What happens if you save "too much" for your retirement, as a recent MSN Money Article suggested was a possibility following conventional financial planning "rules of thumb" such as the 4% retirement withdrawal rate? Nothing too disasterous it turns out - just an accumulation of wealth and a perpetual income stream for our descendants, and/or a legacy to leave to one's favourite charity.
Plugging some "typical" figures into a retirement savings planner from AMP, it turns out that someone on a reasonable salary of $50K from 20-65, who saved the 9% SGL plus an extra 3% via salary sacrifice would end up with a retirement income of $33,333 that would last well beyond their expected life span - until the ripe old age of 150 years!
Calculator data entered:
Current retirement savings $ 0
Your age now years: 20
Your expected retirement age years: 65
Expected annual contribution increase: 3%
Expected rate of return before retirement: 8%
Expected rate of return after retirement: 7%
Expected annual inflation rate: 3%
Current gross annual salary $ 50,000
Your yearly contribution: $ 0
Your employer's yearly contribution: $ 4,500
Yearly retirement income required (% of current salary): 65%
Amount saved upon retirement $ 2,217,233 ($ 586,322)
Which would provide the required retirement income of $33,333 until age 94, which is considerably more than the expected life expectancy (81 years for a male).
But wait, just saving an extra 3% of salary each year via salary sacrifice (ie. pre-tax) would result in the following:
Amount saved upon retirement $ 3,086,723 ($ 816,249 in today's dollars)
Will last almost indefinitely (until over 150!)
Any higher savings rate would result in the retirement account actually accumulating wealth during retirement at a rate greater than 65% of pre-retirement income, so you would leave a perpetual income stream for your descendants.
In reality you're unlikely to get a steady 8% return pre-retirement and 7% during retirement, even if you invest in an asset allocation that is expected to average these rates. Similarly, inflation won't stay at 3%. For these reasons most people will choose to be conservative in their modelling, and the chances are good that you'll end up with an even larger perpetual income stream, plus the ability to draw a larger income stream during your retirement years.