Over-Saving for Retirement?

Haruki writes in:

I am putting 15% of my salary into my 401(k) which gets a 5% match from my employer. I also contribute the max to my Roth IRA.

I followed up with Haruki and found that his salary is $46,000 per year and he’s twenty seven years old, just for calculation’s sake.

So let’s put all of the math together. Haruki contributes $5,000 a year to his Roth IRA. He also contributes $6,900 to his 401(k) and his employer contributes $2,300 to his 401(k), too. Added together, Haruki’s retirement savings each year is $14,200 – 30.9% of his salary.

I think that’s excessive, and I told Haruki why.

First, saving 31% of your income for retirement will give you an abundance in retirement savings. When you finally retire, even if you step away at the minimum possible age that you can access your retirement savings without penalty, you’ll have more than enough for retirement. For some, this seems like a problem they wish they would have, but having excessive income in retirement means excessive taxes in retirement. In short, if you have a mountain of cash in your 401(k), you’ll be paying more taxes upon withdrawal than you ever would if you were more careful about your life’s financial plan.

Second, when you hit your “number,” you’ll likely be many years short of retirement. If you’re saving this much for the dream of retiring early, you might not wind up happy. When you do hit your “number” – the amount you need to have to live sustainably in retirement – and you’re much younger than your retirement age, you’re stuck. You’ll have all the resources you need, but they’re locked up. Of course, you can use your Roth IRA contributions for a few years, since you can withdraw your contributions without penalty, but it won’t cover you for more than two or three years.

The big reason, though, is that excessive retirement savings takes away from your other life goals. Dropping that 401(k) contribution back to 10% gives you another 5% of your salary – $2,300 pre-tax – to save for other life goals without diminishing the quality of your retirement. Instead, start socking that money away for other goals: a big fat emergency fund, a home down payment, a small business you dream of starting, a vacation, or whatever it is that really makes your life worth living.

Haruki is doing tremendously well – this is not a criticism of his saving habits, which are stellar. If you have the capacity to save more than you actually need for retirement, that’s awesome. It’s not a bad thing.

Instead, take some time to step back from your retirement savings Think through your life goals and make some serious, well-informed decisions. Here’s how.

First, calculate your “number.” In other words, figure up how much you’ll need to live on sustainably in retirement. There are tons of different calculators and calculations out there – your best bet is to use several and trust the one that estimates the largest total amount – then add 10%. CNN’s retirement calculator and MSN’s retirement calculator are both useful places to start, but try running your numbers through every one you come across.

Next, calculate how much you need to put away each year to reach that goal at your target age. Assume a 7% annual return on your investments, which is what Warren Buffett suggests is the long-term trend for stocks. One way to get a bead on this is to tinker with the numbers on retirement calculators – set the annual rate of return to 7% and play around with the annual contributions you would need to make to get to your target number. This will give you a good savings number to shoot for each year.

Once you’re sure that you’re saving enough for retirement at the age you want to retire, target the rest of your savings towards other goals. Save for a home, for a car, or for a small business. Give money to a charity. Our goal is a home in the country with a barn in the back which we want to make as green as possible – we want to shoot for near self-sustainability. We also want to do some serious volunteer work in retirement.

What if extra retirement savings makes you feel more secure? If that’s the case – and you don’t have any other goals you’re strongly pushing towards – then feel free to contribute more towards your retirement savings.

In the end, it’s worth your while to make sure that, if you’re focused on saving, that your savings are helping you truly fulfill your dreams. Good luck!

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129 thoughts on “Over-Saving for Retirement?

  1. kim says:

    I am assuming that he is single. I think he has a great plan. Once he has a family and all the expenses that go along with children he may want to have more of his income available. By Socking away as much money as he can now, he will be able to reduce his retirement contributions later without adverse effects. I wish we could afford to scale back our contributions now that the kids need braces and college is looming on the horizon!

  2. Kevin M says:

    If he’s 27 now and putting away $5,000 in a Roth for say, 20 years then wants to retire – he’ll have $100,000 of contributions he can pull out tax and penalty free. I bet that would last someone as frugal as he is more than a couple years.

    Also, if he takes his 401(k) and rolls it to an IRA he can take the money out penalty free using Rule 72(t).

    This is the type of specific advice that is probably better left to professionals. Did his original question indicate that he was struggling otherwise due to this level of retirement savings?

  3. Matthew says:

    I think you are wrong. You can always scale back your contributions AND there are ways to retire early and get money out penalty free. I’m in a similar situation and contributing my max 401(k) per year AND max ROTH IRA per year. But, I can easily scale back if needed. I also have a years emergency fund and waste plenty of money that otherwise need not be spent. This could all change in the future with marriage and/or kids.

  4. Mike Piper says:

    Great job, Haruki! Your excellent head start will allow you to ease up a little bit if/when you get married/have kids. :)

  5. Jimmy says:

    Trent, it’s articles such as this one that further solidifies your dominance over the personal finance blog space. I am also a relatively large saver and was recently considering maxing out my Roth IRA and 401K thinking that would guarantee a worry-free, early retirement. Having just read this article however, I’m convinced that I need to spend some additional time reevaluating my savings and retirement goals to achieve a proper balance between my pre and post retirement life.

    Thanks so much for the insightful, thought-provoking advice.

  6. topspin says:

    Trent,

    It seems like your core objection is that the money Haruki is saving will end up in retirement accounts that will be inaccessible to him until his retirement, and that this is a concern if he reaches his number “too early” and can’t repurpose his savings for more immediate consumption.

    I think that concern is largely offset by the fact that he’s contributing 35% of his savings to a Roth IRA, and that withdrawals of Roth IRA contributions are allowed penalty-free (after a short holding period). Hence contributing to a Roth is a reversible operation: if he doesn’t need the money until retirement, it can sit in there compounding tax-free, and if he does need it, he can get at it without penalty. This has the same accessibility as a taxable account, with the extra tax shelter as a bonus.

    Regarding your advice to scale back his 401k contributions, I’d suggest he should first find out if he needs to contribute the full 15% of his salary to get the full 5% match from his employer. If that’s the case, the match trumps any other benefits he might see from reducing his contributions – that’s an immediate 33% return on anything he puts into his 401k, which is hard to beat.

  7. My Journey says:

    I like the review, but I would want more information….what are his other goals? What does his emergency fund look like? Down Payment fund? etc.

    Great review

  8. scholz says:

    In general, I don’t think it’s possible to oversave for retirement. With the rising costs of healthcare, the uncertainty of social security, no calculator in the world can truly tell you how much you’ll need.

    I do agree, though, that saving for retirement to the exclusion of other savings, like an emergency fund, house downpayment, etc. is foolish.

  9. lurker carl says:

    Since the goal of retirement savings is to start as early as possible so compounding interest does most of the heavy lifting, why is putting 31% of one’s income into retirement vehicles a problem? There is not enough information presented here to make an informed guess. But you never hear anyone say they have saved too much money.

  10. Susan says:

    I just wanted to thank you for your fantastic blog. I must commend you for working so hard as you often have several posts during the day.

  11. Johanna says:

    I do something similar to Haruki – except I save even more. My own retirement contributions amount to 32% of my salary, and my employer adds another 10%. The main reason I’m doing this is because for almost all of my 20s, I was living on a grad student/postdoc stipend and contributing nothing to my retirement accounts. So I have some catching up to do.

    One big thing that’s left out of your reasoning is that just because Haruki and I are contributing large percentages to our retirement accounts now doesn’t mean that we have to (or will) continue to do so each and every year until we hit 65. If the stock market matches Warren Buffett’s predictions over the next couple of decades, we can cut back on our contributions and put the money toward other goals. If it doesn’t, we’ll still be in pretty good shape, whereas the people who have been counting on those 7% returns will have to scramble.

  12. Sdub says:

    I think Haruki is doing the exact right thing. I started my 401(k) when I was young and single, right out of college, saving 20%+3.5% company match. I did that for about 5 years, then got married, bought a house, had kids, etc, etc… I’d love to be able to keep up that 20% saving, but I just can’t anymore. I’m VERY glad I did when I was younger, however, when I still could.

  13. Lisa says:

    Figuring out the actual numbers and ramifications is good. So is having an adequate emergency fund and savings for a home downpymt. But then, over saving this early in his life could be ideal. Like I did and others comment above, saving like mad when your expenses are low allows one more options later.

    Going back to school (no retirement money going in), a family sabbatical (again no retirement money going in), somebody not working to raise a family (someone has no money going towards retirement) are all examples.

    Also, when running the retirement money numbers, he might want to be assuming retirement for 2 (I’m assuming a future spouse to provide for).

  14. lurker carl says:

    I rechecked the calculations, Haruki is contributing a bit less than 26% of his income to retirement. The employer is donating the remaining 5%, those matching dollars do not count as salary.

  15. Tony says:

    I’m in a similar situation where I feel I might be saving too much, but in my case I don’t put it all in an IRA or 401k. My employer matches up to 5% in my 401k so I opt to save exactly 5%. I make regular deposits into my IRA… But I also have a regular brokerage account with sharebuilder. I am single right now and I save as much as I possibly can for the future. By using a regular brokerage account I am able to have a very high level of savings now when I am able to do it, but when the time comes and I get married and have kids, I plan to spend some of my dividend income to help me out at that time if I need it. My goal is to not sell any of the securities but to spend the dividends if needed. If all goes well of course I will reinvest those dividends, but I see it as a middle ground – saving, not necessarily for retirement… but I plan to keep it all for retirement. I think this gives me some more flexibility and I’m less likely to regret it.

  16. Steve says:

    I agree with the idea that front-loading the contributions, at this stage of his life, does not seem like that bad of an idea. Unless there are other goals that are important to him, why not let compounding interest do a lot of the heavy lifting in place of contributions later, when he’s likely to have a family/home/bigger home on which to spend his extra money?

  17. I am in a similar saving situation as Haruki, making only a little bit more than him. I think it’s worth mentioning that:

    1) If you are happy with your lifestyle and are working towards your other goals at a reasonable pace, there’s nothing wrong with super-charging your retirement savings. Like you said though, if there are other goals not being met, then perhaps it needs a reevaluation.

    2) Saving extra now could simply be a lesson in delayed gratification. Haruki could reach his “number” very early and simply stop contributing then if he likes. That would free up all kinds of additional income at that point and he would have more money sitting in a longer investment horizon than if he had spaced it out further.

    Saving is a delicate balance. Currently, I am saving, in total, about 65% of my total salary for various goals and I do not make much more than Haruki. At the same time, I feel like I lead a pretty fulfilling life and am not having any qualms about the amount I’m saving.

    Everyone’s different. Finding the right personal balance is the key!

