The following is a guest post from Neal Frankle. Neal is a Certified Financial Planner in Los Angeles and also owns Wealth Pilgrim — a personal finance blog.
Is it possible that you might be saving too much for retirement? Actually yes.
While frugality is thankfully very cool these days, it could be that we’re taking thriftiness too far.
Assume you’re 60 and you’ve saved up $500,000 by squirreling away 15% of your $100,000 gross pay every year. You want to retire in two years and you’re not interested in opening up a side business channel to generate more revenue. The days of considering small business ideas are behind you. Instead, you’d like to travel and have a taste of the sweet life now while you still can. The question is, is it possible to spend more now and have a secure retirement too?
Which Retirement Scenario Works For You?
Let’s evaluate various retirement scenarios. I recently read a fascinating story in Financial Planning magazine. The article examined a T Rowe Price study that looked at this exact scenario. The study considered three alternatives for this couple who earns $100,000 a year:
Option 1. Retire at 62.
In this case, the couple thinks about retiring a bit earlier to simply live the good life. In the process, the couple will draw $30,000 from Social Security and $22,000 from savings. The total income here will be $52,000. Unfortunately, that’s a lot less than the $100,000 this couple is currently pulling down, so it’s not a great decision.
Option 2. Stop saving now but work until age 70.
The couple could actually spend the money they would have saved ($15,000) on their golden years and still end up with more income in retirement. How would this work? By delaying their retirement, they would be eligible for higher Social Security payments, which go up to $53,000 at 70. Also, their nest egg (in this example) will grow from $535,000 to $784,000 because they’re giving it an extra 8 years to grow. That means (assuming a 5% withdrawal rate) they can draw a total of $35,000 from their investments at 70 rather than $22,000 had they retired at 62. The total income in this scenario will be $88,000 at retirement. Not as much as they have now, but a lot more than Option 1 above. And don’t forget, they have 10 years of money-spending fun until they reach age 70. One downside here is if one dies prematurely. That would be a big hit to their bottom line because of the impact on social security spousal benefits.
Option 3. Keep working and saving until they reach age 70.
This option gives the couple the most disposable income during retirement but it doesn’t give them the highest income during their 60s, which is a prime time to spend and enjoy life.
This example assumes a 7% growth rate. That might be something difficult to imagine but the fact is, 7% is a very conservative projection and utterly realistic on average. It also assumes that under Options 2 and 3, they don’t take Social Security until age 70.
What Does This Study Tell Us?
Here’s what this interesting study highlights:
If you’re smart and are clear on your objectives, you can really have your cake and eat (some of it) too. In fact, it puts an entirely new spin on the question, “How much money do you need to retire?”
It’s reasonable to want to maximize income and spending during your 60s. You’re probably healthier and more able to travel and enjoy things in your 60s than later on in life. For the couple who keeps working but stops saving, their spendable income (in this example) is $100,000 before they retire at 70. The couple that keeps working and saving (Option 3) has $85,000 in spendable income.
My thinking is, you can spend that $15,000 and have a lot of fun during your 60s. And you may not be able to do that in your 70s.
In the olden days, it was a given that people should take their Social Security as soon as they qualify for it. But because our longevity is expanding all the time, this may not be the smart move now. A nice compromise might be to stop saving, start spending more, but keep working and delay taking social security.
What is your take on this? Would you go this route?
Created December 3, 2008. Updated September 29, 2011. Copyright © 2011 The Digerati Life. All Rights Reserved.
{ 8 comments… read them below or add one }
I plan on working til age 70 and continue contributing to my 403B, IRA and Roth IRA. I will draw Social Security and a pension which will provide a reasonable fixed income base and draw about 3% from my IRAs.
@krantcents,
That’s also my plan! Given how things are going, it certainly appears that way for me (and my spouse). I know quite a lot of entrepreneurs who are working way into their 70s and refusing to “retire” from their business or job — they enjoy it too much! I actually wonder just how many people are retiring traditionally these days vs being employed or working on business projects indefinitely.
My husband was able to start taking his works pension aged 52 when he was made redundant. He’d paid additional voluntary contributions into his occupational pension scheme so was able to get a pension equal to of one third of his salary. As I plan to work for until at least state retirement age and our sons are through university and have found employment will can get by financially. What price can you put on your time?
The idea of doing the same job I do today in my 60s really kinda depresses me to tears lol. However, I am a consultant and I’m hoping by 60 I can be a lot more picky on the contracts I accept. Right now I’m thinking I won’t work full time past 60 but will bid only on interesting contracts. So I’d do another option. Work 60% time past 60, stop saving, but enjoy life as much as possible.
Work till I’m 58 (next year), draw off savings till 59 1/2, SS at 62. Die at 88!
This is great! Even though i’m still far from retiring. It’s best to plan ahead right?
Thanks for allowing me to guest post SVB! What a wonderful community you have here!
Thanks for the great information Neal. The retirement scenarios and examples are more than helpful — the illustrations hopefully give us all food for thought about how to proceed once we enter our senior years. As mentioned, I’m opting for Option #3!