Retirement Answers

Jacob: 00:00

Is it possible to oversave for retirement? I'm going to share why I think it's possible to oversave and the negative effects of doing so on today's show. Hey, friends, welcome back to another episode of Retirement Answers. My name is Jacob Duke. I'm your host as always.

Jacob: 00:14

I'm a certified financial planner and the owner of a retirement planning firm that helps people just like you plan smarter so you can retire better. And in my time as an advisor, I've seen many people save millions of dollars for retirement only to spend a fraction of that money and then pass away with more money than they started retirement with. Now, it's one thing to simply accumulate more than you need over time. I'm not here to say that you shouldn't build as much wealth as possible, but the problem that I'm talking about today is working and saving more because you don't think that you'd yet have enough. I want you to have enough safe for retirement.

Jacob: 00:46

I want you to create a clear plan for spending and preserving that wealth, and then go out and enjoy life. No one gets a trophy for having the most money saved for retirement or having the best retirement plan. So here is the question I wanna offer you. Are you saving too much? And is this even possible?

Jacob: 01:03

So to break this down, I wanna identify why people oversave, the negative effects of oversaving, and what you can do to eliminate this risk and retire confidently. And as we're going through this, if you find this encouraging or helpful, be sure to make a note of that and send it to a friend who is in a similar situation, because they can likely benefit from this as well. Alright, let's first talk about why oversaving even comes up as a problem. At its core, oversaving usually just comes down to fear. Fear of running out of money, fear of being a burden to family, fear of the unknown, like healthcare costs or market crashes or retiring at the wrong time before some major event happens that causes that market crash.

Jacob: 01:40

See, fear is the driver of delaying retirement and the truth is, is those fears are valid. They make sense because your number one goal as a human, your human nature is self preservation. You will do whatever it takes within your power to preserve life and preserve yourself. And this happens naturally in your day to day life. You eat, right?

Jacob: 01:58

You eat food to stay alive. You breathe air to stay alive. Same idea actually still happens in our conscious living around our money. We never wanna put ourselves in tight spot financially or create a problem in the future because we retired too soon. So your default is to take on less risk and go with the sure bet, like just continuing to work instead of giving up your paycheck and starting to live on your savings.

Jacob: 02:18

So it's completely understandable. But the hurdle we have to get over is that fear doesn't have a finish line. For example, if you're worried about having enough money for retirement when you have $1,900,000 saved, how do you expect to magically have those fears go away when you have $2,000,000 saved? I'll just kind of let you on a secret here. You're going to feel the exact same way at $2,000,000 as you do at 1.9.

Jacob: 02:40

And here's why. Whenever we start building something or growing something, we just keep moving the goalposts on ourselves. Once we reach a certain wealth level, we reset our new baseline. If we fall below that baseline, we start to kick ourselves. And I've seen this firsthand.

Jacob: 02:53

I talked to hundreds of people throughout the year who reach out to me after listening to my podcast or watching me on YouTube. And I've seen that the fear of running out of money is the same for the person with $500,000 as it is for the person with 5,000,000. The amount of money doesn't fix the fear, but I'll share in a moment what can. The next thing that causes people to oversave is much more innocent and it's simply your habits. You've conditioned yourself and your mindset towards saving and growing your wealth throughout your career, and in many ways, you've come to enjoy it.

Jacob: 03:22

You like to see your account balances go up in value as you put money away and save for the future, but this in my opinion is maybe the hardest part for retirees. It's the shift from saver and builder to spender and trying to enjoy your money and what you've accumulated. I can't tell you how many times I've heard a retiree say this, I just can't get myself just take that money out of the account, or I just can't get myself to spend that much on that thing. It's a mental and a behavioral shift that's hard to break because you've been in accumulation mode for thirty or forty years, and that's what's actually led you to this point of success and this financial independence that you now find yourself in. Now the problem is, is you have to shift that and say, I'm not gonna be the accumulator, I'm not gonna save, I'm gonna break all my habits and start doing the opposites.

Jacob: 04:04

It's almost like a restructuring of your entire mental and emotional makeup, and that's the hard part. But here's the thing, it has to happen in order for you to be able to spend the money in retirement that you can spend, and go enjoy the life that you've built. So the good habits that you've built over time in terms of accumulating and saving and doing everything the right way, that's what's actually holding you back from whatever is before you, whatever is in the future. So be aware of that as you're starting to contemplate retirement. If you're in this spot of, oh my goodness, I just say another 100,000, I'll be good to go.