  18. Dr. Faith says:

    I actually agree with the commentors about front loading the retirement contributions. I’m more in the situation of Johanna though, in that I have been in graduate school and am now a post-doc so I don’t have a lot of means to contribute to retirement (thankfully as a post-doc my university contribute 10% of my salary ON TOP of my salary for me to retirement accounts). However, when I get a permanent position I’m definitely planning on bumping up my retirement for a few years to try to make up for the poor savings I have made thus far in my twenties because of VERY small stipends (i.e. barely enough to cover rent and some food).

  19. Jared says:

    Hi Trent/all,

    Long time reader/lurker, first time commenter. :-) Despite having made huge progress in my personal finances over the last three years, I feel constantly racked with self doubt: “Am I putting enough away for later? When can I retire? What if we have another 2008 stock drop two years before I turn 65, will I have enough?” Given those feelings and the fact that my profile lines up pretty well with Haruki’s (I’m 29, make $49k, and put 30.1% into retirement accounts) this post really spoke to me.

    I completely understand why you’re saying that Haruki is saving too much and should use some of that money to save toward other goals. I’m living that situation right now, feeling future-focused to the point of being somewhat saddened at my current “suffering” for the sake of future benefits.

    That all said, I think (read: I hope!) I’m doing the right thing by putting that much money away for retirement:

    1) Most retirement advice (including the default settings of the retirement calculators you linked to) has people aiming for a retirement income of 70-80% of their current income. Personally, I hope to be making 100+% of my current income in retirement. $49k in the San Francisco bay area doesn’t go very far, and I would hate to have less income in my 60′s and beyond than I do now.

    2) Most retirement advice (including the default settings of the retirement calculators you linked to) say to aim for retiring at 65ish and planning on living to 85ish. I expect that medical technology will advance hugely before I retire in 30-40 years from now, so I’m planning for living (and hopefully being active) until 95, or 105, or longer. If I’m wrong then I bet on the wrong horse, but I’d hate to be going strong at 85 without the financial security to match. I imagine I would feel completely powerless and hopeless.

    3) At 29 years old I still have a great deal of potential career growth ahead of me. If I’m making $75k (inflation adjusted, of course) in 5-10 years from now, then my current 30% retirement savings with my current income is 20% retirement savings relative to my future income. If my lifestyle expenses increase along with my increase in pay, then I’ll be happy to have been saving for retirement at 20% of what I will be accustomed to in the future.

    4) My husband makes significantly more than I do (twice my income) and also has a few years on me (mid-30′s). However, he doesn’t have all that much more retirement savings than I do due to some choices that he made both before and during our relationship. Given that his income makes up a significantly larger portion of our net finances and he’s (relative to me) significantly behind in retirement savings, I view my extra retirement savings as a safety net.

    5) My husband isn’t the only person in my life who makes significantly more than I do. My best friend makes about four times as much as I do, several other close friends also make twice as much, and so forth. In fact, the vast majority of my friends make 1.5-2.5x what I do (which also creates a certain amount of self-worth issues, to be sure). I’ve long since given up on “keeping up with the Jones’s”… Mostly. Not with retirement. I don’t have any delusions about being able to retire nearly as well as they will, but I don’t want to fall too far behind either if I can help it. And while most financial competition isn’t healthy, I’m okay with my competitive drive pushing me toward a more secure future.

    6) I don’t have any other goals that I feel are within reach. The key words are, of course, “that I feel are within reach.” A home feels impossibly far out of reach for me given where I live, and that’s the main goal I don’t feel I can afford. New car? No problem. 12-day transatlantic cruise? I could pay for myself, my husband, and another couple to do this. Six-week international voyage of self-discovery? Can do. Pretty much the only thing I *can’t* do is by a home, and an extra couple thousand dollars a year toward a down payment won’t really scratch the surface given where I live.

    Sorry to ramble for a while there… I guess what I’m saying is that I completely agree you, Trent, on why people shouldn’t over-save for retirement because that stops being an optimal financial strategy in many ways. However, at the same time I think that there are so many axes that you could optimize on that it’s very hard to say what actually is/isn’t optimal for someone.

    Keep up the good work!

  20. getagrip says:

    I agree with the point of the article, you have to know what you’re saving for and work that all in. We don’t know if he’s saving for all his other goals, or if at this point in his life he even has any other substantial goals. If he’s saving out of fear of the future, he may need to reassess a bit and start saving to enjoy some more short term goals. Saving for retirement is fine, but it doesn’t hurt to step back and assess why you’re doing what you’re doing.

    That said, Kudo’s to Haruki for being able to save this percent of salary. I wish I could have started with this kind of savings percentage out of my salary (but then again at twenty seven I was married, sucked into two car payments and my spouses debt payments, and looking to buy a home at that point in time). You can always shift the savings percentage to something else later (like a college fund or a house fund). I also agree that I would tone down the 401K before the Roth because you can tap the Roth money you put in before the 401K to carry you to your 401K retirement age if you needed to, as Kevin M already mentioned. In general looks like Haruki is on the right track, he’ll just need to reassess when other things come up if he wants to keep up this amount towards retirement.

  21. Molly says:

    Congratulations on the saving, Haruki!

    If you do scale back on your retirement savings, please avoid the temptation to just “spend” that “extra” money – it slips through fingers so easily. If, on the other hand, that “extra” money is spent on something specifically researched and chosen (a house, a vacation, school, etc.), then have fun!

  22. Brent says:

    I’m more in agreement with Haruki. First a 401K can be rolled over into an IRA and rule 72(t) should allow you to take money out when you need it. Also I’m assuming this person is single and without children or else this would be more about the value of family. Secondly, there is the implicit assumption that he will be retiring early or cutting contributions far before his expected date. His taxes will be based on his income, just like now. I don’t expect he would be paying any more than he is now on taxes. Thirdly, it is all about the assumptions. 7% may be a stock market average that people feel comfortable using, but who in their right mind recommends 100% in stocks! As you get closer towards retirement and especially when you are in it, the ratio should tend towards less risky and profitable, hence a lower number. Also it depends on how long you expect to be comfortably living around this planet. Will you live to 100? This person might be able to afford to. Add in inflation. Maybe I’m being a little pessimistic, but I don’t see $1 being worth the same in 2047 ,age he hits 65, much less 2082 if he lives to 100. Finally, its a matter of consistency. Most financial plans revolve around you contributing without interrupt, never spending early and earning average stock returns, its value decreasing with average inflation. Starting out on the high side ensures that you can back off or keep up rather than catch up to retirement.

  23. dlm says:

    Maybe he wants to be free to retire early?

  24. Akratic says:

    I don’t understand how a personal finance blog can so misunderstand and misrepresent early distributions from 401(k)s. Haruki could retire at 40 if he felt like it and had saved enough. He doesn’t have to wait for a magic age. The only thing he’d have to do would be to take “substantially equal distributions” (IRS code 72(t)) from his 401(k). He can do that without penalty regardless of age, and he can use the lax rules on the Roth IRA withdrawals to give him flexibility. Google it.

    That said, I definitely agree with the main point of the post about some life goals being more important than saving for retirement. I mean, would you rather travel the world for a year in your 20s or your 60s? If you take a long-term perspective of your life and get to choose 20 years off total, who in their right mind would choose 65 to 85?

  25. Tyler says:

    If he has to contribute 15% to get the full 5% match, then he is acting correctly. The only adjustment I would make is to reduce his 401(k) contribution if he is putting in more than is matched (i.e. employer matching stops at 10%), in which case he should be investing (full-on investment since his IRA is maxed) with the extra cash.

  26. I would argue that saving 30% now and then scaling back in 10 years is a fairly smart choice. The longer it’s in the more it’s making!

  27. Steve says:

    Saving 26% of one’s salary is NOT overkill. In todays world of self-funded retirements (no pensions and social security on the rocks), it seems to me that the standard rule of thumb to save 10% is simply not enough to ensure a comfortable retirement.

    Also, this article totally ignores how these accounts could be used to fund other goals, as other posters have mentioned. For retirement that you can use a special rule to start drawing from your 401k/IRA before the normal age. For a house down payment, you can take $10,000 out of an IRA penalty free. And finally, no matter what your goal, Roth contributions can be withdrawn at any time for any reason without penalty.

    And another +1 to “save early, before life gets in the way”. Save everything you can now – then if and when you start a family, buy a house, etc, you could scale back or maybe even stop contributing altogether, and your existing balances might grow on their own to be enough to support you in retirement. However if you don’t save early, then you’ll be left scrambling after the kids get out of college to make up for all that lost time.

  28. Robert says:

    This is a good article regarding trying to figure out for yourself when you might be making enough contributions toward retirement.

    I’m not entirely sure I agree with the tax aspect of your argument, though. Per withdrawal taxes are the same no matter how much money you have in your retirement account. You only pay more taxes if you withdraw more money, which you may or may not do if you have more money in your account.

    Also, I don’t think someone living off of $150,000 a year in retirement is going to complain about having to pay more taxes than someone living off of $50,000 a year in retirement. At least not to where they cut back to $50,000 anyway.

  29. Dr. Mary Gresham says:

    I have to say that I disagree with your advice to this “big saver.” He can use the money in his Roth for the down payment if he is a first time homebuyer and he can use the money if he becomes disabled. The great benefit is that the money grows tax free and can be withdrawn tax free as it is funded with tax paid dollars. The only exception is if he has no liquid emergency fund ( 6 months of living expenses)..he needs to fund that and then can return to his high level of savings. Getting a head start when you are young is great..then during your high expense years ( marriage, family, etc.), you can cut back and have more income…the young years come with greater flexibility. I wish I had funded more when I was younger as I am now facing the bad years of the market just prior to retirment age.

  30. t says:

    I agree with #1 and #7. I don’t have enough information on his background. I believe it’s better and easier to sock away money when you don’t have a ton of responsibilities.

  31. Marsha says:

    OK, my takeaway from this post is that it is possible to be saving too much money. Whether Haruki is saving too much, um, I’m not sure of that.

    I hope he has some post-tax dollars saved up for real emergencies, i.e., a layoff or replacing a car.

    Presumably Haruki is not eating ketchup soup 3 nights a week in order to save at this rate – if so, then yeah, something is wrong.

  32. Dan says:

    I echo the sentiments of many of the other commentors. It’s great to contribute to your retirement fund early and often. When you’re young and don’t have as many expenses, it makes sense to contribute a higher percentage of your income. You are also taking advantage of compound interest, which is predicated more on time than it is on money.

    Frankly, I disagree with all three reasons that Trent gave for this being a bad idea. “Excessive income means excessive taxes”? This statement is a fallacy. Sure, we all want to minimize our taxes, but not by reducing our income. That’s insane. If I were in Haruki’s shoes, I’d be sweating the taxes now while I’m only making 46k/yr, not 40 years down the road when I have onerous burden of excessive income.

    The second reason didn’t make sense either. The “number” is the amount you’ll need to have saved in order to retire by a certain age. If you are “many years short of retirement”, than you haven’t hit the number yet.

