Invariably, one boring little word seems to be the answer to virtually every personal finance question you'll face: Save. Want to buy a new home? Save for a down payment first. Send your kids to college? Save from the day they're born. Retire on an island retreat? Save, save and save some more. The problem with all this saving is 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 investors are actually saving too much for retirement.

The "saving-too-much" theory comes from the notion that financial services providers are scaring investors into saving so they can profit from managing the saved money. Considering the scandals that have plagued the financial services industry and the international push toward conspicuous consumption, it's clear why this theory has a significant amount of appeal. In this article, we'll explore both sides of the issue.

Why You Don't Need to Save

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

While some experts suggest that most retirees will need at least 80% of their pre-retirement incomes to meet 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 and Medicaid will cover the bulk of health care costs.

Critics argue 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 and Medicaid will cover the bulk of health care costs.

The message of their argument is that you can afford to spend some of your savings 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.

Additionally, Medicaid is available only for individuals who are unable to pay for health insurance—typically those classified as "low-income earners" by their state of residence. Finally, the Medicare program is earning less than rave reviews, and many adult children are moving back home and asking for parental support long after tradition suggests they should be able to fend for themselves.

This means that not only is income from Social Security an uncertain source of retirement income, but also that many retirees will face additional expenses from boomerangs. Furthermore, retirees will face the challenges of paying bills and financing general living expenses during retirement. 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?

In truth, financial planning—including how much will be needed to finance retirement—is an educated guess. A prediction of required retirement income is based on projected costs and your planned lifestyle, but 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 general cost of living also is cause for concern.

Retirement Reality Check

While some economists may argue inflation-adjusted dollars show that the current cost of some items is on par or actually lower than historical norms, consider what really happens with retirees and their finances. How many retirees have you met who complain about having too much money? Money is often tight after retirement. This is the reason people usually retire to areas where the cost of living is low, allowing their retirement savings to last longer.

So, is the "saving-too-much" theory flawed? Unfortunately, the answer depends on which economist you ask and your own personal circumstances. You can't rely on some arbitrary calculator to determine how much you will need to save for retirement. The results may not be realistic for your financial profile unless the calculator considers factors beyond the rudimentary, such as:

  • 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? Will you receive income from other sources, such as royalties and investment properties? Will you be required to care for your elderly parents and, if so, are they able to finance their retirement or will they rely on you for financial support? The answer to these and other fact-finding questions will help determine whether you can afford to save less or need to save more.

To Spend or Save?

The idea that you can save too much is appealing because most people would prefer to enjoy their incomes now, rather than save for retirement. At the end of the day, saving for retirement is like having an insurance policy. In an ideal world, you will never need it, but if the day comes when 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 saved to pay for basic needs during retirement, you are free and clear to spend it on life's little luxuries or donate it to your favorite charity.

The Bottom Line

If retirement is still on the distant horizon for you, take a look a your own personal circumstances rather than focusing on general theories spouted by experts. The dissenting opinions among the economists is only further proof that you 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.

Rather than spend now and hope for the best later, you're probably better off sticking with conventional wisdom and putting together a sound retirement savings plan. You are less likely to be disappointed in the future.