Just Saving More Is Not the Answer

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Whenever I write about calculating how much money you need to retire, some people vehemently disagree with the whole idea that there is such a figure. One told me, "The only correct answer is as much as possible!" Well, that's crazy.

Now, it's certainly true that many people aren't saving enough. If you've made it to your 30s or 40s and your retirement savings hasn't cracked five figures, then "as much as possible" is a reasonable suggestion for how much of your paycheck to put into your 401(k).

But if you're talking about the size of your retirement portfolio, "as much as possible" is a wrong-headed goal.

Here's a thought experiment to show that it's wrong: Suppose you're 75 with savings of $10 million, or 85 with savings of $50 million. Would it make your retirement more secure if you dragged yourself to work for one more year and socked away another $20,000? I don't think so.

But the theory of "as much as possible" is worse than just wrong. Thinking that way leads to bad decisions. You have limited time, energy, and money, so you want to address the risks to a secure retirement as efficiently as possible. How many of these risks would be best addressed by an extra $10,000 in your retirement portfolio?

• The market might fall.
   
• The market might stay up, but your investments might fall.
   
• Interest rates might stay low.
   
• Inflation might eat up your savings.
   
• Even if prices in general stay down, the price of things you need (food, medicine, fuel) might surge.
   
• You might overspend.
   
• You could lose everything in a lawsuit or a natural disaster.
   
• You could become disabled, and have to pay people to do things you'd planned to do yourself.
   
• Your pension might go kaput.
   
• The government might change the rules on retirement savings (or taxes, or something else).

If your retirement savings are small, probably the most efficient things you can do are work hard, earn money, live frugally, and save for retirement. (And you should be taking advantage of standard tools like diversification and insurance right along.) But right from the start — and especially as your retirement portfolio grows — there are other things to do. Here are some things that might address the above risks more efficiently than just putting the equivalent amount of money aside (or the equivalent amount of time into earning money):

• Learn new skills. In particular, skills that will open up new options for earning money if necessary, but also skills that will allow you to do things yourself, rather than having to pay to have them done.
   
• Grow a garden. A garden can produce healthy, tasty food very cheaply.
   
• Make friends with your neighbors. There are a lot of problems where good relations with your neighbors are much more likely to produce a solution than an extra $10k in your investment portfolio.
   
• Build your connections with your family. Same as with neighbors, only more so.
   
• Insulate your house. Something that reduces your heating and cooling bill by $100 a year is worth about as much as $2500 in your retirement portfolio. And you can be sure your insulation isn't going to declare bankruptcy.

Yes, you want to save up some money for retirement. But trying to save "as much as you can" will only distract you from the work that really will ensure a secure retirement:

• Paying attention to your spending, your portfolio, and the world around you.
• Building and maintaining your productive capacity.

Although having some savings is nice, real security in retirement will never come from your investment portfolio. Real security comes from your ability to react to changing circumstances.

That's the context in which it makes sense to say that some amount of retirement savings is "enough." It's not that more money wouldn't make you more secure. It's that putting more money into your retirement portfolio wouldn't make you as much more secure as putting the money (or the effort it would take to earn it) someplace else.