PowerShares High Yield Dividend (NYSE: PEY  ) invests in high-yielding companies with decent track records of consistently increasing their dividends. And Vanguard's REIT ETF (NYSE: VNQ  ) owns real estate investment trusts, whose income often provides a hedge against inflation.

Don't forget, too, that especially if you retire early thanks to the growth of the money you socked away throughout you career, your future may well stretch out multiple decades. If your time horizon is measured in decades, staying invested in traditional stock ETFs like the S&P 500 tracking SPDR S&P 500 (NYSE: SPY  ) or Vanguard's Total World (NYSE: VT  ) still makes sense.

After all, you want your money to last as long as you do, and over the long haul, stocks truly can treat you well, volatility and all.

Enjoy your flexibility
Perhaps the best benefit of starting with an aggressive retirement plan is the flexibility it gives you down the road. You simply have a lot more options open to you if you've got cash at your disposal, and there's nothing wrong with having more money than you need to simply keep food on the table. Plus, you can always redeploy your surplus funds to a worthy cause, should you eventually find yourself with more money than you could realistically use.

At the time of publication, Fool contributor Chuck Saletta did not own shares of any ETF mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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