Jacob: 04:35

Just know your habits might be the thing that's holding you back, not so much not having enough money. Another reason that I see people continuing to work and saving beyond what they need is comparison. Maybe you know a work colleague who didn't retire until they hit $2,000,000 saved and you're at 1.8 and you just simply won't allow yourself to retire until you get to that $2,000,000 mark, so you're just like them and can say, yep, I retired at 2,000,000 as well. Or maybe your best friend is shooting for a particular goal or a number that they kind of have in their mind and you're trying to beat them to that number, you're shooting for the same thing and it's almost like a race to get there. The problem with this is that you're shooting for a singular number that has no bearing on your ability to retire.

Jacob: 05:12

So that's the problem I have with picking a number, whether it be 1,000,000, 2,000,000, 5,000,000, whatever the number is, and you're saying once I get there, I'm going to retire because again, going back to the point I made a minute ago, is once you get there, you're going to reset the bar, you're going to change the goalposts and move those on yourself and say, 1,000,000 might not be enough today because of inflation or because of healthcare costs or because of whatever it is in the moment, right? We're in a we're in the middle of a economic cycle where it's like, oh my goodness, this is too scary to retire now. Well, you said, hey, once I got to 1,000,000, was gonna do it and now you're not doing it. So we always move the goalpost on ourselves. And this is the problem that I have with picking a single number and you're saying, once I achieve this wealth status, I'm going to do X, because the problem is we just never end up doing it that way.

Jacob: 05:52

So the question I want you to ask yourself is, what good does it do to work five more years to have 2,000,000 saved whenever 1,000,000 was actually more than you could ever need. So picking a round number like this, it just doesn't work, it doesn't make sense because it doesn't account for your specific or unique situation. So these are some of the reasons why over saving happens and really what causes it, but why is it so bad? Like how bad could it really be Jacob, to have a little bit more money than they actually needed to make sure, like extra sure that I have enough saved? Seems like a pretty small thing.

Jacob: 06:23

It doesn't seem like a major issue at all to make sure I have enough saved, but here's what it costs you, time. It costs you time with your spouse, or your family, or your kids, or your grandkids, it costs you time in your community or your church or whatever organization you wanna be a part of more. It costs you time to enjoy the trips that you've put off for so long, the things that you've said, I'm gonna do this one day, I'm gonna do this one day, you haven't been able to do those things yet, that's what it's costing you. It costs you the opportunity to discover what's next in life. Sometimes you don't know what you wanna do in life, and that's okay, but it's gonna take time to figure that out and say, wanna try this new hobby, pickleball, golf, hiking, rock climbing, whatever it is, I wanna try something new, but it takes time to do that and say, oh, that doesn't work for me, or this does work for me.

Jacob: 07:03

If you don't have the time to go do those things and explore and see what's best for you, then you're never gonna get there. So this is such a big deal because time is the only resource that you can never get back. Once you spend time, you can't buy that back. So think about the next hour of your life. Thank you for spending about twenty or thirty minutes of your time here with me today.

Jacob: 07:22

I appreciate that. Hopefully it's worth your time and it's valuable. But if you think about the next hour, what you're gonna do, you cannot get that back after you spend that hour. So when you hold this idea of time being your most valuable resource in one hand and the fact that you don't know how much time you have left in the other hand, I hope it creates an urgency within you to go do what you said you've always wanted to do. Instead of telling yourself one day, I'll do this, make today day one of doing that.

Jacob: 07:51

So think of it maybe like the, you know, if you want to start walking or working out or exercise in some way, instead of telling yourself one day I'll start exercising, make today day one of exercising. So take that approach to your retirement mindset as well, instead of saying, yeah, one day when I get there, I'll go on the Alaskan cruise I've always dreamed of. Instead of saying that, today be day one of planning it and making it happen. Because at the end of the day, time is really all we have. My encouragement for you is evaluate why you're spending your time the way that you are.

Jacob: 08:20

And I know you're thinking, hey, Jacob, you're kind getting a little woo woo on me here. This is kind of not my vibe, not what I'm normally used to from you, but really, want you to think about it because it's important. I want you to understand that this stuff that we do, retirement planning, it's fun. I enjoy it. It's a challenge for me, and I like figuring out and kind of putting the puzzle pieces together.

