What to Do When You Realize You’ve Saved Too Much for Retirement
An increasing number of retirees are confronting an unexpected reality. What may not have been obvious during their working years—even if they were high earners throughout much of their career—often becomes clear in their 70s or 80s: that they may have saved far more for retirement than they are likely to spend over the remainder of their lives.
For decades, the dominant narrative in personal finance has been one of scarcity. Investors have been inundated with messaging designed to evoke anxiety and uncertainty, prompting several questions like, Will I have enough? Will my portfolio last? Should I be saving more? Today, however, a growing number of retirees are confronting a very different question: “How much is too much?”
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The data suggests that this is an increasingly common reality. For instance, Fidelity regularly publishes data on its own clients’ retirement accounts, showing a 3x increase over the past decade in the number of “401(k) millionaires,” a figure that continues to grow almost daily.
As lifespans extend and disciplined savers continue to benefit from decades of compounding, it is reasonable to expect that more individuals in their 70s and 80s will encounter this reality in the years ahead. And while it is certainly an enviable position to be in, it introduces a new set of decisions that are less about growth and accumulation and are more about intention.
For much of your working life, your investment portfolio likely has a singular mandate: growth. But in retirement, once you reach the point where your assets far exceed your projected needs, the role of your portfolio begins to shift.
A retiree who has more than enough to fund their lifestyle may find little value in maintaining a high-volatility allocation designed to chase marginal outperformance above the broader markets. The downside risk of a significant drawdown may far outweigh the benefit of additional upside that they no longer need.
This does not imply that older investors should abandon growth altogether. Rather, it suggests that by reallocating toward asset preservation through vehicles such as fixed income and REITS, you are able to introduce more stability and simplify the overall structure of the portfolio.
In essence, that could mean trimming an outsized equity position that was accumulated over a long career or exiting the more volatile positions that tend to drag the portfolio down significantly at a moment’s notice. The goal is not to eliminate risk entirely but to ensure that the risks being taken are still aligned with the purpose the portfolio now serves.
Another more subtle yet important shift occurs on the tax side of the equation. During your working years, the strategy is often to simply defer as much of your income into your retirement accounts on a pre-tax basis, which in most cases helps reduce your taxable income dollar-for-dollar.
But in retirement—particularly for those with large balances in tax-deferred accounts—this strategy can create an unintended tax consequence. Since required minimum distributions (RMDs), Social Security income, and investment income all tend to stack up in one’s later years, it is not uncommon for some retirees to find themselves in the highest tax brackets once these income sources converge.
Thus, Roth conversions can serve as a powerful tool for legacy planning. By gradually shifting assets from tax-deferred accounts into Roth accounts, where future growth and distributions are treated as tax-free, you can create a more tax-efficient inheritance for your next generation.
But perhaps the most underappreciated—and perhaps most difficult—move that 401k millionaires can make is to spend more today. After decades of disciplined saving, spending more than what is absolutely necessary can feel counterintuitive, even when the math clearly supports it.
But not all spending is created equal. For many retirees, the most meaningful expenditures are not those that increase status, but those that enhance comfort, convenience, and connection.
Choosing to fly first class instead of economy, for instance, may not materially change your financial picture much, but it can significantly improve the experience of air travel. Similarly, having groceries delivered to your home rather than navigating crowded stores can reduce physical strain and free up time for more enjoyable activities.
Even more impactful are the spending decisions that preserve long-standing relationships. Consider an individual who has historically driven several hours to visit family and friends but now feels less comfortable making that trip. The default response might be to stay home and travel less frequently, if at all. But perhaps using a rideshare or chauffeured car service might allow that connection to continue for several more years without the mental and physical burdens of driving.
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Malcolm Ethridge is the Managing Partner at Capital Area Planning Group, based in Washington, D.C. His areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
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Disclosures:
The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your tax and legal advisors before taking any action that could have tax and legal consequences.
Investments in securities and insurance products are:
NOT FDIC-INSURED | NOT BANK-GUARANTEED | MAY LOSE VALUE