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Building Wealth through Saving and Investing

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Ask the Readers: Can One Save Too Much Money?





A new thread on Canadian Money Forum involves a question that got me thinking -  “Can You Save Too Much Money?” which originated from a Globe Investor case study article.  In the case study, Lucinda has well paying job, she is a  big saver, and has a lucrative defined benefit pension.  A financial advisor crunched the numbers, and determined that Lucinda will have a significant nest egg by the time she is 90.

By the time she is age 90, the planner calculates, Lucinda’s investments will total $3.3-million – and she’ll still have her condo as well.

So the question is, with so much capital remaining at the end of Lucinda’s life, is it possible that she’s saving too much money?  It’s challenging to quantify “too much” as it’s subjective with everyone having their own opinion.  The fact of the matter is that people form habits that are hard to break.  Frugal people will naturally save money and spending the extra money will be foreign to them, even challenging.   Whereas people who are more liberal with their money would consider Lucinda to have a mental condition as they cannot imagine holding onto so much money without buying the next greatest thing.

It could be that Lucinda lives within her means, buys whatever she needs, and her income happens to be significantly greater than her required expenses. Or it could be an extreme, where she is a miser who puts saving money in front of all of life’s enjoyments.  More than likely, it’s somewhere in the middle.  But even so, is it wrong to accumulate that much capital just for the sake of accumulating?  Or should one spend the extra money just because it’s available?

As the title of this blog suggests, we are focused on building wealth (and likely you as well) through saving and investing.  I’m frugal, use many saving strategies, and a capitalist at the same time. As a result, we have surplus cash equal to a large percentage of our take home pay which is directed towards increasing our net worth.  We may occasionally buy things that are slightly greater than our needs, but overall, we keep spending in check.   Do we save too much money?  Perhaps to some, but to me, it’s about living a balanced today while working towards a financially free tomorrow. Having money means security and buying certain freedoms.  For accumulators, in the end, the money can be used as a legacy for the next generation.

So back to the question, can one save too much money?   It’s a tough one to generalize, but I’ll give it a shot. My thoughts are that if someone is already frugal, saving too much is when they sacrifice the happiness of themselves and/or others for the sake of keeping more money in their pocket.

What are your thoughts?  Is it possible to save too much money?  What is your definition of saving too much?





35 Comments, Comment or Ping

  1. 1. Jeebs

    Tough question. Some people derive enjoyment from the simple act of saving.

    I used to be a spender and now I’m a saver. but should I ever find myself in her position you can bet I’ll be doing more than a few international vineyard tours in retirement.

    I’ll want something left at the end to pass onto children and some to my favourite charities but at the same time there’s a lot of things that I still want to do and experience.

    If experiencing life means having a HUGE nest egg and watching sports on a 30 yr old television, then to each their own.

  2. 2. Steve

    It’s supposed to be what makes YOU happy, not what would make other people happy.

    If you are a ‘miser’ and having fat sacks of cash that you never spend when you die makes you happy and that you achieved something with your life, then whatever floats your boat.

    If they are doing it out of some negative emotion like irrational fear of running out of money, then yeah maybe it’s not healthy.

  3. 3. mike

    i often wonder this – when you read ‘wealth through frugality’-type books, or things like ‘millionaire next door.’ people wear their frugality on their sleeve like a badge of honour, but i’m not sure it’s a prize to say that you’ve got 4 million dollars in the bank but you eat tuna every day and wear a $6 wristwatch.

    i’d rather have 2 million in the bank, and an extra 2 million’s worth of great memories. but going to the grave with 3 million in savings just seems like a waste, to me.

  4. 4. Echo

    I think when you are talking about savings rate, you can’t really save too much as long as you are meeting your needs. But saving without a plan to direct the funds somewhere is kind of a waste.

    What good is $3.3M when you’re 90? It’s fine if you don’t need to spend the money, but I’ve seen grandparents in their late 80′s sitting on piles of money while their children still have mortgage payments and are struggling to send their kids to post-secondary.

    This woman didn’t need an advisor telling her to keep funnelling money away into stocks, she needs an accountant or an estate planner to help her plan to spend her money.

  5. 5. Dylan

    Easy answer..why would u want 3.3 million at 90..who cares. Days of leaving money to your kids are gone. Enjoy life..save a decent amount and enjoy yourself.

    What kind of financial advisor is showing someone numbers for when they are 90. Average life is 78? Gezzz..by 80 it becomes tough to travel and live for most…

  6. 6. jesse

    The answer: NO!!!!!!!!

