Why Saving Too Much for Retirement Can Be a Mistake
As one reader recently put it to me: “some people work too long and save too much”. Certainly, saving too much can for retirement can be a mistake.
For most of us aspiring to retire, we all know the recipe by now:
- Live within your means.
- Maximize savings to registered accounts like the RRSP and TFSA, then consider taxable investing.
- When you do invest inside these registered accounts, keep your investing costs low and diversify your investments.
- Rinse and repeat for 30 years.
- Retire with money in the bank.
These elements, and more, should be part of your financial plan.
At some point though, even with your grand plan, you must figure out how much is enough.
When it comes to you, only you know what you need or want from retirement.
This doesn’t mean this recipe is simple to figure out. In fact, it’s like putting together a 10,000-piece jigsaw puzzle.
Your retirement answers may not be intuitive:
- Should you take your pension early, if you’re lucky enough to have one?
- What about drawing down your RRSP assets? When?
- Should you keep your RRSP assets intact until you convert that account to a RRIF?
- When should you spend any non-registered assets, if you have those?
- What about the TFSAs, invest and keep those assets “near the end”?
- When should you take Canada Pension Plan (CPP)?
- When should you take your Old Age Security (OAS)?
- Should you consider an annuity?
- Dozens more questions abound…
Maybe this is why “some people work too long and save too much” for their retirement…they just don’t know any of these answers and err on the very conservative side.
That said, there is much more ground to cover and as always, I like to learn from folks that have been there and done that (or are doing that) for their retirement. My dedicated Retirement page is full of those people that you can learn from too.
Rob is a fan of My Own Advisor in Germany, and has been following my site for years.
Previously, he wrote about his early retirement litmus test.
Rob caught up with me recently over email and I bundled some questions for him to answer on that subject (some people work too long and save too much) and asked him to offer his own thoughts.
Rob, nice to hear from you!
Mark to Rob: How are things in Germany? Are you still working?
Good thanks! Yes, for a bit until I retire in a few years.
Some background for your readers…
My wife and I got married in 1984 and bought out first place in 89 just as the late 80s housing bubble burst. This left us in the unenviable position of being in negative equity. About a decade later we had managed to crawl out of that hole and were reasonably well positioned. My wife’s career had taken off and I was (ironically) finishing my CFP studies with the hope of becoming a Financial Planner one day when an off handed comment to an intern at my wife’s (Chris’) place of employment opened the door for us to make a temporary move to Germany. We rented our place out with the intention of returning. A year or so in we decided to make the move permanent and we severed our ties to Canada. We toyed with the idea of keeping the property but the hassle of long distance landlording simply wasn’t worth the effort. In the end we sold the property for a small profit.
Tell me about your investments Rob.
I guess like most people I started off investing in expensive mutual funds in the early years. I too, I guess, succumbed to the heavy advertising during the “RRSP seasons”. Over time, thanks to blogs like yours Mark, I eventually got out of big bank mutual funds and owned some stocks directly, I started DRIPping stocks too.
We left Canada when I was 39 (celebrated my 40th on the Eiffel Tower) and Chris was 37. Enough time to build some assets but not a lot. Most of our investments (beyond the house) came via my wife’s DCP (defined contribution pension). Sadly, my company offered an “opt-in” pension which I never got around to joining. Once my wife left her job her company pension, we rolled that over to a Locked-In RRSP. Unsure what to do with it then, I decided to park the whole thing in a 30-year government strip bond. In this case my timing couldn’t have been better – I got lucky. I bought the bond just as interest rates began the long run down to zero. I sold it 2/3 of the way to maturity. I moved everything into Canadian dividend paying stocks like banks etc.
What are your projected modest income streams in retirement? How are you figuring out your retirement income puzzle?
A BIG FYI for readers – I keep some FREE tools on my Helpful Sites page to help others on that front.
Great resources Mark!
It’s interesting because when I first contacted you I was still very unsure of how everything would work out. My wife was looking at taking a buyout (retire early but at a reduced income). Now many spreadsheets and a lot of research later I’ve learned some interesting facts about retirement.
The biggest one: you don’t need as much as you think. Your cost of living drops substantially once you stop working. There are several factors involved, with the first being taxes. They drop substantially in retirement. In fact here in Europe, one scenario I ran showed us owing a mere $7 in taxes!
Another thing: your cost of living steadily decreases as time wears on. Mortgages get paid, tuition support ends, kids launch – and grocery, gasoline, auto insurance, and hydro bills all tend to drop alongside that when you’re not running around as much. The experts say you need ~70% of your working income to maintain your lifestyle, but I figure we’ll need around 25% to live the same.
It’s probably worth telling your readers Mark, our income streams in Germany can be broken into 4 areas:
- Government pensions
- Locked-In Retirement Account / Locked-In RRSP
- Real estate investments.
