A financial adviser says there's a classic piece of money advice her high-earning millennial clients are too good at: saving for retirement

Christian Vierig/Getty ImagesSome high-earning millennials are oversaving for retirement.

There are a lot mistakes you can make when saving for retirement.

Turns out, oversaving can be one of them, according to Priya Malani, founder of financial firm Stash Wealth, in New York City. Malani, who works with Henrys – millennials known as “high earners, not rich yet” – told Business Insider she often sees her clients saving too much for retirement.

“Oversaving is pretty easy to do when you’re a high earner,” Malani said. This might be you, she added, if you’re stashing away money without thinking about an end goal or are saving “super aggressively” – such as starting to save in your 20s and maxing the contribution limit of your 401k, she said.

This may sound contrary to popular wisdom often touted by financial experts, but Malani says the danger in saving too much for retirement lies in the possibility of sacrificing short-term goals in the process.

“The potential issue with oversaving for retirement is that if you’re saving in an arbitrary fashion (without any specific goal in mind), you’re likely compromising on the goals you probably want to accomplish between now and retirement,” she said.

To determine if a client is oversaving for retirement, Malani said she projects their current retirement savings amount along with their savings rate. This tells her how much money they’re on track to retire with, compared to how much money they need or want to be on track for. She said she often finds they’re on track to retire even earlier than planned.

If you could decrease your retirement contribution and still be on track, then you’d have more money to redirect to other goals such as saving for a down payment on a house or planning to start a family, she said.

Oversaving for retirement is a case-by-case basis

To illustrate her point, Malani provided an example.

Consider a 25-year-old who earns $US100,000 a year and has $US30,000 saved for retirement in a 401k. For simplicity, Malani said, let’s assume their income never increases, there’s no company match, and they always max the contribution limit, which is $US19,500 for 2020.

Assuming an annualized growth rate (the rate at which the money compounds) of 8% and a withdrawal rate (the percentage of money taken from the account per year after retirement) of 5%, they would have $US5.7 million saved by age 65, Malani said. The average annual return on a 401k is 5% to 8%, but Malani says she based the example on 8% because it’s the most commonly quoted annualized historic growth rate.

This would give them an annual income of $US389,491 per year, every year, for nearly 30 years, assuming they drawdown on the principal amount. “This amount may be more or less than they want or need,” Malani said. “If they want to plan for less than this, they could save less or retire earlier.”

But projections like this shouldn’t be done without additional context and conversation with a financial expert, Malani said, as there are other variables to consider: Your income could fluctuate; you could marry, bringing in additional income into your retirement goal; or you could receive an inheritance later on in life.

There’s also the fact that the Social Security trust – the government-run program that provides benefits to retirees, the disabled, and their families – will be underfunded as soon as next year. In case Social Security is no longer around by the time millennials retire, Malani doesn’t usually include it in retirement projections – “if it exists, it should be thought of like icing on the cake,” she said.

This all isn’t to say you should discount the importance of saving for retirement – the sooner you start, the better. But, according to Malani, it’s all about establishing a balance between the lifestyles you want now, in the short-term, and in the long-term.

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