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Saving Too Much

Question: I would like your opinion on the retirement goals set by my investment firm. I'm 54 years old and have no debt at all. My house, car, etc, all paid in full. I have a job I love, making $90k annually plus I still have a small income from a former business - approx $10k annual. My house is worth approx. $340k and I have $350k invested in mutual funds through an advisor (Wachovia - fee based plus commission). I've had a miserable history with advisors - this group is my third. I'm currently putting 56% of my job salary into savings, plus I have 401K and a pension through my employer.

The 56% is getting a little tough but my advisor says to be in the "safe range" at retirement, I need to be this aggressive. I don't know if they are telling me the truth or if they just want me to beef my portfolio so they can charge a higher fee.

I would like a little breathing room and enjoy life a little. I worked hard to get everything in this comfy state but now I can't even have a small splurge occasionally... Advice? Please? Kate, Charlotte, NC

Answer: You're savings 56% of your income? No wonder you feel strapped. I'd really loosen the spending reins, and enjoy yourself. Obviously, in an email communication I can't know all the ins-and-outs of your finances. But by any measure, setting aside 56% of salary in savings is steep. I'm puzzled--no, I don't understand at all--the advice to save such a large percentage of your income. What am I missing?

Put it this way: The old financial planning advice was to salt away some 10% to 15% of income in savings. In recent years that figure has been upped to 15% to 20%, largely reflecting greater volatility in the markets and higher healthcare costs. But that's still way below 56%.

I don't understand the reasoning behind saving any more than 10% to 20% of income unless there is a particular goal in mind. What's more, unlike most people your age, you don't have any debt. Let's not turn the smart idea of saving for tomorrow into meaning little more than hoarding cash and collecting regrets today. Saving to save is just as bad as spending to spend.

About the author

Chris Farrell is the economics editor of Marketplace Money.
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You have to dump your financial advisor. You don't even need one, just invest in a no-load, very low expense ratio, index mutual fund. You'll have more money in retirement becauese you didn't spend part of your savings paying for your advisor's plush retirement. Run a simple calculator such as Yahoo Finance's "How Much Will I Need To Save For Retirement?" and you'll get an estimated amount that you need to be saving. From your description, considering your age, income and assuming that you are single, a conservative 8% return on investments, 75% income replacement at retirement (this will seem like a HUGE jump in income to you if you are only using 47% of your take home pay), will live to 100, and plan to retire at 65, then if you assume that Social Security will still be around you HAVE ALREADY SAVED ENOUGH. If you assume the worst (very unlikely)case and there is absolutely no Social Security, then you need to save 46%. You only need to save 53% of your income if you are planning on armageddeon or have very high fees paid to your advisor. Live life a little, reduce your savings rate to a paltry (sarcastic ofcourse) 40 or 30%.

I don't know Chris-- 10-20% might be too little. At 56, 350K + 10% contributions for 9 years may not be that much to live on if she retires at 65 and doesn't have a pension.

People quote the 10-20% yearly savings do so assuming an adult lifetime of earnings.

I would definitely enjoy life more and maybe cut back a little on savings, but cutting back to 10% might not be such a good idea.

Mr. Trevor, please take a closer look at the question. The person has $350K in mutual funds, $340K equity in her house (all paid off), plus 401K and a pension from her employer with unknown sums. She may have a million or more in asset. Why save so aggressively now?

Thank you all for your comments; I'm the author of the question.

I've only been in the job for a year so my 401k and pension amounts are low at this time. However, I have no debt - not even credit cards - and the amount in savings/property as mentioned above. I put 6% of my salary into my 401k which my company matches up to 4%. Then I deposit 50% of my net into an account and turn the money over to my advisor every six months.

They indicated my portfolio was "too small" for the top guy to handle so I was passed to another. I feel like they are trying to get my total investments up so they can charge more fees. Most of the investments are through Wachovia.

I would like to travel a little, I haven't had a vacation in over 15 years, but I don't have much room financially for splurges.
Thanks for your input.

Kate, Charlotte

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