    Finally, the claim that “excessive retirement savings takes away from your other life goals” assumes too much. It’s quite possible that Haruki is adequately funding all his short-term and long-term life goals. We don’t know of any compromises or trade-offs that he’s struggling with. He might not be putting away enough to fund all the activities that Trent cited, but whose to say those are consistent with Haruki’s values. It is valid to generally say that one shouldn’t over-save for retirement at the expense of other important financial goals. However, the case of a 27 year old man of whom we know very little else about is a poor example to illustrate this point.

  33. Gwen says:

    This article protrays why I stopped reading for a while and why I probably will stop reading, again.

    First, there is not enough information to judge this response. Among the comments are: is he happy with his standard of living now. Does he have enough savings? Does he have children? What does he want to do with his retirement?

    If he doesn’t have kids and a wife now and he’s happy with life, then why is he oversaving again? Trent, you’ve been adament that you want life to be focused on your children. Perhaps he doesn’t want to work forever and he wants to enjoy his children. Or maybe he just wants to travel. Who knows, but with the way things are now, why would anyone negate him saving when most Americans don’t save enough?

  34. Eric H. Doss says:

    Trent, et. al,

    This is a great post, but there’s still info missing. I think Haruki is doing great, mainly because you can’t predict life expectancy at this point. My wife’s grandparents are facing a situation where they might outlive their savings. Thankfully, they have pensions that will allow them to maintain their lifestyle, with some changes, but still.

    I think its important to factor in life expectancy, as Brent mentioned in #14. Most people call 65 retirement age, but this is hardly true anymore. Sixty five was a reasonable age to retire when most people only lived a few years beyond that age. Now, it’s very reasonable to expect to live to 85+. If you’re a white male, alive today, age 80, your life expectancy is 88.1 years.

    My grandparents are facing the reality of outliving their savings. Thankfully, they have pensions, etc, but they will still have to make some significant changes. I don’t want to find myself in that position.

    So, for my retirement, I plan to live to 95+, work till 75+, and am not depending on Social Security for any portion of my income. Since I’m only 29, this is significant speculation, but I can always adjust down later. Always easier to spend then save, so why not roll into the golden years with a nice cushion?

    Eric

  35. Johanna says:

    I just ran some numbers on MSN’s retirement calculator. For me, a 31-year-old with just under one year’s salary in retirement savings right now, to retire at 60, replace 70% of my pre-retirement salary, and have my money last until I’m 95, I need to save 33% of my income. (This is assuming 7% annual gains before retirement and 4% after, and counting on nothing from Social Security.) Cut the expected rate of return down to 6.5% (because my retirement portfolio isn’t 100% stocks) and the required percentage jumps to 37%. Suddenly Haruki’s 31% doesn’t look so unreasonable.

  36. todo es bien says:

    I have to say, I disagree with your advice on this one big time. 1) The real rate of return adjusted for inflation will likely be considerably less than 7%. 4% would be more realistic historically. 2) Just because Warren Buffet says it, doesn’t mean you want to base your entire retirement on it. 3) He is saving a ton now, but he may not be able to save as much in the future due to life events. Why not get an early jump now? 4)Most people would argue that you could access the principal in the Roth without tax consequences should you need to… That being said, as long as you are saving it somewhere, the particular way you choose to save it is not all that problematic…

  37. Barbara says:

    Okay, I disagree with the response. and frankly, lets leave giving financial advise to the professionals. The smart move for a young single professional is to contribute early and often. You make my point, actually. He’ll have reached his number before he gets to retirement age. Ya know what?? Great!! Thats when his family will be in the most need of that extra cash-college, the cost of teenagers or tweens, family type expenses that he does not have now. Sorry, but unless this person is struggling now (and it doesnt sound like it) i would say his contributions are right now. Frankly trent, its comments like this that show you speak from the – Im young and I havent been there yet- mindset. Ask anyone my age who have kids in college and other obligations now if we wished we done what this person is doing and I suspect not a one would say no.

  38. George says:

    Haruki is right on the money. Save early, save often.

    Hopefully he has the capability to also have savings on the “taxable” side, but there’s no reason for him to stop with his current plan.

  39. todo es bien says:

    Incidentally, a friend of mines Dad gave me one of the best Rule of Thumbs re wealth that I have ever heard. He said “You know you are doing well when you worry more about your taxes than your income.” That has always seemed just about right. Sadly, even @ my late age, I still worry more about income…

  40. NYC reader says:

    Trent, I think you’re all wet on this one. As others have observed, we don’t have enough info on Haruki’s finances to say he’s over-saving.

    Does he have a substantial emergency fund? Any debts? Some life dreams or goals that might change his ability to make hefty retirement contributions in the future?

    It’s far better to over-save early in life, and let compounding returns increase the value of the savings. Haruki can always change his saving allocations later, as other expenses arise (children, college savings, house downpayment, etc.).

    Haruki might want to get out of the corporate rat race early and pursue other interests that don’t pay well, or simply spend his volunteering. Having a good early start on retirement funding will give him that flexibility.

    Suppose Haruki decides to become the stay-at-home parent for a decade or so. He will be able to do that without a negative impact on his retirement by his early contributions.

    And then there are the curveballs that life throws at people. Haruki may develop health issues and might not be able to work. His employer may go out of business. His career field might not be a good one in 15 years and he may have to return to school for a new career.

    All of these unpredictable situations can be mitigated with the right financial preparation as early as possible.

    1. Pay off all consumer debt
    2. Max out all retirement contributions, or at least get the maximum employer matching funds
    3. Live below your means
    4. Start saving early
    5. Carry insurance appropriate to the financial risks at each stage of life

  41. liv says:

    I think it’s ok that he’s saving that much early. I keep hearing that what we save for retirement may not be enough when we actually hit retirement age given the way the economy is right now so having extra in his retirement fund is not always a bad thing.

    Other commentors are right though…if he is not struggling, then he’s fine. If he IS…then it may be a different story and he’ll realize that he can cut back on his contributions a little bit…but we don’t really know if that is the case.

  42. Kelly says:

    After reading this post, I am now curious to see your comments on the next book club post since Dave Ramsey suggest 15% of income going towards retirement (not including company matches).

    And on a side note, I agree with most commenters, way to go Haruki, I am 27 and wish I was able to save this much, especially in this economy where the market is lower than many think it should be and destined to go back up.

  43. Laura in Atlanta says:

    This post hit home for me. I also wonder if I over save. I make $47,500, contribute 16% of my salary to 403B with an additioanl 3% being matched. On top of that I contribute $5000 to a ROTH IRA every year. Im 43, and got a late start on retirement savings so I am playing a bit of catchup. I have no plans on getting married, happily single and not looking. No kids, no CC debt, and house paid for. I lost 34% of my savings in the past year and half, due to the rocky road of the economy, so I REALLY want to play caatch up. Right now, I plan to continue on this path til I’m 50 and then will reevaulate. But yah . . . I have wondered if I save too much. I don’t feel I’m lacking anything in my life, so I guess not. Pretty happy and content to let my money continue to grow and if I can be agressive about it, then more power to me.

    But yes . . . this post was very interesting to read. And i have especially enjoyed the comments. Been a little let down lately by the articles here on TSD, so glad to have a solid thread that really speaks to me. Thanks to Trent (not sure if I agree 100% with him, but I like that he addressed the topic) and thanks to all the wonderful comments.

  44. bogart says:

    ??? As others have said, there is nowhere near enough information in your post to reach the conclusion you’ve drawn.

    Using the MSN calculator you link to, if I assume Haruki has saved nothing (to date) and wants to replace 100% of his income in retirement, use your assumptions otherwise, don’t factor in Social Security, and drop the post-retirement return rate to 4%, he runs out of money at 82. 82!!!

    (But personally I wouldn’t dream of assuming a 7% average return after inflation — yow! I’d go with 4 or 5.).

    If your point is that retirement savings shouldn’t, or cannot, be our only saving (or even budgetary) priority, then sure. But beyond that, you lost me …

  45. Rad Grad says:

    There was a fascinating article the other day in the New York Times that discusses how there is nothing stopping congress in the future from changing the tax specifications of Roth IRA’s. Basically what they are saying is that you should assume the laws will change and perhaps ROTH IRAs aren’t going to be as good a retirement vehicle in the future.

    http://www.nytimes.com/2009/07/18/your-money/individual-retirement-account-iras/18money.html

  46. Kim says:

    My husband and I are saving 50% of his salary for several reasons. He’s in a great job, but it could go away anyday. We want to retire before we are 50. We don’t need the extra money as we have always lived a modest, comfortable lifestyle.

    We have always followed this rule. We made equivalent salaries in our 20′s and always saved one of our salaries (same as saving 50%). Our nest egg grew substantially during this time which is the best thing we ever did financially. Then came kids, including one with autism. Then came cancer. Everyone is going to have some challenges in their lives. Having our nest egg has made facing them a lot easier. Even with these challenges, we are still on the road to retiring before we are 50 (if we can get the medical insurance figured out). If we’d saved only 15% in our 20′s, life would have been a struggle the last 15 years. Just a few things to think about. As long as one is not sacrificing quality of life, I say save as much as you can. Way to go Haruki!!!!

  47. TDP says:

    Although there wasn’t enough information given about Haruki, I will agree with the general sentiment on the comment board. Unless some parts of your life are suffering, it’s never a bad idea to front load your retirement savings. Compounding interest is a great tool, and we should all try to make the most of it.

  48. Dave says:

    Just for kicks, run this in msn retirement
    newborn gift of $21,000
    9% return until they are 65
    5% after
    thats front end loading
    this is one time
    turn $21,000 into $1,027,419

  49. T'Pol says:

    I agree with Johanna the 7th commenter.

    I do hope however, he has an emergency fund and a savings account to cover 6-8 months of living expenses. If he is all set with these, I see no reason why he should not contribute as much as he can while he is still single.

  50. Rosa says:

    I’m another dissenter – if Haruki hits his number at 35, he’s free to do whatever he wants until he’s retirement age – take a lower-paying job, take a sabbatical, raise kids, go back to school – without having to worry about contributing to retirement savings.

    And if he gets to be 85 and has too much money – hey, that’s how universities get endowed.

    My partner and I cut our 20% retirement savings/10% other savings rate (which I started at age 24 and he started at 21) for a few years so I could be a stay at home mom. Having the “extra” money in our budget did a lot to make the transition smoother – it was like my partner gave himself a 20% raise just by adjusting his 401k deduction.

  51. harm says:

    You simply can not save too much money.
    (Unless the sun burns out and you have foregone
    things you really wanted to do in the meantime) ;)

  52. Kat says:

    I don’t understand this:

    “In short, if you have a mountain of cash in your 401(k), you’ll be paying more taxes upon withdrawal than you ever would if you were more careful about your life’s financial plan”

    Then don’t take a lump sum of cash from your 401k: roll it into an IRA, take a life expentency annuity, or recommend a different retirement savings account that will allow taking out only what you need each year so you don’t pay the taxes all at once and end up in the higher bracket for some of your money. But to STOP SAVING altogether because you will pay taxes on it??? I’d rather be in a higher tax bracket in retirment (that means I have lots of money! yay I can travel and afford great healthcare!) than be in the lowest tax bracket in retirement (that means I have little money! ramen noodles and Dr. Nick Riviera for me!). He’s maxing out his Roth, he already is doing a good job at limiting taxes in retirement, but limiting taxes by limiting his retirement income? That’s a total loss.

