) -- Few days pass without some new study or survey reinforcing a dire message that Americans are not saving enough for a comfortable retirement.
For some, that message may actually be detrimental. While true that many -- perhaps most -- are dangerously behind with their savings timeline, even those with a suitable nest egg are prodded continually into saving more. Some run the risk of saving too much, of letting their lives be dictated by compulsive frugality. Think of them as the financial equivalent of hoarders. They're so dead set on accumulation that they find it psychological torture to spend anything.
Some retirees could never spend all of their money, given their frugality, but still worry about running out of money or not having an inheritance to leave their children.
Ted Bovard, principal and financial consultant for
in Pittsburgh, says his firm has high net worth clients who fall into this category. Even though they could never spend all of their money, given their frugality, they still worry about running out of money in retirement or not having an inheritance to leave their children.
As an example, one client, despite having a $9 million nest egg, called to seek advice on whether she could afford to buy a new clothes dryer.
"We have clients who have $6 million to $7 million saved and they ask, 'We were thinking about giving money away to this school, or this charity, or the grandkid -- do you think we can do it?' Well, how much money are you thinking of giving away? 'Probably just the gifting limit for the grandkids, maybe $13,000 times three or four.' Well, I think with $7 million you are OK," Bovard says.
"There is nothing wrong with being careful, but you can overdo it,
, president of
Capital Financial Advisory Group
in Cary, N.C. "It's like the skinny squirrel who stores a bunch of nuts in a tree over and over again, but doesn't eat them. He just runs off looking for more nuts. Then termites get in there and when squirrel comes back the tree's not there anymore."
D'Arruda uses that fable-like example to explain that the fear of depleting assets doesn't just lead investors to take on an unhealthy degree of risk; they can also err on the side of perceived safety.
The fear of running out of money isn't always without merit, he says, pointing to the "biggest risk of all" -- the eventual need for long-term care. With these needs in mind, he urges clients to create an income stream and hedge against future expenses with various annuity and life insurance policies that include long-term care riders. What he doesn't advocate is relying on so-called "safe" investments -- including cash, CDs and other bank products -- to provide peace of mind.
"CD accounts are not earning anything," D'Arruda says. "I refer to it as losing money safely. Look at inflation right now. You can go to the grocery store now and see how expensive it is, and there are also rising fuel costs and increasingly expensive health care. You need to be keeping up with inflation if you want to make sure you have money for the future."
Bovard sees several reasons for why some people have a hard time accepting that their savings are, in fact, sufficient. Factors include a lifetime of frugality, over-reacting to market fluctuations and the intangibility of wealth that is in investments, not in physical cash, gold or even stock certificates.
"A lot of time, I think I, as their adviser, am the person who can help them relax," he adds. "For the folks we have had longer-term relationships with, they look to you to tell them what they can do and what they can't do. If we tell them they can do it, they are more comfortable."
A challenge, he says, is getting clients to move past an all-encompassing drive to save and accumulate wealth and to focus as well on enjoying the fruit of their labor.
"People ask, 'How much do I need, do I have enough?' We don't really focus so much on the total number. We see how do you want to live and what it's going to cost," Bovard says. "If it is $500,000 a year, your $2 million isn't going to get you very far. If it is $50,000 a year then yes, you are probably going to be in very good shape."
A persistent voice warning that some are saving too much for retirement is Laurence Kotlikoff, an outspoken economics professor at Boston University.
In a past interview, Kotlikoff, who co-wrote the book
Spend 'Til the End -- The Revolutionary Guide to Raising Your Living Standard, Today and When You Retire
(Simon & Schuster, 2008) with Scott Burns, put much of the blame on the retirement calculators companies such as
T. Rowe Price
deploy on their Web sites.
"Financial advisers are giving bad advice using bad financial tools that aren't remotely capable of dealing with the question that they are trying to answer," he said, noting that advisers can profit from their inadequate assessments.
"The bottom line is that if you over-recommend products, you sell more," he said. "If you get compensated, either directly or indirectly, based on your sales, there is an incentive to make recommendations that are, on average, too high."
Kotlikoff, who has crafted his own retirement software tool,
, estimates that about 20% of households are likely saving too much for retirement, compared with the 40% he believes are saving dangerously too little.
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"I think under-saving is probably a bigger problem, but there is still a risk with over-saving," he said. "You could save like crazy and then you can drop dead when you hit 55. It is not only that you may die young, it is also that you can be induced into much riskier securities than you should be investing in because you think that this is the only way you can make your target. The whole focus is on making a target that is ridiculous to begin with."
Bovard says many retirees who have saved and invested appropriately throughout their life follow a similar pattern of financial realization.
They start out very nervous they don't have enough. That persists for the first seven years or so. Then they start to breathe a sigh of relief and get comfortable with the idea that they can enjoy life and spend down some of their assets. Later, they fully grasp that they have more money than they can ever spend and face regrets over what they wish they had done.
Bovard isn't surprised by the psychology at play among those who resist post-retirement spending.
"You spent 40 to 45 years accumulating this pot of money, and you did it by saving and saving and scrimping," he says.
In response, he tries to work with clients, especially during the early years of retirement, to "bump that expense level up a bit" and factor in the cost of various trips and activities they have expressed an interest in but haven't had the time to do until retirement.
"Sometimes part of our job is not just to be your financial adviser, but also a counselor," Bovard says. "It's all about striking a balance. If there are a couple of things you want to get done, lets figure out how to do them and still feel comfortable whether the markets are up or down or back and forth. While you still have the health and energy and desire, let's make these things you want to do happen."
"If you can't actually do that and relax, why retire? Maybe you are just tired of work, and that's fine, but if the idea is to retire because there are things you want to do and enjoy, then you are going to have to learn to relax a little bit," he adds. "It is a very different thought process for people when they've spent years pumping money in and now they turn around and have to take money out. Psychologically it is a huge transformation and if they are a workaholic, this can be a very difficult transition."
The balancing act between preserving financial security and enjoying your money differs from person to person, Bovard says. It is hardest for those he describes as "worrywarts."
"You have to deal with that personality differently, and they may never be comfortable," he says. "You say that they can afford to do something and they reply, 'Oh, I'd better not.' As soon as you go through the first downturn together -- and if you look at them long enough you are going to go through at least one or two or maybe three -- they are like, 'See, I knew it, I've got to pull back, I knew I shouldn't have gone on that trip.' What I have to say to them is that we've got the money set aside and life is going to move on whether the markets are up or down."
Bovard says having a solid financial plan in place helps investors learn to enjoy life in retirement. It also keeps them from taking on excessive risk in the name of returns.
"It's important to have the ability to stick to that plan through the good the bad and the ugly," he says. "It is not just when things are bad that people go off the reservation. When things are great, people believe they are much less risk averse. 'Oh look, everybody is making tons of money and I'm not making as much.' Well, remember that we have a balanced portfolio because when things are down you get really upset. We'll still get to the same place, we are just going to do it with less bumps."
--Written by Joe Mont in Boston.
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