Jacob: 08:38

But at the end of the day, if we don't think about you as a human and life in general, and the amount of time we have here on Earth, then all the planning kind of doesn't matter. We have to attach the planning to the real life and make sure the planning that we do is intentional and purposeful. So that's one problem is just delaying the things that you otherwise need to be doing or want to be doing as you get closer to retirement, you've always wanted to do certain things. So in addition to delaying retirement, which calls you delay some of the things you want to do in retirement, another issue or risk with over saving is sacrificing your lifestyle today. Because if you're trying to save for the future, it means you're likely denying yourself of some sort of spending today, so you can have more money tomorrow or in the future.

Jacob: 09:16

And here's an example. Let's say you've got $3,000,000 saved for retirement, but you still drive that 15 year old Camry with 300,000 miles on it. And by the way, I'm thinking of a client right now when I say that, I hope they don't get mad at me, but this is just reality. They got that 15 year old Camry with 300,000 miles on it because they're so worried that if they don't save the money that's needed to buy a new car, that something that would be an enjoyment for them or maybe a splurge, it could blow up their retirement plan. Well, guess what?

Jacob: 09:42

If you can't retire with $3,000,000 then you definitely can't retire with $3,050,000 That doesn't move the needle in terms of retirement, yes or no, it just changes things slightly. And I'm talking slightly. So by continuing to oversave and deny yourself of some of the luxuries or just finer things that you would enjoy and you know you would, why not go buy yourself a new car, whatever you wanna put in this example, whatever splurge or just extra thing that's, ah, I don't really need that, but man, it'd be cool to kind of have or do. Think about that for you and put yourself in that situation, because if you're still over saving only for the future, whatever that looks like, you're likely denying yourself or keeping yourself from enjoying something nicer today. These are a couple of issues with working longer than necessary and over saving, but beyond this, you could be hurting your health because of the stress of the work that you're doing or how hard it could actually be on your body.

Jacob: 10:33

And that's not something to take lightly. We only get one body and our health is perhaps second to time, maybe our most important thing to us. So if you have no health, then you have no wealth. It doesn't matter how much money you have. If you're not healthy enough to go do something and go enjoy the money that you've got, then what's the point of having all the money?

Jacob: 10:49

And in addition to the health risk of working too long, there's actually a fascinating observation that I've seen. The people who oversave are often the ones who underspend in retirement because of the spirit of frugality and always trying to make be certain about things. And guess what, it doesn't stop whenever you retire. Who you are before retirement often is the same in retirement. So it carries over and you get so used to hoarding money that you can't actually enjoy what you've built and go spend and do the things you wanna do.

Jacob: 11:16

You worry about touching the principal or spending too much too soon. And even when your plan clearly shows that you're gonna be fine regardless of if you spend 50,000 on the car instead of 70,000, guess what? It doesn't matter, right? So your your mindset before you get to retirement that got you to this point of financial independence going back to this, that was necessary to get there, but it's really hard to switch and that switch is necessary. You have to make the switch from saver and accumulator to spender and enjoyment.

Jacob: 11:45

So that's the hardest part for most people. And the point of saving is not just to die with some huge balance, it's to give you freedom to spend and to give and to live and enjoy. If you're so afraid to spend that you never enjoy it, then what was the point of saving in the first place? And the final problem here with over saving is going to be the tax bomb that it creates for yourself. If you've over saved to pre tax accounts like 401ks or IRAs, you could be setting yourself and your spouse, maybe through the widow's tax trap up for a massive tax problem later on through required minimum distributions or RMDs for short.

Jacob: 12:19

Those would begin at either 73 or 75, depending on your year of birth. If you were born before 1960, it's gonna be '73, if you're born 1960 or later, it's gonna be '75. And if you've accumulated this big balance, those RMDs could be huge. I'm talking hundreds of thousands of dollars if you've got multi millions in these tax deferred accounts. So when you think about your future RMDs and you add in social security income on top of that and how that would be taxed and maybe a pension or any other sort of taxable income, you suddenly find yourself paying a really high tax rate in retirement for more income than you really need.

Jacob: 12:53

So you're paying taxes on something you don't need. And to make matters worse by having that much income, you're likely gonna be over the IRMAA thresholds from your income standpoint, which causes you to pay higher premiums on your Medicare. So oddly enough, saving too well without a tax strategy can actually leave you worse off, more money, but less control over how you're getting taxed. That's what we want to avoid as well. This is why I stress the importance of balance in terms of how you're saving.

