Everyone's heard of stretching to buy a McMansion and becoming "house poor." But what about saving too much for retirement and ending up "401(k) rich and cash poor"?
It can and does happen — often to investors with both good savings habits and good intentions for their financial future. These model savers later run into a cash crunch because of unexpected expenses, ballooning lifestyle costs or miscalculations.
Most personal finance pros advise U.S. workers to save as much as they can by stashing money in 401(k) retirement accounts, which lower taxable income and shelter investment earnings from the IRS. But there's a downside to tying up too much cash in these accounts: it could leave you without enough money for unexpected bills.
"Oftentimes investors box themselves in — in terms of future financial options — by worshiping solely at the altar of tax-deferred retirement accounts," says Tony Ogorek, founder of Buffalo-based Ogorek Wealth Management.
The error over-savers make is failing to put their finances through a stress test. By imagining your own financial crisis, you learn whether your cash flow is sufficient to cover expenses without tapping your retirement savings. And that knowledge is crucial because there's a heavy penalty for borrowing from your 401(k). Most accounts charge a 10% early-withdrawal penalty for people
"The main mistake," Ogorek says, "is not doing a realistic assessment of what your cash needs could be under various scenarios."
Of course, the bigger retirement crisis is Americans not saving enough, or not at all. Only about one-third of workers are saving in a 401(k) or a similar plan, according to the U.S. Census Bureau.