Are You Saving Too Much?

Some truly shocking stats suggest that far too many Americans have saved far too little for their golden years, and now face a gruesome retirement. But several financial experts are bucking this conventional wisdom. Surprisingly, they argue that we might be saving too much for retirement.

Don't pack that piggy bank
One of those experts is a financial columnist I respect, Scott Burns. In a recent book, he and co-author Laurence Kotlikoff objected to the standard rule of thumb that we should aim to replace 70% to 85% of our income in retirement. They note that in retirement, our expenses are different. We're usually not supporting children, and we've probably paid off our mortgage and carry much less debt.

Elsewhere, economists Richard Thaler and Cass Sunstein point out that we all tend to think we're extraordinary, which can affect how we save and invest. For example, while the average life expectancy for us Americans is around 78 years, we often save for a much longer life.

What's wrong with that?
The idea that we should consider saving and investing less makes little sense to me. Sure, the average life expectancy might be 78. But that's just an average. You might get hit by a bus tomorrow and never recover -- or you might live to 98. If you live 20 years longer than you planned to, how will you support yourself?

Averages are useful to consider as we plan, but unless we have a date with the electric chair, we probably have no idea just when we'll die. The inevitable uncertainty in planning for our futures justifies our need to err on the conservative side. Wouldn't you rather end up on your deathbed with several extra years' of living expenses in the bank than have to live for years with nothing?

To your health
Too many expenses in retirement are unpredictable. Think about health care. According to the head of wealth management at TIAA-CREF, a 55-year-old planning to retire in 10 years will spend an average of more than $200,000 on medical expenses, beyond what Medicare covers. If you're planning to live off a $1 million nest egg, are you also planning on devoting at least a full 20% of that to health care?

Don't forget about inflation, either. The costs of food, fuel, and other goods have skyrocketed over the past year, and it's entirely possible that inflation could remain unusually high over the next few decades. If so, it could take a huge bite out of your savings.

Part grasshopper, part ant
I do agree with these contrarians on one front. In an attempt to sock away as much as possible, overly aggressive savers and investors may risk losing out on too many opportunities to enjoy their lives while they can. Keeping our noses too firmly against the grindstone can be a definite shame; we should be sure to have fun along the way, just in case we don't quite make it to our hundredth birthday.

Thankfully, we can save and invest and still have enough left over for fun, especially if we choose stocks or mutual funds with a healthy rate of return. Just to demonstrate that you don't need to hunt down obscure little firms in order to make money, here are a few companies that have done rather well over the past decade:

Source: Yahoo! Finance.

So go ahead and keep saving and investing. If you're worried about saving too much, just put together a plan for any excess money left over -- it could make your surviving loved ones very happy, or empower a cause or charitable organization dear to you.