Jacob: 13:18

So building up taxable accounts, maybe doing backdoor Roth contributions beyond your four zero one ks Max's, doing that is going to help you have more tax diversification, which I talk about all the time and have more balance in your overall portfolio. So over saving in the wrong bucket can be a huge hidden tax bomb in retirement. So those are some reasons why over saving happens and why it can be bad, but what can you do about it? How can you keep from over saving and working longer than you otherwise need to? The first thing that comes to mind for me is you have to have a real plan.

Jacob: 13:47

Now, what does this mean Jacob? What is a real plan? Is it just a Monte Carlo simulation saying that, yes, I have a 98% chance of never running out of money? Well, that's a part of it. We wanna do that and kind of project things forward and say, hey, based on this huge set of assumptions of X amount of dollars a month being spent and what our social security might be one day and, you know, whether we're gonna be spending more or less over time and our healthcare projected costs, all these assumptions have to go into this and say, on this set of assumptions, we're gonna be okay.

Jacob: 14:16

We're not gonna run out of money regardless of market fluctuation, and we can stress test it and see, hey, if we get a 20% reduction in social security benefits, how does that affect things? Or if tax rates go up by 20%, how does that affect things? Or what if the market drops as soon as I retire? How does that affect my chances? So we wanna do those projections and use that Monte Carlo simulation and use a software in that way, but I would encourage you to actually take it a step further.

Jacob: 14:40

And this is what I enjoy doing with my clients. Instead of just saying, can I retire? I wanna show you how you can retire. So whenever it comes to like the different facets of a retirement plan, think income taxes, which accounts you're gonna pull money from, when to turn on social security, how to do Medicare, what is the right way to build all this together? How does our tax plan fit into our income plan?

Jacob: 15:01

And how does our income need dictate our investment strategy? All these things have to be considered globally within your plan, but they all have a little mini plan within that. So from an income standpoint, it might just be outlining something on paper like, hey, before 67, before we take our Social Security, we're gonna take X amount of dollars from our IRA every single year, X amount of dollars out of our brokerage account using long term gains or tax gain harvesting there. And then if we want to turn on Social Security beforehand, if we get a major market pullback, we can have that in our back pocket. That's just a written plan from an income standpoint or for a tax plan.

Jacob: 15:34

Hey, every single year, we want to make sure we use up that 12% bracket, whether it be for income distributions out of an IRA just to live on or a portion of our income can come from the IRA, a portion can come from or whatever sources you have, and then the rest of it up to that 12% bracket, we want to do Roth conversions and get that money into the Roth for the future. So that's what I mean by not answering only the question of can I retire, but how do I retire? Actually lay it out and draw it out for yourself and say, this is how I'm going to create income. This is how I'm gonna do tax planning. This is how I'm gonna be investing my money.

Jacob: 16:05

This is how I'm gonna pull the money out of my accounts every single month for my income. So I want you to take it a step further and whenever you start to see how this thing works, how your plans actually gonna play out in real life, you can actually envision yourself and picture yourself retired and say, oh, I'm gonna put myself in that plan and close my eyes and really think and project and just look at and see what I'm doing day to day and see how my income's coming to me really envision yourself in that. Once you can picture yourself retired, it makes things that much easier and that much more palatable in terms of actually pulling the trigger and stopping your paycheck and going into retirement and living off your savings. It makes it that much easier to do once you can picture yourself there, but you gotta build the extra plan, you gotta go a little farther than just can I retire and say, oh, how am I gonna do this? What does it actually look like?

Jacob: 16:52

How does it actually work? So that's the first thing you do. You got to have a real plan. The second thing is, is you need to start spending now and living today like you're already retired. Okay, so that one's kind of hard.

Jacob: 17:04

So if you're planning on, hey, I'm going to do the Alaskan cruise, I'm going to go to Europe or whatever it is that you've got on your mind, do that now while you're still working. Two reasons, number one is because you can actually envision yourself again, you can put yourself in the future and say, oh man, this is actually really awesome. I really wanna start doing this more with other things. Boom, that's maybe your encouragement to retire and pull the trigger on it. The other thing is this, if you're gonna spend that much money to go overseas or take the big trip or do a month long or two week long vacation, guess what?