    Also, he is SAVING on taxes now, and since he has a LONG way to go for his contributions to be compounding, by not paying the taxes now, he has extra money in that 401k compounding itself. That extra money will MORE than cover the taxes he’ll have to pay on it.

    I will never understand the urge to “save” on taxes by not earning. The tax rate isn’t 100%, you are still ahead! Yes, some of the new tax credits cut off (ex: 1st time homebuyer) so it may be a slight loss if you don’t qualify for that by a small margin, but overall, more money you earn = more taxes = STILL more money you keep than before.

  53. Alex W says:

    The reason I am putting in 9% into a roth 401k on top of the 11% my employer is putting into my traditional 401k is because I don’t want to worry during retirement. I don’t know what the stock market will do in the future. Who knows if America will continue to be a financial powerhouse–even mutual funds aren’t diversified enough to account for this. All I have to do at this point is make it to 59 1.2 and I will have a much wealthier lifestyle than I have today. No one knows what the US will be like in 40 years.

  54. jc says:

    I think a lot of the comments in this thread are missing two key points that Trent brought up but only implicitly.

    - There’s a huge opportunity cost for each additional % of income that you put away on a consistent basis. Could it earn quite a bit of compounding return? Sure, in an up-market. But what’s the most valuable OTHER thing you would be doing with that money? If it’s worth more to you now for that purpose than being locked up for 40 years, then Trent’s advice is spot on. He was asked for his opinion, and gave it. There is no professional on the planet who can give you a “better” answer–only a different one based on their own different assumptions. Only YOU can decide what your opportunity costs look like.

    - Second, many of you are counting compounded returns before they’ve hatched. Sure, he COULD make out quite nicely in these early years, but if stock prices really are a random walk, he could get killed. Just ask my retirement portfolio–I managed to sock away some IRA/403(a) monies while getting paid dirt as a grad student, and those balances have shrunk dramatically. Do I regret it? No, but I’m glad I wasn’t trying to sock away the “experts’” recommendations based on life situations very different from my own. Trying to “catch up” or “get ahead” is sometimes advisable or even necessary, but it doesn’t fit with long-term dollar-cost averaging.

  55. For the most part I agree with Trent here. There other considerations in life apart from retirement, and most of them will surface well in advance of retirement. We’re not told if Haruki has other assets, or saves outside retirement, but if he doesn’t and retirement represents most of his savings, he could be in a bit of trouble.

    If he needs to tap money for some purpose in advance of retirement (let your imagination run free here) he’ll negate the tax savings he’s expecting since he’ll not only have to pay taxes but also a 10% penalty on withdrawls.

    One positive though, if he frontloads retirement and has, lets say $200,000 or so salted away by age 35, he probably won’t need to make contributions any more. With a rate of return of 7% per year, his stash doubles approx every 10 years, so by age 65 he has $1.6 million, with no contributions made for 30 years. Not a bad deal.

    Now who thinks 1.6 million will be enough to retire on in 30 years???

  56. Frugal says:

    I’m not sure it’s possible to save too much for retirement. There’s no such thing as being too rich (or too handsome :p) in my book…

  57. Kevin M says:

    @jc – I think most commenters “counted” the compounded returns in their criticism of Trent’s advice because it was Trent that originally assumed a 7% rate of return. It’s always a risk to invest, that’s why saving more is rarely a bad idea.

  58. Raghu Bilhana says:

    I have calculated my “number” and figured what I need to do. Then you say that after you save enough to achieve your target, then you need to save enough money for a car or a downpayment for house or another business. Dont these suggestions contradict at the core of frugality and financial independence. Do I need a new car, do I need a new house, do I need a new business when I am trying to save to achieve financial independence. I am not trying to be smart but I am seriously confused. Please help.

  59. Raghu Bilhana says:

    Response to Kevin@OutofYourRut.

    I definitely think 1.6 million would be enough in 30 years. When you start to think that even 1.6 million would not be enough to retire on, then no body would even make that first step and save that first $100.

    We need to live on hope. Even if I cant live on $1.6 million, I can live just on hope, god’s gift to mankind.

  60. TDP says:

    When you withdraw money from Roth IRA, your contributions are withdrawn first, so no tax or penalty until you start dipping into the money over your contributions. If Haruki is putting away 5K/year, he will have more than enough to cover him for emergencies from his contributions alone.

    For example, if Haruki keeps putting away $5k/year, and has emergency 3 years later, he can withdraw upto $15,000 from his Roth IRA without incurring any taxes or penalty.

  61. k2000k says:

    I have to agree with some of the dissenters, only Haruki can determine if he is saving too much for retirement.

  62. Todd says:

    I think Trent is simply arguing for some balance for other goals besides retirement. For example, many of my friends have had great family vacation trips to Europe over the years. While I don’t regret not taking such trips on credit, I do wish I would have at least gone to Europe once while my kids were still at home.

    I’ve always told them I’m saving up for traveling when I retire and have the time, but now I realize that my kids grew up without us ever splurging on Disney World trips or a trip to Europe. True, I’ve given them a gift in knowing they won’t have to take care of me in my old age, but I wish I had relaxed just a little bit about saving for my own retirement.

  63. Rob says:

    Sounds like a lot of jelousy. Also sounds like this green thing has gotten out of hand. Its impossible to save to much. Things always happen. Maybe people need to stop worring about being so green, and worry about their kids more.

  64. Katie says:

    If you have to worry about the excess taxes on your 401(k), you did something right. If you don’t want to worry about them, then don’t put anything in – guarantees that account can’t be taxed :)

    You’ll be stuck paying income taxes one way or another. Do you need the money now? Then don’t sock it away. If you don’t need it, why not let it grow tax-free? Of course you cannot avoid the tax-man, but he will let your money grow nicely and the amount lost to taxes will not eat up all the gains accrued by letting the money receive interest and dividends tax-free for many years (or decades).

    Anyone else plan on working right through retirement? I know something could happen with my health, but I am always going to work as much as I can until I am either rich enough not to worry or just too frail.

  65. KoryO says:

    Sorry, Trent, but…as an (ahem!) old lady who kind of did what Haruki is doing now, all I can say is thank you to my younger self. I think you gave him some bad advice here.

    I am not currently working for pay. I’m a stay at home mom. But my retirement savings amount is still well beyond the average for Americans in their early 40′s because I maxed out my retirement plans when I was younger.

    When I do finally return to work, I’m still going to be ahead of my peers, even after this market disaster is over.

    Besides, I’ve never bought into this “number” thing, anyway. No one knows how long they are going to live, if they will continue to be healthy, or even if they will find themselves taking care of other family members (like grandchildren) when they get old. With all the crazy government spending that’s going on, I have NO confidence that Social Security or Medicare as we know them will be there for me when I become eligible. Counting on that safety net is something I refuse to do. If it’s there when I’m old, I’ll be pleasantly surprised. If it’s not…at least I’ll be able to put off eating cat food for a few years.

    Haruki, as long as you aren’t deciding to split up the top ramen package to get two days’ worth of food so you can squeeze a few more cents into your retirement plan….you’re doing something you will be happy about when your knees give out and your kids head off to college.

  66. Yes, saving 30% seems like a lot but as long as your balancing living life today and saving for tomorrow then it’s great.

    Also, the main concept here is living below your means. Even if 30% to retirement at 27 is too much and he needs to address other goals down the line (ie car, vacation ect)… all he will need to do is direct some of the 30% to non-retirement savings.

    -Gen Y Investor

  67. Gen Y (46)–You’re making an important point here. We tend to focus on saving up enough money for retirement, but few of us will ever be able to retire if we don’t learn to live on less money.

    The current generation of retirees is made up heavily of children of the Depression/World War 2 era–people for whom living frugally was a matter of course and not something done only when reaching retirement. For subsequent retirees, learning to live on less will be the important ‘other half’ of retirement planning, especially if investment returns aren’t as generous in the next few decades as we might expect them to be.

  68. Wendy says:

    Another ‘old lady’ and child of Depression era parents here. One caution. Saving excessively can become addictive and crippling. My mother, now almost 85, has over a million in her retirement account and still worries about having enough. Meanwhile, both my siblings seethe with resentment that our parents deprived them when we were kids because they were ‘saving for retirement’. Saving is great. Just don’t make it the end goal.

  69. Raghu Bilhana says:

    Completely agree with Koryo(47)…

    On another note, since when do you have to go to an entirely different continent to have a vacation and spend quality time with your family.(May be in the last 10 years of all human history I guess).

  70. AnnJo says:

    Before concluding that high retirement savings will take away from other important life goals, people should review the options for early withdrawal from retirement accounts.

    A couple of commenters mentioned Section 72(t), for example. That allows you to annuitize your 401(k) or IRA so that you can begin distributions AT ANY AGE without penalty, along the lines of an annuity. So if you have enough in your 401(k) or IRA to allow you to retire at age 40, and begin regular distributions from your IRA at that time (the formula has to work out to be substantially equal payments over your expected life), there are no extra taxes.

    There are penalty-free early withdrawals available for other purposes as well, such as first home purchase, emergency fund uses such as covering your health insurance during unemployment, some education expenses, and others.

    Assuming Haruki is not making too many sacrifices in saving that much, I think he/she should keep it up. There will likely come a time in the future when demands of family, health problems, unemployment or other bumps in the road will force a cutback in retirement contributions; until then, “Make hay while the sun shines.”

  71. Ryan Vaught says:

    This is exactly why 401K are not meant for those who wish to retire early. Pay takes on some of it now, while you taxable income is lower and save it in other vehicles that allow sooner access. I don’t care how much tax savings I am going to have, if I have to wait 40 years to touch it. If retiring early is a goal, perhaps a 401K isn’t your best vehicle, at least not solely.

    I would guess that if you can save 30% of your income, and keep it up, chances are you will hit your number before you are able to draw from it.

  72. Rosa says:

    @Rob #43 – what are you talking about? Being green *is* thinking about my kid – but it has nothing to do with this discussion.

    And why assume Haruki doesn’t have other short-term savings? I know we do, and always have – there’s no point putting it away “for retirement” if you don’t have anything for a rainy day – or a fun day – now.

  73. Susan says:

    As long as Haruki has adequate emergency savings, adequate cash flow and an adequate balance between saving for the future and living in the present, then my advice would be, if it ain’t broke, don’t fix it.

