This post is in response to a question an individual had for me when I was meeting with her a few months ago. The question she had for me and the title of the post was if she was saving too much money.
The reason she asked is that after a conversation with friends of hers, they had collectively told her that she was saving too much money for retirement. Currently, this 25 year old was saving 26% of her income for retirement! My verbal response was a firm, “Well done!” My internal response was, “Get some new friends.”
Her friends were trying to convince her that 10% was more than enough to save for retirement at such a young age. While 10% is a decent amount to put away, 26% is even better. In addition, this young lady was already used to saving 26% of her income. It wasn’t straining her financially.
This is what I told her. I recommended that she keep saving the same amount and gave her some reasons why. The first reason is that once she reduced the amount to say, 10% of her income, she would have an extremely difficult time increasing it in the future. Psychologically, she would be used to spending that money on something else and would see an increase as a “sacrifice” that would put strain on her income.
Second, we discussed the time value of money. Like any finance nerd I grabbed my financial calculator and went to work. Based on her income of $50,000 and current investment of $25,000 already in her plan, I took 26% of her income ($13,000) and invested that annual payment at 6% for 30 years. This turns out to be just over 1.17 million dollars (not accounting for any annual raises). Next, I reduced the annual contribution to just $5,000 (10%) of her income (again, not accounting for raises). In 30 years her nest egg dropped to just under $539,000 – less than half of what she’s currently on track to have.
Finally, and respectfully, I asked if her friends were willing to hand her a check at retirement for the difference. In other words, I asked if she was confident her friends would hand her a check in 30 years for $631,000 as congratulations for taking their advice.
She simply smiled and shook her head.