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What to do when you save too much

January 31st, 2007 at 03:36 am

The NY times has an article covering the contrarian view of some academics that Americans are saving too much for their retirement, and risk squandering their youth rather than their money. The theory being that a middle-income couple could trade off $400,000 less in retirement money for an extra $3,000 a year disposble income during prime working years to spend on education or home improvement.

On the other hand, I've seen advice that if you are "on track" to meet your retirement or investment target you should adjust your asset allocation to attain the amount of return required for the least possible risk.

I don't find either of these options terribly attractive - just because my retirement fund is on track to meet my retirement income needs doesn't mean that I want to start spending more or wish to adjust my asset allocations to a mix with lower "risk" and a lower expected rate of return. I'm happy with my current budget, so I intend to add any future pay rises (that exceed increases in my cost of living) to my savings plan. Similarly I'm quite content with the current risk level of my investment portfolio, so it is likely to achieve a higher rate of return than I really require to achieve a comfortable retirement. Even if I adjusted the risk level of my retirement account investments down in order to "guarantee" that I'd have enough money in retirement, I'd still aim for the same overall level of risk in my entire investment portfolio that I'm comfortable with, so I'd likely accept an increased level of risk with my non-retirement investments as my retirement account got load up with "safe" assets.

So, my preferred option for when you find yourself ahead of target for your investment goals is just to keep on accumulating "excess" wealth. You can always leave it to charity in your will if you're so inclined, or else leave a larger estate to your heirs.

Plus there's always the risk that advances in medical technology might mean that you live a lot longer than you currently expect. Or else the world could go to "hell in a handbasket" due to global warming, WMD terrorism, etc. etc. and you could find yourself "retired" earlier than you expect, or else needing a lot more income in your retirement than seems likely assuming "status quo".

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