  74. Aaron says:

    My wife and I are 28 and 24 respectively. We happily save close over a 3rd of our income toward retirent and in total save almost 40% of our income toward long term goals.
    We do it so that we have choices. Choices now and later in life. Retire early? Maybe. Work less once we have kids? Maybe.
    Who knows what we’ll do in the future, but knowing we have choices provides us a comfort that an extra $500/mo spending money could never do.

  75. There is not enough information to form any sound advice. Does he have consumer debt? What is his cost of living? How long does he want to work? Married? Kids? All kinds of other things to consider too.

  76. SP says:

    I agree with your point in general — you need to balance future/retirement savings with short/mid term savings and current pleasure. Really I think that is the core of the personal finance struggle.

    I disagree with your advice, using only the information given. I have no idea what “my number” is. At 26, I think that those calculators make SO MANY assumptions that they are almost arbitrary.

    Like many here, I would like to save as much as I (comfortably) can, and as I get closer to retirement (even just in my late 30s!) I can make major changes if needed. By then I’ll know where I might retire, if I have kids, when I might retire, etc. More money saved = more options.

    I’m not surprised so many disagree with you. Were you surprised? Did you have more information?

  77. Eli says:

    Trent (or others)

    Perhaps you can clarify a question I continue to have. Why is it ok to use 7% for an annual rate of return when calculating “your number” when every finance book you read says your investments should become less risky the closer you get to retirement. It seems your percentage should taper towards your later years to reflect your smart investing. I don’t see a calculator….Why?

  78. kk says:

    As I commented after the post from the guest guy a number of days ago, it is important for Haruki to come up with a plan for his finances. What are his financial goals over the years.

    If he has no specific goals now and he is not overly depriving himself (in his own eyes) now, there is no reason why this level of savings shouldn’t continue.

    So many commentors mention “retirement”, but what exactly is “retirement”?? Each person needs to consider their own financial goals (or have some) both long and short term, and then generate a plan, either on their own or with the help of a professional, for reaching those goals. So, I agree with a number of commentors above that we just don’t know enough about Haruki to really speculate.

    Trent, thanks for another thought provoking post.

  79. deRuyiter says:

    With compounding over a long period maximizing the amount of money saved EARLY IN ONE’S CAREER, this seems like a great plan for now. Of course it can be changed any time the person decides to spend money buying a house, increasing the emergency fund, marries, has children. The idea of spending more for something like a house, and saving less each year for retirement would seem like a good idea later if our financially bankrupt government confiscates our retirement accounts and rolls them into the Social Security system to keep it afloat and then assigns each person whose money was taken an income stream from the newly funded ‘government retirement fund” when they retire. This is a possibility that younger Americans have to keep in mind. A government which can take over the auto industry, take over the banking industry, take over health care, fire legitimate CEOs, hire “Czars” who negate the powers of Congress, govern by executive fiat, will not bat an eye at taking your retirement account for the good of the non producers. And considering the prices the government is paying for ham and cheese for food banks, MORE THAN DOUBLE THE AMOUNT WHICH THEY WOULD PAY IF THE GOVERNMENT WENT TO COSCO FOR THESE SUPPLIES, the idea that any of these government run industries is going to be run better is fascinating.

  80. azphx1972 says:

    One point that was left out, but Haruki might want to take into consideration, is that qualified retirement accounts (401k, IRAs, etc.) are protected assets and cannot be touched by creditors as a result of bankruptcy or lawsuit. While it is not a substitute for having adequate liability insurance, people (especially young ones) often neglect to purchase sufficient insurance coverage.

    Also, some 401k plans now offer ROTH contributions. So that makes the tax issue moot as you would be paying taxes going in. Subsequent growth is tax free, thus making the returns superior compared to identical investments outside of retirement plans, which are subject to taxes.

  81. plonkee says:

    I was thinking that the problem is kind of that he might have enough money to retire early, but it’ll be locked away in retirement accounts. If he keeps this up, at some point he’ll want to consider investments that he can access earlier than his late 50s.

  82. Matt says:

    I’m trying to look at this logically, and this is what I gather:
    $48K/year is about $34,000 when you remove taxes and health insurance.
    Remove the additional $11,900 he’s saving for retirement, and he’s left with $22,100.
    Let’s say rent is a measely $500/month, or $6K/year, then he’s down to $16,100.
    If he only spends $100/month in food, he’s now left with $14,900.
    Electricity, phone, gas, cable, water, etc let’s say is only $200/month. Down to $12,500.
    So unless he rides his bike to work everyday because he doesn’t have a car (no gas, insurance, car payments), never does anything that requires money, eats for $3/day, has a pay-by-minute phone for emergencies and bundles up in the winter months, I think something is wrong here. Unless he lives with his parents and pays nothing…

    Not to knock his saving ability, but something’s just not sitting right.

  83. Matt (57)–Well put! When discussing finance we tend to get caught up in numbers, often forgetting that the entire purpose of an improved financial situation is an improvement in the QUALITY OF LIFE (QOL). Someone once said, “who ever dies with the most money–is still dead”. That was of course spoken with an obvious note of irony, but it’s well worth pondering.

    When we get on that numbers chase it can become something of a treadmill, where the utlimate destination is never reached because the numeric goal is moved ever higher, as though the key to life is found in the numbers.

    Personally, I’ve known a lot of people with money, and from what I’ve seen there’s a lot of truth to the correlation between money and unhappiness. Money can make us happier if we see it as a tool, but those who think it’s the be all of life are never happy, because the number that they have is never big enough.

    On that note, given Haruki’s age, his heavy saving for retirement does strike me as a bit obsessive, even though we can all come up with justifications for it in one direction or another.

    I

  84. Sunshine says:

    I like the idea of maintaining a balance. I am faaaar behind what I “need” to be at with respect to my savings – I’ve got some work to do!

    I love this quote: “You know you are doing well when you worry more about your taxes than your income.”

    Thanks!

  85. Jessica says:

    Who is to say Haruki is going to continue his retirements savings at this rate? Isn’t he better off to continue this way as long as he is able? Say he gets married at age 35, and decreases his contributions, using that money to pay for a wedding and honeymoon. Then a few years later purchases a home. Then a few more years later, babies are born. Then babies need braces. Then babies are in college. He will have less on his mind to worry about because he had an advanced start on his retirement savings.

  86. Johanna says:

    @Matt: I don’t understand your point. By your numbers (which I don’t think are quite right, since $6900 of the retirement contributions are for a 401(k), which reduces his tax obligations, but never mind), Haruki has covered all his necessities and still has $12,500 left over. That’s more than $1000 a month, or more than 25% of his income. A thousand dollars a month in discretionary spending is more than enough for a young single person to afford what would be a good quality of life by any standards. He could take a nice vacation, go out for dinner or drinks three times a week, replenish his wardrobe every year, and still have money left over.

  87. Lisa Ramaci says:

    Well, Haraki might be saving this kind of cash now, but I am betting he’s still single and childless. If he ever does get married and procreate, his new expenses will make this plan evaporate like mist in the desert!

  88. Matt says:

    @Johann,

    You must have misread. $1000 month left over is assuming he’s eating Ramen noodles every day, bikes to work, doesn’t have a car, etc. That’s not quite discretionary spending, I just gave the top cost drivers and was hoping to let the reader continue the thought process to realize where I was heading. Apparently I didn’t go far enough….

  89. Sumeet says:

    I love this blog, but I think your advice has the potential to be misused. If someone told me they were stuffing away 20-30% for retirement, the LAST thing I would do is ask them to cut back.

    The fact of the matter is that *MOST* people would cut back and spend the rest of the money on an overpriced depreciating asset that will end up collecting dust after a few months, rather than starting up a business or doing something useful.

    If someone thinks they are disciplined enough to reallocate those funds towards other INVESTMENTS, then they should consider scaling back. Very few people have the necessary discipline to avoid wasting an extra $1000-$2000 a month.

    I’m not telling anyone anything they don’t know, but reallocating funds from retirement to housing is IMO a horrible idea, specially in an era of increasing unemployment. If someone loses their job, the $2k/month going to retirement is put on hold and is no longer a liability. If that person had instead put that money into a mortgage, then the mortgage liability will erode savings for weeks or months until the person finds another similar-paying job.

    I have been investing in my retirement accounts at the same rate, and it is great to know that I will have the opportunity to scale back my contributions in my 30s/40s because I should have a large pool of funds by then. And I am very excited about the idea of max-funding retirement accounts and even taxable investment accounts at this time because it seems the long-term potential upside significantly outweighs the downside risk.

  90. Kat says:

    @Matt,

    Firstly your taxes are way off, $14k? He makes $39100 taxable income, so federal taxes would be about $4k. State, local and SS taxes and health insurance (why are you assuming his employer doesn’t provide that?) is doubtful to be the additional $10000 you are assuming. But let’s assume instead he pays about $10k in taxes. That’s $29k left. Minus the $5k into the Roth, that’s $24k/year in post tax money. $2k a month is more than enough for (we assume he is) a young single to live comfortably, and it is almost elitist to say otherwise (families with children live off of that much). If Haruki does not have any consumer debt (credit cards or high student loans) then he could have a hefty car payment and still live well. I don’t see how it doesn’t compute that someone could live off of $2k a month comfortably.

  91. Orthros says:

    I think Haruki is (probably) well ahead of the game.

    We don’t know his debt structure, but given his savings rate I’m going to make a huge leap of faith and presume it’s zero or close to it.

    He is single. When I was 26, I could easily live off $1,500-$2,000 (in today’s dollars)… and mostly did. At one point, I was saving 2/3 of my take-home pay!

    Was it excessive? Well…

    Now I have a SAHM and 5 kids to financially support. The money savings rate has plummeted to the 20s… and I look back in utter thanks that I saved as much as I did when I did. It will allow me the opportunity to address a much broader set of options with respect to future dollars (529? Vacation monies? Assistance to ailing parents? A bigger house?) than if I knew I had to plow $X a month away for retirement.

    The future is uncertain. Having too much saved is a problem that the vast majority of people would love to have.

  92. Jessica says:

    Kat & Johanna are 100% correct on this one. My DH and I are almost to the penny in the same boat as Haruki. We have a car, a mortgage, and eat locally and ethically whenever possible (that is to say, our meat and dairy is not cheap, and we never eat Ramen). If two people can comfortably live on that amount, certainly a young single person can in 99% of the cities in America.

  93. Liko says:

    I’m an year older than Haruki. I make just a little more than him, $72k. Between my employer, maxing out my 401k, and roth IRA; 36% of my income goes towards retirement. In addition to my 36%, I also save $1,500 in cash per month! I’m single too, I don’t own a home, I rent an apt with a roommate, so my living expenses are pretty low. However, what sucks is that I don’t have any tax deductions either! So maxing out my 401k seems like a logical thing to do. Why should I give an additional $4620 in taxes (28% tax rate of $16500) to Obama?!?

    Also, I want to cut my work week to 3 days a week 10 yrs from now. So saving 36% per year is minimal in order to do that. I won’t be able to save for retirement anymore on 3 days a week.

