Having enough money saved for retirement is crucial, but is there such a thing as having too much? As you approach retirement, determining how much is “enough” is an important question. While conventional wisdom states that the more retirement savings the better, there are some potential downsides to having an extremely large nest egg that are worth considering.
How Much is Enough for Retirement?
There are a few common rules of thumb when it comes to how much money you should have saved by retirement:
- Have 1x your annual salary saved by age 30
- Have 3x your annual salary saved by age 40
- Have 6x your annual salary saved by age 50
- Have 8x your annual salary saved by age 60
- Have 10x your annual salary saved by age 67 (full retirement age for Social Security purposes)
So for example, if you make $100,000 per year, you would want to have $1 million accumulated in retirement savings by age 67. This is a general guideline, but the actual amount you need depends on your planned retirement lifestyle and sources of retirement income.
Common retirement income sources include:
- 401(k)s, IRAs, and other retirement accounts
- Pensions
- Social Security
- Rental income
- Part-time work
Once you tally up your estimated monthly retirement expenses and expected sources of income, you can determine if you’re on track or need to make adjustments. Online retirement calculators can help crunch the numbers.
Potential Downsides of Having Too Much
While a large nest egg provides security, there are some potential negatives to having an extremely high retirement account balance such as $5 million or more:
- Required minimum distributions (RMDs) – Once you reach age 72, you must take required minimum distributions from 401(k)s and traditional IRAs every year based on your account balance and life expectancy. Large RMDs can push you into a higher tax bracket.
- Higher Medicare premiums – Your Medicare Part B and D premiums are based on your income from two years prior. Large retirement account withdrawals can increase premiums.
- Reduced retirement account growth – Taking large RMDs reduces the amount left in your accounts to continue growing tax-deferred.
- Ineligibility for certain tax credits – Having high retirement account balances could make you ineligible for premium tax credits on health insurance plans.
- Security concerns – Keeping extremely large amounts of money could increase concerns about theft or exploitation.
- Family conflict – Wealth can sometimes create conflicts with children/heirs over inheritance.
Strategies to Mitigate Downsides
If your retirement accounts are projected to be significantly more than you need, here are some strategies to consider:
- Tax-efficient withdrawal strategies – Work with a financial advisor to develop a tax optimal withdrawal plan, timing RMDs and withdrawals to manage your bracket.
- Roth IRA conversions – Consider partial Roth conversions during early retirement to spread out the tax liability over time.
- Delay Social Security – Waiting until age 70 to claim can reduce future RMDs and Medicare premiums.
- Charitable trusts – Transfer a portion of assets into a charitable remainder trust to receive a stream of income now and leave the remainder to charity later.
- Gifting – Make gifts up to the annual exclusion amount to reduce estate size and pass on wealth during your lifetime.
- Investment diversification – Diversify your holdings into varied asset classes like stocks, bonds, real estate to reduce risk.
A financial plan can help ensure your resources last without needing to excessively constrain your retirement lifestyle.
What Level is Considered Too Much?
There is no definitive threshold where a nest egg becomes “too much,” but most experts agree once your accounts reach into the multi-millions, additional savings provide little extra security or benefit:
| Savings Amount | Potential Issues? |
|---|---|
| $1 million | No, $1 million is a common target goal for retirement savings |
| $3 million | Maybe, but RMDs and premiums can likely be managed |
| $5 million | Possibly, taxes and Medicare premiums start becoming concerns |
| $10 million | Almost certainly, very large RMDs could push you into highest tax bracket |
However, the amount that may be considered too high depends greatly on your lifestyle. For example, if you plan to splurge on luxury travel and residences, $10 million may not go that far. Or if you have a larger family you intend to support, a higher savings amount likely makes sense.
Factors That Impact Your Answer
Some key factors that can influence whether a given savings amount is too high for you:
- Your annual retirement spending needs
- Cost of living in your geographic area
- Number of dependents you need to support
- Luxury purchases like second homes you desire
- Long-term care needs
- Legacy goals and estate planning objectives
Those with more modest lifestyles usually find they need less savings than those who wish to regularly travel, move residences seasonally, and cover hefty long-term care costs.
Conclusion
While there are some risks and responsibilities that come with an extremely large retirement nest egg, you’re generally better off having too much saved rather than too little. As long as you work with qualified financial and tax professionals and maintain an appropriate, diversified investment allocation, excess savings simply provides more options and security.
The key is developing an intelligent withdrawal strategy and using additional assets strategically for causes you care about such as gifting to family or charities. With some prudent planning, there is likely no such thing as having too much money in retirement.