Jacob: 17:33

Do that while you're making money. Don't make your portfolio pay for it, right? So that's another added bonus or reason to go take the trip now, or buy the thing or upgrade the car or renovate the house or replace the roof, whatever you've got that you think you need to do, want to do or have to do in the future and you're waiting to retirement to do it, maybe start thinking about doing those some of those things now and living like you're retired today. Whenever you do this, you might be surprised at how much you actually enjoy those things or actually enjoy the time you have, and how much maybe you're missing out on if you don't go retire now, and actually start doing those things more often. So just evaluate your life going back to time, right?

Jacob: 18:10

Are you using your time the way that you want to? Are you working because you want to, which is not a bad thing. I personally enjoy work. I don't know what I would do without it. I would be really bored.

Jacob: 18:19

Okay, that's some of us, we enjoy what we do, but I don't want to work simply to make money. I wanna work because I enjoy it. There's something I can add value to the people around me or are you listening, There's a benefit or a purpose to it. There's something fulfilling about it. Or are you working simply because you think you have to, in terms of having enough money and saving enough?

Jacob: 18:38

That's what I want you to evaluate in regards to why you're working and kind of how you're spending your time. And then finally, number three, if you do keep saving and you do keep growing your wealth and you keep working, make sure you do so intentionally. It might mean saving more money to cash rather than your four zero one ks, which means you're gonna pay more taxes if you cut back on your tax deferred contributions, right? But having that cash to maybe have stability in retirement, just have a bigger slush fund for yourself to, you know, hey, I've got a 100 plus thousand bucks sitting in cash. So if the market drops, I'm good.

Jacob: 19:09

I've got some cash ready to go. Or maybe you're thinking, hey, I've got this big tax that I'm going have in the future. So Roth conversions are probably going to be something I need to do, but I don't have any cash to pay the taxes on those conversions with. So if you keep working, maybe it makes sense to instead of contributing again, more money to that tax deferred account, which should only be making your tax bill in the future bigger, maybe start just paying the taxes while you're earning money, okay, up to a certain amount, maybe you have to figure that out. But pay the taxes so you can build cash to then pay the taxes on your future conversions with, or perhaps it's just paying off that last little bit of debt aggressively, whether it be a mortgage or a car, just get that out of the way before you enter retirement.

Jacob: 19:45

But the key here is this, if you're going to keep working because you make want to make sure you have more money for retirement, I just encourage you to make sure you do it intentionally, because how you save is almost as important as how much you save. And what I mean by that is, if you're not saving to a Roth, if you're not saving to a brokerage account on top of your normal tax deferred four zero one ks or employer plan contributions, you might not be saving intentionally. So think about how you're saving just as much as you are thinking about how much you're saving because the tax diversification and the flexibility you can create for yourself in retirement could pay huge dividends. So continue continue to think about the big picture. At the end of the day, over saving really isn't a math problem, a purpose problem.

Jacob: 20:26

You're not really sure what your purpose or fulfilling thing in life is. And if your goal is to maximize a financial legacy for your heirs, then yes, saving aggressively makes sense. But if your goal is freedom, experiences and generosity, then over saving can actually rob you of those things and actually take those things away from you. So I always tell my clients, money is just a tool, it's not a trophy. No one gets a trophy or gets an award for having 3,000,000 instead of 2,000,000 like that's not the case.

Jacob: 20:52

It's not about having the biggest portfolio or the biggest balance when you die. It's really just about aligning your money with your values while you're still alive. So ask yourself this as we finish up here, what are you really saving for? If the answer is security, then let's define how much you truly need for that. If the answer is legacy, then let's plan intentionally for that.

Jacob: 21:11

If the answer is freedom, then let's make sure that you're actually living that freedom now, not just someday in the future. So I hope this has been encouraging for you as you've gone through it. Maybe it's kind of sparks a little bit of just introspection and evaluation for you, right? Because I don't want you to over save, I want you to save what you need to have and I want you to be able to enjoy life. So if this episode struck a chord or been helpful, obviously, do me a favor.

Jacob: 21:33

If it's been beneficial, I love a rating and review there on Apple Podcasts or Spotify, but also share with a friend who's in a similar situation who maybe is stressing about not having enough money. Hopefully this will be encouraging for them as well. Thanks so much for tuning into this week's episode. I hope you found it valuable. We will see you again next week.

Jacob: 21:52

Hey, it's Jacob again, and I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement Answers is for educational purposes only. Thanks for tuning in to this week's episode. I look forward to talking with you again next week.