  94. FrugalCubicle says:

    i do something similiar and it is not that hard with a dual income family.

    I save 25% not including my compant match(7%)and my wife saves nearly 20%. We have a very active lifestyle and live on a lake(we got a sweet deal). We even save for short term. Our biggest problem is that we dine-out a lot which would amount to about another 5% of possible savings.

    BUT: we do sacrifice other things like, purchasing new clothes all the time, new gadgets, big gifts, etc. We plan our purchases to balance our desires with what I feel the product is worth.

  95. Liko (65)–In fairness to those of us who think Haruki’s retirement savings are excessive, consider that you have a much higher income (72 vs 46k per year) and therefore a lot more margin for living, you’ve provided a lot more information about how you live, and you’ve indicated that you have a very specific goal and timeframe for it that you’re saving for, well in advance of retirement.

    When presented with all of that information, I suspect most of us would give a different response than what we offered in Haruki’s situation.

    It’s never just about money. You have to look at background, temperment, preferences, goals, options, circumstances, etc. Trent probably didn’t provide these because he didn’t have them.

  96. Golfing Girl says:

    I don’t often disagree with you Trent, but Haruki is doing a fabulous job of giving himself flexibility in the future. There simply is no catching up since time waits for no one. He always has the ability to slow down or stop contributing later.
    That being said, I only think he should temporarily cut back if he doesn’t have a fully funded emergency fund or if he’s saving for a downpayment on a house.

  97. Tony says:

    “Trent, it’s articles such as this one that further solidifies your dominance over the personal finance blog space. I am also a relatively large saver and was recently considering maxing out my Roth IRA and 401K thinking that would guarantee a worry-free, early retirement. Having just read this article however, I’m convinced that I need to spend some additional time reevaluating my savings and retirement goals to achieve a proper balance between my pre and post retirement life.

    Thanks so much for the insightful, thought-provoking advice.”

    This is sad. Somebody was about to do what was probably a good thing in maxing out retirement savings and will now use this ill-informed advice as an excuse not to.

    As others have said maxing out retirement savings when you have the funds available offers flexibility in the future. Trent also completely ignores compound interest in his advice. Having larger contributions now gets savings growing faster in the future. If he hits his number early he can simply stop contributing and invest elsewhere if he wishes.

    These kind of discussions are best left to financial planners. And to give this type of advice most states require you to be a registered investment advisor.

  98. ML says:

    I disagree with Trent on this one. As others have said, once he has more responsiblities such as a family, he will not be able to save as aggressively as he is now. Also, a point no one else has made, his salary will go up over time, which will free up money to do other things with (I doubt he is or will be living like a miser). As someone that is around Haruki’s age, I am maxing out my Roth and contributing 13% to my 401k (no company match). I think it is safe to assume that if he is smart enough at a young age to save for retirement, he would have the sense to save money otherwise. I think Trent should have focused on if he has any debt (i.e: student loan or credit card debt), he could maybe reduce this 401K contribute just a bit to pay off his debt. The only helpful part of this article, is that he should set additional savings goals (i.e: a fund to go back to school, a fun/splurge account, house down payment).

  99. Gary S says:

    @Liko #65
    Haruki’s tax rate needs to be looked at. When I was in his position a few years ago, I set up my 401k contributions so that my taxable income would be as close as possible to the 15%/25% cutoff. It was worth it to avoid the 25% bracket and I was more than happy to pay 15% and never worry about having to possibly pay a higher rate down the road.

  100. Dan says:

    @Kat

    You are right on the money. I bet the health care cost is less than what you estimated even. It’s definately not a stretch for a single guy in his twenties to live comfortably on $2k/month. Remind me not to let Matt do my taxes or sell me health insurance.

    You’ve got the right idea Haruki. Keep it up.

  101. Kat says:

    Trent, you did have good advice about finding “your number.” But I have a question (could be mailbag):

    How do I find “my number” that I need saved to retire? I have 40 years to go to real retirement age (I’d like an earlier retirement), but I am confused by whether the online calculators do/don’t include inflation, which is a big consideration when retirement is so far away. When they say I need $X in savings, is that assuming that inflation will keep going up? When they say I need 70% of my pre-retirement income annually, are they figuring my income now, or my income in 40 years, assuming I was getting raises that whole time?

  102. Matt says:

    I seriously feel sorry for those posting that I don’t know what I’m talking about. I put a rough guesstimate down on why I was questioning this Haruki claim and, like a typical liberal would, you run around with one phrase (in this case, taxes) and go to town trying to call me ignorant. Sad days in your lives, I must say.
    My favorite is trying to “fix” my tax number by saying “it’s about”… my God, you can get the tax bracket breakdown by typing “tax brackets” in google. Give it a shot.
    “Remind me not to let Matt do my taxes…” lol
    “…I bet the health care cost is less than what you estimated, even…”

    You people seriously can’t be that stupid, can you?…

    I’m guessing that you can. Sad. Only liberals would make odd claims like you people are doing and using your “feel good” analogies to make your subjectiveness feel right.

    My favorite: “…it is almost elitist to say otherwise…” Spoken like a true liberal.

    God you people are dumb.

  103. Des says:

    Where is Trent’s impatience for negative comments that add no value when you need it? ;)

  104. Kat says:

    Matt,

    Please note Trent’s message under the reply box: “If you’re going to criticize the statements of others, supply supporting information that backs up your statement” I stand by my posts, I disagreed with you and backed up my statements (including that it is elitist to say that someone cannot live well off of $2k/month, many do quite well with that much money!). You are being completely negative and had no real evidence of anything you said.

    If you got your $14k in taxes by googling “tax brakets” then you are either ignorant or very bad at math (or, “stupid” and “dumb” to use your own words). You cannot get an exact tax number from Haruki’s information because we do not know his exact situation: what state or local taxes he pays, what deductions or credits he may have, and what percent of his health insurance his employer pays. Therefore, I stand by my estimate that his federal taxes are about $4k and the (quite high) estimate of everything else would be an additional $6k. Haruki is obviously employed somewhere with good benefits (he gets a 401(k) match, many people don’t), it seems strange to make an assumption that he has to pay a large percent of his health insurance (and if he did, his federal taxes would be even lower), which is why I think that the $10k total is a high number.

    If you had any real proof that your numbers weren’t completely made up then I would like to see it.

  105. D.C. says:

    Here’s one for the “we need more specific information” folks. I’m 27, single and have no children. I have no debt and an emergency fund of $15,000. My base salary is $60,000, but I make about $65,000 after freelance work, etc. I put 25% of my salary into my 401(k), and my employer throws in another 5% (in the interest of specifics, the match is 1 to 1 for the first 5%, so it’s not like I have to contribute as much as I do to get the full match). I also max out a Roth IRA each year. Rent is $800 a month; bills are about $230. My share of my health insurance is about $70 pre-tax.

    With all of that, I often have more money at the end of the month than I know what to do with. I eat wonderful meals, I travel to see friends and family, and I take in plenty of live music and theater. And, no, I don’t want to buy a house. (I should point out that I don’t have a car, but I live in a metropolitan area with good public transit.)

    I hope to retire early, and to help cover the gap between cutting back on work and tapping retirement accounts, I started a taxable investment account last fall, which is about $2,800.

    And I’m also thinking about going back to school, so it’s nice to run the numbers and see that the aggressive early saving will pay off even if I don’t contribute for several years.

    But with those numbers, and to return to the post title: Do Simple Dollar readers think I’m over-saving for retirement?

  106. lurker carl says:

    “How do I find “my number” that I need saved to retire? I have 40 years to go to real retirement age (I’d like an earlier retirement), but I am confused by whether the online calculators do/don’t include inflation, which is a big consideration when retirement is so far away. When they say I need $X in savings, is that assuming that inflation will keep going up? When they say I need 70% of my pre-retirement income annually, are they figuring my income now, or my income in 40 years, assuming I was getting raises that whole time?”

    Don’t rely on any one of these calculators to give you exactly what you want or need to know. A better option is to sit down with your current 1040, a calculator, a sharp pencil and plenty of paper to work up the numbers yourself. It’s nothing more than an algebra equation.

    Keep in mind that your “number” will constantly change as you progress through those 40 years. Changes in finances, family, health and some hard knocks will play havoc with your calculations.

    Living off of 70% of your pre-retirement income isn’t much different than what Haruki is practicing right now with his retirement savings. Assuming he keeps this same savings plan for his entire working life, his standard of living would not change once he retires since he is used to banking that missing 30%.

  107. Dan says:

    @Kat

    If you want a good site to financial calculators, check out http://www.finance.cch.com/sohoApplets/index.html. I’ve wasted a lot of time on this site. It’s wonderful. It has plethora of tools, including calculators that account for inflation. There’s not too many useful financial calculators that this page lacks.

    As far as the idea of a “number” goes, I agree with the lurker. 40 years is a long time and undoubtedly many things will change between now and then. No one knows what inflation will do over that period of time. Also, new innovations will change what we consider to be basic expenses. Today, many people (though not all) consider cell phones and home internet access basic expenses. Twenty years ago, that wouldn’t have been on anyone’s radar.

    Also, it’s hard to project what you will value in forty years. My mother in law thought there was no way she’d live even 5 years in the first house she bought in her late twenties, but today, on the brink of retirement, she won’t even entertain the idea of ever leaving that same house. At 27 myself, I’m in a similar spot as you. I can guess how much money I’ll need decades from now, but I really have no way of knowing. Five years ago, my image of retirement involved living in a quiet town on the coast in Mexico and traveling the world, tethered by nothing. But these days I see myself working part time, pursuing hobbies and growing old with my wife during my golden years. Who knows, maybe I’ll still be living in the same house I am now, golfing four days a week and looking for ways to spoil my grandkids. All these scenarios are going to cost different percentages of my pre-retirement income (which is another thing I can’t predict).

    As your values change, you can always change your savings habits. Most financial calculators aren’t going to account for that. They will spit out a number based on your salary increasing X%/yr and the % of your income being saved remaining steady. Life doesn’t work like that though. Some raises will be bigger than others. Some years won’t have raises. It’s impossible to predict a layoff or a career change 15 years down the road. Some years you can save 31% of your income, some years you might be lucky to save 5%. Or perhaps you choose to put less into retirement because you see kids on the way, or a business venture on the horizon. A lot can happen in a lifetime. Of course, I haven’t even entertained the idea of bad things happening yet. I could develop Alzheimer’s and need to pay someone to look after me. Perhaps, I only get 4% return on my investments instead of 7%. Again, there’s really no way of knowing.

    However, there are a few things we do know. First, compound interest is powerful. Second, perhaps the single most important factor for financial success is the ability to live comfortably within one’s means. And lastly, rainy days are coming for all of us. Like Forrest Gump found out in Vietnam, there are lots of different kinds of rain. When these days will occur and how they will be is anyone’s guess, but we know they’re coming. It’s for these three reasons, that I don’t think Haruki’s strategy is excessive. In fact, I believe it’s prudent. It’s much better prepare for the rainiest of days and have “too large” an umbrella, than to undershoot on a “number” and get soaked.