Some tidbits for your readers, since we’re no longer residents of Canada both our SINs were considered non-active so before either my wife or I could access our Service Canada accounts we needed to get them re-activated. Of course with the pandemic this is a total nightmare but now resolved.
Thanks to social security agreements signed by the Canadian government CPP and OAS (not GIS, that’s residents only) we can receive those benefits here Germany. The money will be converted into Euros and paid into a local bank account. There are some forms to be filled out but the income will be subject to 15% withholding tax and paid into our local bank account. Like all Canadians we have the option to take it early or delay. Because the amounts aren’t that large and due to withholding tax I’m inclined towards delaying both till age 70.
Just another note for immigrants to Canada, the chances are very high Canada has signed a social security agreement with your country and you will receive a pension at retirement age.
I won’t discuss the Locked-In RRSP because I suspect most of your readers understand how that account works. We’ll have some income from that.
When it comes to rental income, property is one of the better tax advantaged investments here so with my inheritance we bought 2 rental properties. When we cash out my wife’s LIRA, we’ll use those funds to pay off the remaining mortgages. That will generate some extra income for us being debt-free.
Great stuff Rob. In closing, why do you believe some people work too long and save too much?
Remember Mark, working is expensive! See my points above. Every senior I’ve spoken with reminds me they are living on substantially reduced incomes but with no difference in their standard of living.
Another thing to consider, although the pandemic has pushed this back: travel while you have your health.
What I’m constantly surprised at here is how little people actually travel in retirement. A few go to Florida for the winter (’till illness makes the health insurance too expensive) but you just don’t travel as you get older. People are worried about running out of money so travel gets put off. Don’t delay is my advice!
Finally, on the subject of health – that is true wealth.
That post on your site Mark is so true – health is wealth and it needs to be factored into retirement planning.
I remember when my father-in-law turned 60 and retired. That seemed SOOOO old! Now that 60 for me is in the rear view mirror it seems so young. I read somewhere that the average man lives only 13 and the average lady only 17 years after retirement. After a lifetime of working that is not a lot of time and that’s assuming all those years are healthy ones.
Life is more than money.
And it’s not just your health, but your spouse’s health. I know many retirees who gave up travel and activities to care for chronically sick spouses. My brother is in this exact boat. He’d love to travel more but his wife can’t. My uncle mentioned that his best years were 60-70, because after that it’s all downhill.
Sadly, the pandemic is forcing many of us to stay at home much more but at the end of the day, please remember there is more to life than work and saving any money from work. There is a legitimate fear of not having “enough” but if you have your health best to start planning for retirement when you can. Don’t take anything for granted.
Great last point Rob.
Finding the balance between financial security and enjoying life is not easy and I really haven’t met anyone that has mastered it. For many, the fear of running out of money is real and it’s likely framed by childhood circumstances and lived experiences.
Boomers might have had parents who lived through the Depression and needed to watch every penny. More current, Millennials are likely to follow Boomer paths in some fearful footsteps: they watched their parents struggle through The Great Recession and some have probably had student loans for years.
Having more money than you need for retirement can help you with your sleep-at-night factor. Not having enough will likely cause significant stress.
Retirement – how to avoid working too long or saving too much
When it comes to our plan, I’m trying my best to right-size it. We certainly want to work long enough whereby we have enough but putting off ambitions and plans for too long could deliver some financial regrets.
Like most things in personal finance, I believe the answer to avoid working too long or saving too much for retirement lies with: “it depends”.
- It depends if your retirement spending plan makes sense – what can you afford in a sustained way.
- It depends if you have considered the unexpected in your plans (hint: you should!)
- It depends if you have included some buffer or discretionary money beyond #1 and #2.
If you have confidence in all three of these areas above, you probably have enough.
While I believe you should always consider what will make you happy and joyful today, you also need to account for the money needed to keep those good days rollin’ into your senior years.
Too little money could make you miserable. Too much money could be filled with regrets.
A BIG part of our financial independence plan is making some assumptions about our future. You should do the same. We’ve included some of the following in our plan:
- Will inflation be higher or lower than today? (hint: we’re going for higher).
- What will our portfolio rate of return be? (hint: we’re assuming lower equity returns in the future).
- What will our portfolio draw down rate be? 4%? (hint: we’re targeting 3-4% in our early years of our retirement; the first 5 years we will “live off dividends” only).
- Could we require long term care? (hint: we are planning for that).
- What unexpected expenses might occur? (hint: some could come up and we’re planning for that!)
We can’t predict the future however we can make some assumptions about it.
The irony is though, good savers typically need less money in retirement. They’re used to living below their means. Something to consider when it comes to your financial planning and personal projections.
Thoughts? Did you know folks that have worked too long or saved too much? Are you one of those people? What advice do you have for folks saving and investing for their retirement (like me)?