    Some people want the option of retiring, or semi-retiring, at 40, and will sacrifice spending in their early years to have this option. Screw niceties or “taking one for the team” to get the economy rolling again. The modern economy has no interest in funding your retirement. Take a page from people in Asian countries and save save save.

  7. Absolutely. One can definitely save too much! Other than specific amounts one might want to give to their children or to charity, it makes the most sense to die with ZERO. At precisely the moment the bank account hit zero, no later of course! There is no point to having millions in the bank at age 90… At age 55, or 60, perhaps. If Lucinda had 20 million at age 55, then 3.3 at age 90 might be a good goal….

  8. 8. DanP

    Personally, it would depend on how much i made. If i was making 100k a year, and i saved 40k a year, i think that would be saving too much. Anything that would hamper my lifestyle or my families lifestyle is too much saving. If i was bringing in a million a year, and saved 400k, that wouldnt be as impactful to my lifestyle. If i were Lucinda’s kids, i’d rather have seen her spend the money and enjoy life, instead of saving it all and giving it to me when she passes away.

  9. That’s the thing, it’s easy to say that she should spend it, but what if she’s spending on everything that she wants and needs already? She could easily buy luxury cars, fancy electronics etc, but what’s the sense if it doesn’t add value to her life?

    I like the idea that some of you have some up with in giving away some of the money while she’s alive. That way, she can watch and enjoy the impact that she’s having.

  10. 10. iceisnice

    Being rich is creating memories for yourself and loved ones. Memories cannot be bought off the the shelf at Walmart and are the things you will remember as you get close to the end. Not knowing the circumstances of the individual in question makes it impossible to offer a valid opinion.

  11. 11. Sarlock

    FT hit the nail on the head: What if she already can buy what she wants? What if $50,000/year is all she needs to buy everything she wants/needs? A portfolio that size will probably earn double that.
    As a parent, I can speak to a change in priorities that occurs when you have kids and want to leave them something after you pass away. It’s a difficult balance to strike between providing them with financial assistance during their younger adult years and doing them a disservice by eliminating the drive to work hard and save by making their path too easy. I’d be happy to have a couple million left over for them when I pass away, but I think I will convince them that it’s all going to charity and then surprise them when the will is opened up after I’m gone and they stand to receive a good chunk of it.
    Bottom line is, leaving a financial legacy to subsequent generations is important to me. Money is freedom and power. I’ve never seen it as “my” money, I see myself as the caretaker of the family wealth until it’s my time to pass it on.

  12. 12. Leigh

    @DanP I make about $100,000 a year and this year, I will save about $50,000 of that. The way I see it is that if I’m spending enough to make me happy now, I’m better off saving the rest so that I could have a job with fewer hours making less money later on.

  13. 13. krantcents

    What is the goal? It is not to save for the sake of saving! We are saving for something, a secure retirement, vacations, trips, cars, education for your children. If it turns out you have too much, give it away.

  14. 14. Ray

    At 90, with that money she should be investing in anti-wrinkle cream and fountain of youth/cryogenic stocks to crank out an extra year.

  15. Absolutely there is such a thing, at least in my book. Sure, I love saving and investing and learning to be better at both as I get older but I can’t imagine having $3.3 M at age 90.

    Saving for the sake of saving is wasteful. To each their own I guess.

    I want a comfortable life and a comfortable retirement but I’m not going to stop living and seeking out opportunities that life offers as a sacrifice to saving. Life is for the living; you only get one shot.

    If you have “too much”, give it to some folks that are less fortunate. At least you can help them :)

  16. 16. Amit

    What would $3.3 million buy when she is 90? It’s possible that in today’s terms it’s value is just like $30,000 or $300,000 in today’s terms. :-) Who knows how many black Mondays will appear till she hits 90 years of age and how her investments turn out. These projections are useless so far down the road. 90 years ago no one would have even thought of the internet, or cell phones or the changes the modern technology brings.

    On other hand, what if when she is 90 her money can buy her (or her descendants) a one-way ticket to Mars while the other non-savers stick it out on a highly hot and unlivable Earth. :-)

  17. 17. Splitsec

    @leigh: If you are making $100k per year, and live in Alberta with a top tax rate of 36% at $100k, then you are living on approximately $23k a year after taxes if you save $50k. Kudo’s to you if you can do that, but I find it a little unlikely. (I used http://lsminsurance.ca/calculators/canada/income-tax to calculate that you would have $73,510 after tax in Alberta)

    @FrugalTrader: The question is a loaded one, and without more information or the “list of assumptions” made by the advisor, it would be hard to answer.