  108. Dan says:

    If you want a good site to financial calculators, google “CCH financial calculator” and click on the first result. I’ve wasted a lot of time on this site. It’s wonderful. It has plethora of tools, including calculators that account for inflation. There’s not too many useful financial calculators that this page lacks.

    As far as the idea of a “number” goes, I agree with the lurker. 40 years is a long time and undoubtedly many things will change between now and then. No one knows what inflation will do over that period of time. Also, new innovations will change what we consider to be basic expenses. Today, many people (though not all) consider cell phones and home internet access basic expenses. Twenty years ago, that wouldn’t have been on anyone’s radar.

    Also, it’s hard to project what you will value in forty years. My mother in law thought there was no way she’d live even 5 years in the first house she bought in her late twenties, but today, on the brink of retirement, she won’t even entertain the idea of ever leaving that same house. At 27 myself, I’m in a similar spot as you. I can guess how much money I’ll need decades from now, but I really have no way of knowing. Five years ago, my image of retirement involved living in a quiet town on the coast in Mexico and traveling the world, tethered by nothing. But these days I see myself working part time, pursuing hobbies and growing old with my wife during my golden years. Who knows, maybe I’ll still be living in the same house I am now, golfing four days a week and looking for ways to spoil my grandkids. All these scenarios are going to cost different percentages of my pre-retirement income (which is another thing I can’t predict).

    As your values change, you can always change your savings habits. Most financial calculators aren’t going to account for that. They will spit out a number based on your salary increasing X%/yr and the % of your income being saved remaining steady. Life doesn’t work like that though. Some raises will be bigger than others. Some years won’t have raises. It’s impossible to predict a layoff or a career change 15 years down the road. Some years you can save 31% of your income, some years you might be lucky to save 5%. Or perhaps you choose to put less into retirement because you see kids on the way, or a business venture on the horizon. A lot can happen in a lifetime. Of course, I haven’t even entertained the idea of bad things happening yet. I could develop Alzheimer’s and need to pay someone to look after me. Perhaps, I only get 4% return on my investments instead of 7%. Again, there’s really no way of knowing.

    However, there are a few things we do know. First, compound interest is powerful. Second, perhaps the single most important factor for financial success is the ability to live comfortably within one’s means. And lastly, rainy days are coming for all of us. Like Forrest Gump found out in Vietnam, there are lots of different kinds of rain. When these days will occur and how they will be is anyone’s guess, but we know they’re coming. It’s for these three reasons, that I don’t think Haruki’s strategy is excessive. In fact, I believe it’s prudent. It’s much better prepare for the rainiest of days and have “too large” an umbrella, than to undershoot on a “number” and get soaked.

  109. Ken says:

    I don’t even know where to begin. Your advice is wrong.

  110. Ken (78)–But isn’t it cool that even if some of us are wrong in the eyes of others that we can have an open exchange of ideas that stimulates us to think about where we stand on the topic?

    Personally, I enjoy the give and take of these discussions.

  111. Jason says:

    Trent, I too disagree with your advice based on the facts given. What other facts about the person can you share with us? Maybe I am missing something?

  112. Tony says:

    Kevin (79)

    Different ideas is one thing. But giving faulty advice is another thing altogether. Trent has crossed the line of sharing his experiences with others to giving advice to individuals that only a registered investment advisor or other financial professional should give. And we have seen in this comment section somebody is paying attention and acting on this faulty advice.

    There’s just no way around it. Anybody who is living comfortably while contributing the max to retirement accounts should not be encouraged to do otherwise. No other investment vehicles offer the advantages of retirement accounts. And if a person gets away from contributing the max and gets used to the budget without contributing the max, it will be very difficult to go back. Human behavior is another factor that Trent very often ignores. Even if it were ok to ignore the tax advantages of retirement accounts, compound interest, etc. very rarely when somebody scales back retirement funding do they continue to save the difference in other responsible manners such as investing in “dreams” as Trent put it. Unfortunately most of the population is just not disciplined enough. The money gets spent on eating out, impulse items, etc. etc. Funding retirement accounts keeps the money out of site, out of mind.

    Also notice that Trent says that the money saved by scaling down will be $2300 pre-tax. This is correct, but deceptive. He should quote what the figure will be after tax. Because you will be taxed on that money now or later. Also it is just flat out wrong to infer you will pay more taxes at retirement by saving more money in retirement accounts. You aren’t going to be taxed anymore by saving the money in a retirement account or taking it now. The only difference is when you are taxed. It should also be mentioned that often in retirement you are in a lower tax bracket. This isn’t the case for everyone, but typically income is reduced at retirement which often means lower tax bracket. Also, if you draw money from the taxable 401(K) and the tax free Roth you can really limit how much of your income you will be taxed on. e.g. You draw 30K from 401K and 30K from Roth and you are only taxed as if you earned 30K in that year.

    Last, but not least contributions to a Roth (at least the last time I checked) can be withdrawn tax free before you reach retirement age. So if anybody saving extra wanted to take some of their retirement money and invest in a dream or opportunity, they could pull the money from the Roth which has been growing tax free.

    I’m not trying to be negative here. But when I see poor advice being given, and people acting on it, as a former financial planner I really have to speak my mind and hope people are listening. But I should also add, I have not been a financial planner for 5 years, so what I said shouldn’t be taken as gospel either. For important decisions on retirement accounts, one should seek the advice of a registered investment advisor.

  113. Trent, I read your advice to Haruki and almost fainted. I tried to work on something else and just could not let this go. In reviewing the comments I am glad that I am not alone in my concern over the advice given in your post. I am glad that at least 2 people made comment of “the substantial periodic payments” exception to 401K withdrawals ahead of the minimum distribution age of 59 and a half. Also we have all seen the illustration of the person who saves 2K a year from 25 to 35 then stops saving besting the efforts of the person who begins at age 40 and saves until age 65. Haruki should start early and invest as much as he can. Life circumstances may dictate something else later, but the foundation for a well-funded retirement will be laid. The tax argument is really not well founded. Haruki will pay ordinary income taxes based on the money withdrawn not on the lump sum amount in the retirement account. The only way he will pay more in taxes is if he decides to give himself a substantial raise in retirement. Otherwise his tax rate will not change. Right now Haruki’s top tax bracket is 25%. He is used to living on 36K per year. He can give himself a 100% raise in retirement, provided he has adequate resources and still his top rate would be 25%. If Haruki is enjoying life and what he is doing, I say keep on keeping on.

  114. Tony (81)–You make some valid points that I don’t completely disagree wih, but you’re also expressing 100% confidence in the idea of maximum retirement funding for all, but may I offer that nothing in this life is completely certain, not even maximizing retirement contributions?

    Consider that our country is now waist deep in deficits, accompanied by rising demand for funds for the Baby Boomers who are now entering social security and soon medicare. There are a few trillion dollars sitting in tax sheltered retirement accounts–are we 100% certain those won’t be subject to a “one time (until next year) tax” to cover a funding problem? I’m not as certain as you that those accounts will be sacrosanct in a money grab.

    Also, Trents point of possibly being in a higher tax bracket in retirement is hardly off base. In the years I’ve worked in public accounting, most of the really high income earners were over 65. I know this doesn’t fit the stereotype of the elderly, but years of experience in running businesses, the wisdom of operating with a strong balance sheet, and the absence of dependents often sees people making more money than they ever have late in life.

    I know the financial media reduce retirement planning to a neat math equation, but real life doesn’t always cooperate with theories and equations.

    I hope this makes some sense as a counter position.

  115. Tony says:

    Kevin (83) – I’m certainly not advocating maximizing retirement savings for all. I clearly stated that anybody living comfortably while contributing the max to their retirement accounts should not be encouraged to do otherwise. For those who are struggling with debt or other hardships, a change might make sense, but this is not mentioned in the article.

    While I can agree that nothing in life is guaranteed, your money is safer from taxes in private retirement accounts than it is anywhere else. The odds of what you suggest could happen actually happening I would estimate at slim to none. Even if a one time tax on retirement accounts did happen, would that justify giving up the benefits of compound interest and tax free growth?

    Sure it’s possible for people to make more in their later years. But I don’t think that’s the case for the average American. And the fact still remains, you have control over how much you are taxed in retirement. Withdraw large amounts, get taxed more. Withdraw small amounts and supplement with Roth withdrawals and get taxed less. On the flip side, if you contribute less money to your 401K in the present time, you will be taxed more today. It’s a zero sum game.

    As to your final point, nobody’s unique circumstances can be answered with a simple equation. Everybody’s goals and plans are different. Maybe Haruki told Trent something else in their communication that warranted the advice to ease up on retirement savings. But that information should have been presented.

  116. Kat says:

    Thanks for your thoughtful answers, lurker carl and Dan!

  117. Valueseeker says:

    I disagree a little bit. While it is important to evaluate all savings goals holistically, I think that there is nothing more important than retirement (save emergency fund) at 27. By contributing such an enormous percentage now, he can have the flexibility to reduce his contributions as a percentage of income as he gets older and needs to save/spend for other things, especially children. In the meantime, he has a nice sum getting compound interest.

    It is important to put the framework in place when you are young to have maximum financial flexibility later in life. Unlike many thirty-somethings, Haruki will be able to change his contributions as his situation changes without affecting retirement prospects.

    It also depends entirely on goals. I for one, would love to retire to a vineyard… that’s gonna take some serious coin.

  118. karl says:

    31% is not at all excessive.

    I am 27 yrs old. Me and my wife together make $150k and we manage to save 41% of that per yr, without having to sacrifice any major change in our quality of life.
    Our most biggest expense is rent where we spend around 18k for a nice townhouse. We are planning to buy a house in the near future whose mortgage payments wouldnt exceed our current rent. Then that would mean that we could end up saving another 12%.

    Both of us only recently started working so our net worth is only around 150k.

  119. Wendy says:

    Young folks – don’t obsess about “the number”. This becomes important a few years before you retire and helps you decide when you can pull the plug. There are so many variables that you simply cannot plan this 10 – 20 – 30 years in advance. In the meantime, live a good life, learn to manage your finances well, keep debt free and, by the time you are ready to retire, ‘the number’ will be ready for you.

  120. Dan says:

    You’re welcome Kat. Thank you for the spirited defense of our math-loving, liberal ideology. Truly a lift on what had been a very sad day in my life. ;)

  121. AD says:

    Wow… there is an excessive amount of assumptions here that, I don’t even know where to begin. Let me just begin by saying that the title is incorrect if you are going to refer completely to the 401k. You can over-contribute to a 401k, yes, but not for retirement. Retirement also is a very fluid word. But in essence, it just means financially independant. So how can you overcontribute to your independant future?

