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The quick answer to the question, “Can you save too much for retirement?” might seem like an obvious, “No. You can never have too much money.” But another way to ask the question might be, “What are you giving up by saving too much for retirement?”
Fred Vettese, co-author of The Real Retirement and author of Retirement Income for Life, has given this answer a lot of thought and he feels that some Canadians may be depriving themselves of present-day opportunities to enjoy more of their money because they are over-saving for retirement. That doesn’t mean blowing the bank on frivolous things. Saving less and spending more now could mean giving away some of your wealth while you are still around to see the effects of your generosity.
To support his feeling that some savers are saving too much, Vettese turned to the findings of the Society of Actuaries. The Society set out to identify the types of rainy-day situations that retired Americans actually encounter and how they cope with them. Canadians might expect similar situations. “When I looked at the list,” says Vettese, “the shocks seemed to fall into two major categories: “supply shocks” and “demand shocks”.
| Supply shocks involve a sudden loss of assets (our supply of assets goes down). |
| A drop in home value of 25 per cent or more |
| Running out of assets |
| A loss in the total value of savings of 10 per cent or more due to poor investment decisions or bad investment |
| Bankruptcy |
|
Loss of a home through foreclosure |
| Demand shocks are events that require us to spend (the demand for money goes up). | Frequency |
| Major home repairs or upgrades | 35% |
| Major dental expenses | 26% |
| Significant out-of-pocket medical or prescription expenses | 8% |
| A family emergency | 6% |
| Victimization by a fraud or scam | 4% |
| Significant damage to the home due to a fire or natural disaster | 2% |
| Divorce during retirement | 2% |
This may look like a long list of potential threats to financial security but Vettese points out that most “supply shocks” can be avoided by effectively managing investment risk. That’s where a Lawyers Financial Advisor can help. Most “demand shocks” occur very infrequently and tend to be manageable when they do. Many of the medical and dental expenses may be covered by Provincial or personal health insurance plans. So, it’s possible that many Canadians may be saving more than they have to and giving up some of their opportunity to enjoy life more in their earlier retirement years.
So, what does Vettese suggest? He says, “It appears that the vast majority of retirees muddle through reasonably well, in spite of the odd retirement shock. I would therefore suggest we don’t try to overthink the matter of rainy-day spending by devising too elaborate a strategy.” His suggestion is to hold back a small percentage of your retirement income each year and use it to build a reserve for unexpected situations. How much you set aside is up to you and will likely vary by the type of retiree you become. Learn more about budgeting for retirement spending based on your retiree type here.
