Media headlines often herald that Americans aren't saving enough for retirement, but there are also some who might be saving too much. While this might not seem like a bad thing, it can actually lower your quality of life during your working years and cause undue financial stress.

These are some of the reasons why you may be saving too much and how to strike the right balance.

Not Personalizing Retirement Planning

One big reason you may be saving too much is that retirement planning has become too generalized. With the advent of online calculators and personal finance software, tech providers have built too many general assumptions into their technology.

Key Takeaways

  • It’s possible to save too much for retirement if you rely on general assumptions to calculate how much you’ll need.
  • Don’t overestimate your retirement income replacement rate or how much you will spend on housing.
  • In order to save the right amount, figure out your timeline, don’t use the standard replacement rate, research living, and medical expenses, and tally your expected retirement income from pensions and Social Security.

Not all assumptions work for all people. Everyone has a different life situation that cannot be easily be packaged into a smartphone app or represented by a few numbers that you enter into an online calculator.

For example, it's unlikely that any automated program will be able to accurately predict how much of your pre-retirement income you will need—otherwise known as replacement rate—and what the return rates, inflation, and spending will be throughout your retirement years.

Overestimating Your Replacement Rate

Overestimating your replacement rate can cause you to save much more than you need for retirement. Simply put, the retirement income replacement rate is a percentage of the pre-retirement income you will need to maintain your standard of living in retirement.

The perils of saving too much for retirement include causing unnecessary financial stress, such as struggling to pay your mortgage or for one of life's unexpected and costly emergencies.

A general rule that is often cited by researchers is to estimate that you will need 80% of your current income to maintain a comfortable lifestyle in retirement. But David Blanchett, head of retirement research at Morningstar, found that replacement rates vary when a number of other factors are also considered, including different income levels and life expectancy.

His research concluded that the actual range of replacement rates is between 54% and 87%. If you are planning for 80% and really only need 55%, you'll likely end up saving a sizable amount of money that you probably won't need.

Incorrect Housing Cost Forecasts

Where you live during retirement is one of the biggest costs you will face. How you plan for and manage this aspect of your life will have a big impact on how much you need to save for retirement.

"Spending on housing in retirement is extremely difficult to estimate," says Mark Hebner, founder and president of Index Fund Advisors, Inc., in Irvine, Calif. "Most retirees will spend most of their retirement in their own home."

If you plan to stay in your home as long as possible, your costs will be lower than if you move to an assisted living or continuing care facility. This is especially true if your mortgage is paid off.

The cost of housing ranges from 30% to 37% of annual income, according to the Bureau of Labor Statistics. Assuming your household earns $50,000 a year and spends 30% of that annually on housing, you would reduce your costs by about $15,000 in retirement if your mortgage is paid off. If you factor that in over 30 years in retirement, you'll need to save a lot less money than you had planned.

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How Much Should I Save for Retirement?

How to Save the Right Amount

So how do you know if you are saving too much or not enough? Taking these steps will help you save the right amount.

Figure Out Your Retirement Timeline

The first step is to determine how far from retirement you are. If you are more than 10 years out, it's likely best to save a generic percentage. That's because the further away from retirement you are, the harder it is to get the numbers exactly right. Experts often recommend between 10% to 15%.

If you are within 10 years of quitting work for good, you can do some more detailed planning that will shape how much you need to save in the years just before you retire.

"The easiest starting point is to assume the same standard of living in retirement as in one’s working years," says Hebner. "Chances are, most will not spend that much money since they will no longer have to save for retirement, probably pay less in taxes, and also have certain costs like transportation go down significantly."

Don't Use the Standard Replacement Rate

Don't just use the 80% of income as a replacement rate. Calculate how much you spend now, subtract expenses that you will no longer have, and add in new expenses that will occur in retirement. For example, you may plan to relocate or, in the early years, travel more than you currently do. If you become a parent later in life, you may still have children in college or just getting started in their careers when you're ready to retire. Or you may have grandchildren or other relatives you're helping to support.

Once you have a realistic estimate of expenses, you can use that to figure out how much you need to save to be able to pay for them.

Research and Plan for Healthcare Expenses

Research and create plans for healthcare expenses. Since this is the biggest unknown in your budget, understanding your options will help you estimate the right amount to save. Research Medicare, long-term care insurance, assisted living costs, and in-home care costs. 

Tally Expected Retirement Income

Finally, tally up what you expect to receive from pensions if you have one, and Social Security. The more you have from these resources, the less you will need to save in retirement accounts.

The Bottom Line

Planning how much you need for retirement is not an easy task. There are many variables to consider. With a little extra time and effort, you can figure out the amount to save that's right for you. And remember that if it ends up you're saving too much, you could consider retiring sooner or using some of that money now instead. Another use is an emergency