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Save early, save often, but don’t save too much

Even though the mantra of the financial services industry is to save early and often, there is such a thing as saving too much. TODAY Financial editor Jean Chatzky shares some tips to keep you from overestimating your retirement needs.
/ Source: TODAY contributor

The mantra of the financial services industry has always been to save early, and save often. In many cases, that's been my mantra as well, but as a country, we're behind the eight ball when it comes to saving. Now that pension plans are basically a thing of the past, we are responsible for covering our expenses in retirement, and many of us won't be prepared.

But the other side of the equation — those of us who are saving too much — is rarely discussed.

You may have been told again and again that it is impossible to save too much. Recently, though, the tide has started to turn on that theory. One proponent of the message that some people may be overestimating their retirement needs is Larry Kotlikoff, an economist at Boston University. Kotlikoff has co-authored a new book with financial columnist Scott Burns titled "Spend 'Til the End: The Revolutionary Guide to Raising Your Living Standard — Today and When You Retire."

The book focuses on what Kotlikoff refers to as consumption smoothing. "We're not interested in having a fantastic living standard in retirement if we have to starve beforehand, nor do we want to splurge today and starve tomorrow," he says. "The goal is to figure out how much you need to save in order to have the same living standard in the future that you have in the present," explains Kotlikoff.

An appealing notion if I’ve ever heard one. Here's how to put it into practice:

Find your target We hear a lot of talk about magic numbers, but it’s impossible to pinpoint exactly how much you're going to need in retirement. General rules of thumb that advocate saving 15 percent of your salary are exactly that, general, and are really no more than a starting point. Adding up your expenses now and applying that figure to the number of years you plan to spend in retirement doesn't get much closer, because chances are a few things on that list — a mortgage payment, saving for college — won’t be a consideration in your 60s and 70s.

Nearly every major financial institution and personal finance magazine has a calculator on the Web. These are good places to start, provided that the information you plug in is correct. Kotlikoff, however, says that in some cases, these tools can be way off, sometimes shooting back numbers that are five times too high. He's developed software, available at for about $150, to complement the book.

Keep on top of it
Whether you work out your goal on paper or online, accuracy comes with regularly checking your progress to ensure that you're still on track.

"With a number of the tools out there, you can go in and rerun your numbers to see if your likelihood of running out has increased significantly. That will help you decide whether you've been too cautious," says Christine Fahlund, a senior financial planner with T. Rowe Price.

Know how to catch up and slow down
If you find that you're either ahead or behind in your retirement saving — believe it or not, these are equally important problems — you need to make some adjustments to your strategy. If you're ahead of your savings goals but still have a mortgage, one of the best things you can do is pay it off, says Kotlikoff. "Paying down your mortgage is a very safe investment, and for most people who aren't itemizing their deductions, you'll actually save taxes." I'm not going to tell you to go out and spend for the sake of spending, but if you've been eyeing a vacation or a few home improvements, now's the time to go for it.

On the other hand, if you find that you're behind, and you already feel strapped for cash, one of the best things you can do is to delay your retirement by a year or two. Not only will this allow your money more time to grow, but you'll generate a bit more income to contribute.

Time Social Security carefully
Sure, you can tap Social Security when you turn 62, and many people do. But waiting just a few years can have a tremendous impact on your financial security in retirement.

"Every year you wait, the Social Security formula increases payments by about 8 percent, and then on top of that, Social Security adjusts for inflation. So it could be that you're getting a 9, 10, or even 11 percent increase for every year you wait," explains Fahlund. Numbers like that mean you might want to spend down some of your own investments before tapping into Social Security.

The good news — and something few people are aware of — is that if you took the benefits at 62, you have the option of paying back the money you've received. Social Security will then recalculate your payments so you receive the higher benefit. "There are potentially 5 to 10 million Americans between the ages of 65 and 75 who can significantly raise their standard of living by doing this," says Kotlikoff. Of course, this assumes you have the cash on hand to pay back, but if you do, it's certainly an option worth considering.

With reporting by Arielle McGowen.

Jean Chatzky is an editor-at-large at Money Magazine and serves as AOL’s official Money Coach. She is the personal finance editor for NBC’s TODAY Show and is also a columnist for Life Magazine. She is the author of four books, including 2004’s “Pay it Down! From Debt to Wealth on $10 a Day” (Portfolio). To find out more, visit her Web site, .