    If Lucinda is 60 and dependant free, then yes, she is most likely saving too mcuh.

    If Lucinda is 35 and wants to financially retire at 50 (and the advisor assumed retirement at 65), then probably not, as she will not have 3.3 million at age 90, as she will “loose” 15 income earning years, and drastically affect the numbers.

    If Lucinda is 35 and about to start a family, again, she is probably not saving too much right now, as she is about to have a significant change in expenses for the next 18 years or so, and it will also likely affect her ability to earn income during that time as well.

    Just my $0.05 opinion though…

  18. 18. Frugal Greenie

    You can’t take it with you. If you are meeting your financial and personal goals who cares what anyone else thinks?

    Check out the CBC NS Newsmakers of the Year 2010: Allen and Violet Large – it gives a great perspective of a 74 and 78 year old lottery winners who gave away most of their winnings:

    http://www.cbc.ca/news/canada/nova-scotia/story/2010/07/22/truro-lotto-winners.html

  19. 19. Paul Meane

    The other day, you had a post saying that paying down debt was a bad idea to build wealth. Now you have a post about saving too much money.

    This is an interesting blog.

  20. 20. Andrew

    It has been interesting Paul.
    The next post will be
    “Increased risk tolerance: selling your house to buy more stocks after you’re dead” by Ed Rempel.
    This is a follow up to today’s post.

  21. Too little is easy, it’s when you can’t expect to ever retire anywhere near the lifestyle you had prior to quitting.
    Too much? The family living on $100K/yr needs $2.5M or more to replace that money every year at retirement. One can make a case that if they are really conservative, they’ll withdraw ever less than this 4%, so they’d need more. It all seems to be a judgment call, who can say what others should spend? The frugal discussion and talk of everything being a luxury from movies and TVs to iPads has us all wondering what’s a need vs a want.

  22. 22. Jungle

    Interesting that it’s good. There is such thing as saving too much money. It can be a money disorder. Moneysense had a good read on this, during it’s last issue.
    It used a picture of a dude who was well off, but was walking in the rain with a broken umbrella. Classic example of people who underspend which can be linked to tramatic events that occured during child hood or their early life.

    Sometimes I think we save too much.. and I grew up poor.

  23. 23. Greg

    Yes, I believe one can save too much money. With so many excellent charities and so much need, some of this money should be used to help others. The other aspect is in what type of an instrument are the dollars saved i.e. RRSP etc., due to the potential impact on OAS when the person has to cash out and put the dollars into RRIFs.

  24. 24. Gerard

    @splitsec: Your calculation assumes a single person with absolutely no tax breaks and none of the money that they save going into an RRSP, right? And no advantages like a house already paid off? I think with a maxed-out RRSP and a few breaks, Leigh would be have 30-35K a year to live off, which doesn’t seem too rough.

  25. 25. TabithaP

    Interesting. I agree with many commentators that she shouldn’t manufacture reasons to spend, if she is happy living fairly frugally, though there should be no need for her to deprive herself of fun. Not having an expensive shoe or car habit is I think no bad thing however much money she has, as spending on these things probably wouldn’t add much to her happiness, though missing out on experiences – travel, time off etc – would to me seem more of a waste.

    I also think that projections of her potential wealth at 90 are a little odd: also, unless I missed something the $3.3m is in today’s figures, rather than being linked to inflation so who knows what that will be worth by then. And we know how much residential care can cost….(In the UK, where I am writing from, anyway.)

    It might not be a bad idea to have money in reserve for other relatives’ possible needs in later life, as well as her own, as they may be less fortunate, quite apart from charitable causes she might like to benefit. And having plenty of cash in reserve could allow her to retire early, volunteer, travel, and basically have more choices in later life, which sounds like a good thing to me.

  26. 26. Andrew2

    @Splitec

    Even by your calculations, $1917 / month is quite a bit of money to live on if you spend it wisely. I don’t think it is that unlikely.

    @Paul Meane

    Ed Rempel is a financial advisor who makes his living off of encouraging others to invest in specific things. As well intentioned as he may be, his profession puts a bias on the advice he gives.

