One boring little word seems to be the answer to virtually every personal finance question you'll ever face: Save. Want to buy a new home? Save for a down payment. Send your kids to college? Save from the day they're born. Retire on an island retreat? Save, save, and save some more.

Key Takeaways

  • Some economists argue that Americans are being persuaded to save more than they need in order to feed the financial services industry.
  • A retirement savings goal is a best guess.
  • To right-size your savings, estimate the amount you and your family will need to retire comfortably.

The problem with all this saving is that it's not nearly as much fun as spending. And this brings us to a new headline-grabbing theory pushed by a number of academics and economists who say American investors are actually saving too much for retirement.

The "saving-too-much" theory blames the financial services industry for scaring investors into saving so they can profit from managing all that money.

Considering the scandals that have plagued the financial services industry, this theory has a certain appeal.

Why You Shouldn't Save

According to some academics and economists, investors don't need to save as much for retirement as the financial services industry currently recommends.

While many experts suggest that most retirees will need at least 80% of their pre-retirement incomes to meet their retirement needs, the critics argue that this number is inflated. They say that your bills will be lower during retirement because your mortgage will likely be paid off, your kids will be out of the nest, Social Security will provide some income, and Medicare will cover the bulk of your health care costs.

Some economists argue that your bills will be lower during retirement. Maybe they will be for many people but consider your own probable circumstances.

The message is that you can afford to enjoy life now rather than save it all for the future.

Why You Should Save

On the other side of the coin, even the Social Security Administration expects the program to be unable to meet its full financial obligations beginning in 2034 without Congressional action, meaning higher taxes, benefit cutbacks, or both.

The Medicare program also is vulnerable to political attacks. Already, about one-third of recipients use a supplemental policy to cover the gaps and limits in coverage. (These are regulated private insurance plans known as Medicare Advantage or Medigap coverage, depending on the consumer's choice.)

Varying Circumstances

Finally, not all Americans reach the age of 65 or 70 with the mortgage paid off, no bills, and the kids grown and gone. For starters, many adult children are moving back home long after tradition suggests they should be independent. Many older Americans are saddled with their children's' student debt. They may have other debt eating into their income as well. And about 35% of Americans are renters, not homeowners, and that's a cost that can keep on growing.

The key questions then become: Does anyone really know with absolute certainty how much money they will need to finance retirement? Would you be willing to bet your financial security on that calculation?

Educated Guesses

In truth, financial planning—including how much will be needed to finance retirement—requires an educated guess. A prediction of required retirement income is based on projected costs and your planned lifestyle, and financial predictions are fraught with uncertainty.

For instance, consider the cost of housing, which spiked during the late 1990s and 2000s, and the soaring cost of health care. For the elderly, a $500 per month bill for prescription drugs is common and is often a necessity. The rising cost of living also is a cause for concern.

Retirement Reality Check

So, is the "saving-too-much" theory flawed? Maybe, but you need a calculator, not a financial pundit, to figure it out for yourself. You should consider the following:

  • How much you have saved to date
  • How much you plan to save each month
  • Your desired retirement lifestyle
  • Your projected rate of return on your savings.

Ultimately, a holistic point of view must be taken as you consider factors both general to all retirees and specific to your particular situation. For instance, will you need to purchase long-term care insurance because of your health profile? In addition to your savings, what income sources can you expect, such as royalties or investment properties? Are there others relying on you for financial support?

The answer to these questions will help you decide whether you can afford to save less and spend more.

To Spend or Save?

Most of us would prefer to enjoy our hard-earned money now rather than save for retirement. At the end of the day, saving for retirement is like paying for an insurance policy. You might not need it, but if you do, you'll be glad you have it.

Of course, saving for the future may be even better than an insurance policy, because if you don't need the amount you saved, you are free to spend it on life's little luxuries, leave it to your offspring, or donate it to charity.

If retirement is still on the distant horizon for you, take a look at your own personal circumstances rather than focusing on general theories spouted by experts. The dissenting opinions among economists are only further proof that you may need to work with a competent financial professional to determine your specific needs.

It doesn't do you much good to keep your money out of the hands of rich financial services companies if you end up poor in the process.