  122. FINman says:

    “First, saving 31% of your income for retirement will give you an abundance in retirement savings.”

    Now, THIS… this is a real problem. My goodness, where is the world headed to when you save too much?

    “When you finally retire, even if you step away at the minimum possible age that you can access your retirement savings without penalty, you’ll have more than enough for retirement.”

    Again, MAJOR problem in today’s society.

    “For some, this seems like a problem they wish they would have, but having excessive income in retirement means excessive taxes in retirement.”

    Now if that is not an assumption, I don’t know what is.

    “In short, if you have a mountain of cash in your 401(k), you’ll be paying more taxes upon withdrawal than you ever would if you were more careful about your life’s financial plan.”

    So let’s deal with this one: First, because there is no FIN# talk in this article, we don’t even have an idea of what this person could be withdrawing monthly/yearly. So if the withdrawals are large, yes, much taxes. But if the withdrawals are within a target amount to lessen taxes, then this statement above is incorrect. What about the excessive income that you may leave in the investment that will grow the account even more? Well, if you think that is a problem (as already lead by the initial statement in this article that it is possible to over-save, then beware: re-investing profits will compound this), then you can go ahead and withdraw the excessive amounts and donate it. You won’t get taxed.

    “Second, when you hit your “number,””

    Great advice from someone who generalizes the most important factor to this whole retirement planning.

    “you’ll likely be many years short of retirement.”

    Wow. And knowing this without knowing the FIN#, is real magic.

    “If you’re saving this much for the dream of retiring early, you might not wind up happy.”

    Didn’t realize that happiness was dependant on conditions. I think the writer is just not happy period.

    “When you do hit your “number” – the amount you need to have to live sustainably in retirement”

    Here is the magic at work again.

    “- and you’re much younger than your retirement age, you’re stuck. You’ll have all the resources you need, but they’re locked up. Of course, you can use your Roth IRA contributions for a few years, since you can withdraw your contributions without penalty, but it won’t cover you for more than two or three years.”

    Wow… flabbergasted. 2-3 years…. I seriously need to learn how he figures this stuff out. I wouldn’t have to use a calculator anymore.

    “The big reason, though, is that excessive retirement savings takes away from your other life goals. ”

    What if your life goal is to save excessively for your retirement? Another assumption here which deters people to his type of thinking. Without knowing what the life goals are, how can one make that statement?

    “Dropping that 401(k) contribution back to 10% gives you another 5% of your salary – $2,300 pre-tax – to save for other life goals without diminishing the quality of your retirement. Instead, start socking that money away for other goals: a big fat emergency fund, a home down payment, a small business you dream of starting, a vacation, or whatever it is that really makes your life worth living.”

    …Because once you retire, life is not worth living.

    “Haruki is doing tremendously well – this is not a criticism of his saving habits, which are stellar. If you have the capacity to save more than you actually need for retirement, that’s awesome. It’s not a bad thing.”

    I think I was harsh on this writer at the start. He may have needed to write this article first to figure out what he was saying because… I sure don’t! He now says it’s not bad. Yet, quote “For some, this seems like a problem they wish they would have, but having excessive income in retirement means excessive taxes in retirement.”

    “Instead, take some time to step back from your retirement savings Think through your life goals and make some serious, well-informed decisions. Here’s how.”

    Finally… a method to his madness. Hopefully, he can prove me wrong and make my words look foolish.

    “First, calculate your “number.” In other words, figure up how much you’ll need to live on sustainably in retirement. There are tons of different calculators and calculations out there – your best bet is to use several and trust the one that estimates the largest total amount – then add 10%. CNN’s retirement calculator and MSN’s retirement calculator are both useful places to start, but try running your numbers through every one you come across.”

    Woe, woe, woe, woe, woe, woe, woe, woe, woe….. WOE! Did you just say “ADD”? As in, OVER estimate, or OVER contribute for what the formula gives you? (Mouth open in TOTAL AWE)

    “Next, calculate how much you need to put away each year to reach that goal at your target age. Assume a 7% annual return on your investments, which is what Warren Buffett suggests is the long-term trend for stocks. One way to get a bead on this is to tinker with the numbers on retirement calculators – set the annual rate of return to 7% and play around with the annual contributions you would need to make to get to your target number. This will give you a good savings number to shoot for each year.”

    Finally been waiting for something like this. But instead of playing with single digit returns, I was thinking more in the upper double digits… you know 60%, 70%. Then I can shoot for that! Because the funds you pick don’t matter. What matters is choosing your interest rate (first is your “number” +10% as already stated by the writer). I’m so glad I can assume numbers and don’t actually have to look at history trends.

    “Once you’re sure that you’re saving enough for retirement at the age you want to retire, target the rest of your savings towards other goals. Save for a home, for a car, or for a small business. Give money to a charity. Our goal is a home in the country with a barn in the back which we want to make as green as possible”

    This is not a bad idea. I mean, you do want to live while you save. But you should be careful not to let the “now” compromise your future. It’s easy to justify any goal we have and disregarding the future, thinking we won’t pay for that decision eventually.

    ” – we want to shoot for near self-sustainability.”

    Um, how about full independence?

    “We also want to do some serious volunteer work in retirement.”

    Sir, Yes sir!

    “What if extra retirement savings makes you feel more secure? If that’s the case – and you don’t have any other goals you’re strongly pushing towards – then feel free to contribute more towards your retirement savings. ”

    Contradicting advice maybe? Is this about what we feel is right? Or know what is right? Because if we did what we felt is right all the time, wow… we be messed up.

    “In the end, it’s worth your while to make sure that, if you’re focused on saving, that your savings are helping you truly fulfill your dreams. Good luck!”

    And finally… a point I fully agree on!!!

    Conclusion? Don’t take advice unless you see the proof backing it up. Internet is full of opinions stating themselves as fact and experts. Heck, don’t even believe me! Go to a real financial guru and ask to see their personal finances, because any good one will be proud to show it to you. Why is this important? Because you should take advice from someone who practices what they preach. And with that simple advice, make sure that whoemever you pick is leading financially the way you want to. So before taking any advice, get a financial plan done (don’t even dare paying for one)…. oh, and you can’t oversave. But you can overwithdraw…. :)

  123. Jim says:

    Lets highlight a couple things Trent said:
    “Haruki is doing tremendously well – this is not a criticism of his saving habits, which are stellar. If you have the capacity to save more than you actually need for retirement, that’s awesome. It’s not a bad thing.”
    “What if extra retirement savings makes you feel more secure? If that’s the case – and you don’t have any other goals you’re strongly pushing towards – then feel free to contribute more towards your retirement savings.”

    Trent is not categorically saying nobody should save >30% of their income towards retirement. He clearly applauds Haruki for doing this, he says that if you can save a high rate for retirement then thats “awesome” and Trent clearly says that if you want to save extra for retirement and aren’t neglecting other goals then you should do so.

    Trent’s point is that its likely someone saving 30% for retirement and making $46k is skimping on their life today. We do not know for sure if this is the case for Haruki or not. Maybe he’s got plenty of disposable money after his savings, taxes and expenses. Maybe he lives in San Francsisco and pays $1200 a month in rent, $250 a month for health insurance, a $200 month student loan bill and eats rice and beans and has no money for any fun or saving for a house. Or maybe he has $1000 left over after all his bill and such. I wouldn’t assume either way but it seems Trent and most people here are assuming one or the other.

    It is possible to save too much. Would you save 90% of your salary for retirement and live in a cardboard box? Obviously not. Would you eat beans and rice and live in a crampt studio apartment to save 30% of your income for retirement? Thats not a good choice either.

    If Haruki continues with 30% savings rate and you assume a conservative 7% annual growth then he will have a higher income level after retirement than before retirement. Thats saving more than necessary for a comfortable retirement.

    If Haruki has a good standard of living right now and has an adaquate emergncy fund, is saving for other goals and has money to spend on things he cares about then he is doing wonderful and should be happy to save 30% for retirement. But if Haruki has high fixed expenses and is skimping and denying himself any nicities then he could cut back his retirement savings a bit, still save plenty for retirement and improve his quality of life now.

  124. Jim says:

    @ Matt,

    How does people disagreeing with you here have anything whatsoever to do with “liberals”?!?
    I don’t think anyone has expressed any political opinions for you to assume they are liberals.

    Your tax + health insurance estimate is high. Maybe people are nitpicking your estimate a bit but theres no need to resort to namecalling over it.

  125. Chad Smith says:

    Calculating your “number” is a restrictive way to think about retirement savings. Everyone’s individual situation will differ depending on their goals, risk tolerance, and lifestyle choices, etc. However, the idea of saving too much in retirement accounts can become a major hassle upon withdrawal. Part of the art in financial planning is determining how much to save and in which accounts. One of the best ways to combat the inherent future uncertainties that accompany how the tax code may change is to save in accounts that are taxed differently. It’s similar to the diversification concept used in investing.

    Congratulations to Haruki’s savings discipline thus far! But for him to be sure he’s maximizing efficiency in his savings strategy, he would be best served by working with a fee-only financial planning professional.

  126. ranch111 says:

    The key to all of this is to start early. I started at 27 and have enough of a nestegg, even with the stock market crash, to basically coast the rest of the way with a minimum of 5k a year contribution to our Roths. I’m 41 and my wife is 36 and I hope to quit working at 62 and my wife at 60. It might happen before that if we can manage a return greater than 8%. We have one 10 mo. old baby and will most likely have another. We live very frugally, have a small house and no debt except the house. My wife can stay home with the baby with what I make, which isn’t much. I can’t say that for most of the couples we know.

  127. Mneiae says:

    Matt’s response concerning liberals was very…unique.

    “You people seriously can’t be that stupid, can you?…

    I’m guessing that you can. Sad. Only liberals would make odd claims like you people are doing and using your “feel good” analogies to make your subjectiveness feel right.

    My favorite: “…it is almost elitist to say otherwise…” Spoken like a true liberal.

    God you people are dumb.”

    @Matt
    Speaking as someone who has grown up in one of the most affluent communities in the nation, I have to say that you definitely are a bit elitist. The people to whom you are responding express valid points and belittling them does not make your arguments more valid. I’ve read this entire thread and did not find any “feel good” analogies to make people feel better about their subjectivness. Additionally, I believe that Haruki can have a good, sustainable quality of life on the portion of his income that he’s taking home. He might not indulge in the luxuries, but he certainly can afford the necessities. You are obviously biased, so I would not be casting stones about other peoples’ subjectivity.

  128. Trent says:

    I don’t think Haruki is oversaving, as some of the more thoughtful commenters have pointed out. My sole advice for Haruki – who is demonstrably a person with good willpower and the ability to save – is whether or not he’s accounting for other goals as well.

    I find it astounding that anyone would think it’s a bad idea to think about one’s goals before taking action.

  129. Elaine says:

    Update: I’d like to read how these responders have been affected in the last year since making these comments.

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