  27. 27. Sarlock

    Given that this result of $3.3m at age 90 was a financial projection based on current circumstances, job earnings, expected retirement age, estimated return on investments, future inflation rate, etc, it’s a pretty subjective debate. There are a lot of “ifs” with those estimations and one would assume that as she gets closer to retirement, she can re-evaluate her financial situation and choose to retire earlier, save less, etc… and probably not end up with said $3.3m at age 90.
    But, ultimately, it just means that her retirement portfolio will be sufficient size that it will slowly grow through her retirement years instead of shrink. If she retires with $2m in investments at age 60, earns 6%, has an expected inflation rate of 3%, she will earn $60,000 per year from her investment portfolio (eliminating the impact of inflation eroding the purchasing power of her portfolio). If she only spends $40,000 per year in retirement (above her CPP/OAS), this means that her investment portfolio will grow by $20,000 per year. Times 30 years, plus compound growth, we roughly arrive at the value determined by her financial advisor.
    I wouldn’t say $2m in retirement funds at age 60 is a huge stretch and $40,000 per year + CPP/OAS isn’t an extravagant retirement income.
    Adjust a few of those above parameters, investment yield down from 6% to 5%, inflation up from 3% to 4% (right now, you can’t even MAKE the inflation rate with a GIC or government bond), expected retirement expeditures and we’ll find that her retirement portfolio will have instead have shrunk by age 90.
    Having $1-2 million in retirement funds is pretty much par for the course as far as I am concerned, if you want to retire at age 60. You *can* retire at 60 with less, but you have to be prepared for the financial consequences of the type of retirement they have chosen (and many are quite fine with that).

  28. I agree with @My Own Advisor, life is for the living and you only get one shot. I don’t see the point of saving so much money that you end up living in a cardboard box. There is also no point in living like a millionaire on a middle class salary. Life is all about balance.

  29. 29. Leigh

    @Splitsec I live in a state with no state income tax, which puts me in the 28% marginal federal bracket. Some of that total savings amount is from my retirement contributions. I live off of $36,000 per year after taxes and savings. My housing expenses are more than half of that because I live by myself in a high cost of living area. Living in a lower cost of living area would probably halve my housing costs, but then I’d probably also end up with a huge commute or a lower salary.

    You might think I’m saving too much, but I’m spending more than enough money on the things that matter to me, investing for retirement, and saving towards buying a house in a few years. I doubt I will be able to save that much of my income when there are renovations to do on a house or children to feed an clothe, so I’d rather save more now. Spending $3,000 per month as a single person isn’t a small chump of change as far as I’m concerned.

  30. 30. RJ

    I contribute to a company pension (DC), my own RRSP and my own TFSA.
    My wife contributes to her DB pension (Ontario Teachers).

    Including the employer contributions of those pensions (5% and 3 or 4% respectively), we save 36% of after-tax. I always used to think teachers had the easy-street pension but 10% of the contributions are right off their paycheques.

    I’m 29 and she is 27. We have a 5 month old and daycare costs will likely put a dent in this once she returns to work in January.

    I find this rate of savings very difficult to maintain. The active savings (vs. passive pension savings) is all me. Her only savings are in the pension. We do live below our means and the bank accounts tend to grow over time a bit but that 36% is our retirement-devoted savings.

  31. 31. Satish

    I think there needs to be a balance. Often we hear stories about someone who just passed away with millions of dollars in savings but lived like a poor lonely person with no family. If being a miser alienates your friends and family, then you will need to re-evaluate if you are saving money for the sake of a target number or for achieving happiness and financial freedom.

  32. Many of our generation (Boomers) wasted our marriages, family relationshios, and even our health chasing symbols of success.
    Many have accumul;ated way more money than they need.
    Still others have squandered more than they could afford buying tose symbols of success.
    Real success is having a well rounded life.
    A great read was ‘Bring About What You Think About’ by Eddie LeMaoine

  33. I think it is impossible to define “too much”.

    For us, we have a plan which we execute. Excess is used any way we want to use it.

  34. It’s quite likely that she won’t live to 90, maybe her reasoning is to leave the money to an heir. It does kind of seem that she might be missing out on life and all the fun stuff she could be doing while she’s younger.

    I think “saving too much” is when you don’t allow yourself to enjoy life now because you’re too focused on saving for retirement. Just my opinion though. :-)

  35. 35. Jake Long

    It’s good to save, but sometimes you have to realize that using that extra money can provide more opportunities to enjoy life. Having enough extra money to invite the extended family to a beach house is a great way to get people together and have some fun. I think it all comes down to a balance on a personal level. And by personal I mean the individual and their loved ones.

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