When it comes to saving for retirement, the general rule of thumb is that you can never be too prepared. The average worker estimates retirement will cost around $1.7 million, according to a survey from Charles Schwab, but around 1 in 10 workers think they'll need at least $3 million to retire comfortably.
To save this kind of money, common sense says you should start saving as early as possible and sock away as much as you possibly can in your retirement account. However, there are some instances where you might actually be putting too much money toward your retirement goals.
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When saving for retirement shouldn't be your top priority
If you've been dutifully saving for retirement for years, setting aside at least a little money each month, you may think you're right on track to reach your goal. But there may be other financial goals that should take priority over saving for retirement, including establishing an emergency fund and paying off high-interest debt.
Without an emergency fund, you could inadvertently be putting your entire financial situation at risk. If you're slammed with an unexpected expense and don't have enough emergency savings to cover it, you could be forced to rack up debt or tap your retirement fund to pay for it. Each of these options can pose long-term consequences, too. Debt can take years to pay off, and you could end up paying hundreds or thousands of dollars in interest -- and withdrawing money from your retirement fund could throw off your retirement plan.
High-interest debt (such as credit card debt) is another obstacle many people face. Known for its notoriously high interest rates (sometimes more than 20% per year), credit card debt is one of the most toxic forms of debt out there. The longer it takes you to pay off this debt completely, the more your interest payments will snowball. It's also easy to get caught in a debt cycle, where your interest payments get so high that it becomes difficult to pay your other bills. That may force you to rack up even more debt, and the cycle continues.
In a perfect world, you'd be able to establish an emergency fund, pay off all your high-interest debt, and still have plenty of cash left over to save for retirement. However, in the real world, that's not always possible. And in some cases, you're better off putting cash toward your emergency fund or debt before you stash it in your retirement fund.
Balancing your financial priorities
At first glance, it may seem unwise to delay saving for retirement. While it's true that ideally you should start saving as soon as possible, not tackling your other financial priorities first could end up costing you more over the long run.
For example, if you prioritize saving for retirement over establishing an emergency fund, you may be forced to tap your retirement fund if you're hit with an unexpected expense. But if you withdraw money from your 401(k) or traditional IRA before age 59-1/2, you'll have to pay income taxes on the amount you withdraw. A 10% penalty fee also gets added in most cases where an exception doesn't apply. In other words, you could be working hard to save for retirement, only to have all that work undone when you face an unexpected cost.
In addition, if you're more focused on saving for retirement than paying down high-interest debt, you could potentially end up paying more in interest than you're earning on your investments. If you're earning a 7% annual return on your investments but you're paying 20% interest on your debt, for example, it may be wise to put more of your spare cash toward your debt.
Now, this isn't to say you shouldn't save anything for retirement until all your other financial responsibilities are tackled. because if you wait too long to start saving it will be challenging to catch up. But it is important to balance your priorities so you're putting at least a little money toward each goal. Then once you have a healthy emergency fund and your debt with the highest interest rate is paid off, you can supercharge your retirement savings. At the end of the day, this strategy could help you save more for retirement, because your other financial priorities won't get in the way.
While it's important to save as much as you can for retirement, it's also crucial to ensure you're allocating your cash to the right places. If you're only saving for retirement and ignoring your other goals, that could cost you in the long run. But if you're balancing your priorities effectively, you can save more for retirement and improve your overall financial health.
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March 14, 2020 at 06:03PM
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Is It Unwise to Save Too Much for Retirement? - The Motley Fool
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