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Am I saving too much for retirement?
My mom thinks I should put less in my 401(k) so I can save for a down payment on a house.
October 19, 2005: 6:30 AM EDT

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NEW YORK (CNN/Money) - I'm 26 years old and have almost $40,000 in my former employer's 401(k) plan, another $26,000 or so in my current plan and $20,000 in a Roth IRA. Most of this money is invested in aggressive equity funds. My mom thinks I should put less into these accounts so I can save for a down payment on a house. What do you think? Am I saving too much for retirement?

-- Jessica G., New York, NY

With $86,000 tucked away in various retirement savings accounts, you've clearly got a good jump on building a tidy little nest egg that can support you after you call it a career. I wish more twentysomethings -- for that matter, thirtysomethings and fortysomethings -- had as much socked away for their future as you do.

But saving too much for retirement? I think it's far too early to come to that conclusion given your tender age.

Even if you plan to retire early, say, at 60, you've still got 34 years of working, saving and investing ahead of you. There are too many uncertainties to conclude that you've got such a good head start today that your retirement security is a given and you can start coasting. You could get laid off somewhere down the line and miss contributing to your retirement accounts for a few years. You could find yourself having to tap into those savings because of a job loss or financial emergency. Or, despite your aggressive investing stance, the markets could deliver subpar returns, which would stunt the growth of your savings.

'Too much' now may seem like 'not enough' at retirement

You've also got to factor your future earnings into the equation. The way Social Security is set up, the more you earn over your career, the less of your pre-retirement salary your Social Security payments will replace. This is true even if younger workers get the benefits that currently scheduled, which is a big if.

This means that the more successful you are and the more you earn, the bigger the gap between what Social Security will provide and what you'll need to maintain your pre-retirement standard of living. Your own savings will have to bridge that gap. So what may seem like a pretty decent nest egg based on your salary today, might not seem so large compared with what you'll be earning three decades from now.

That said, if you really think you'll want to buy a house in the near future (as opposed to Mom thinking you ought to have one), then I see no problem with setting up a housing fund of some sort. Ideally, though, the money you put into your housing fund should be in addition to the money you put into 401(k)s and the like. After all, saving for retirement should be considered a regular living expense. It should be baked into your budget. If you're going to stop contributing to retirement accounts every time something else comes up -- you need a house, a new car, whatever -- you may not have as much to live on during retirement as you'd like.

Make the most of your savings

Of course, that's the ideal world. If you really have no more give in your budget and you want to start saving for that house, you could consider diverting some retirement savings to your house fund. If you do that, I'd say cut back on the IRA account first, since that's the easiest one to reduce or eliminate from a practical standpoint. If you find you still need more money for your housing fund, you could also reduce the percentage of salary going into your 401(k), although you certainly want to do all you can to assure you're contributing at least enough to get the full company match. And once you've got that housing fund together, be sure to resume your retirement-saving discipline.

Remember too that you can always withdraw the annual contributions you made to your Roth IRA at any time for any reason without paying tax or a 10 percent early withdrawal penalty. So if you're ready to buy that house and you're coming up short on the down payment, the Roth may help you bridge the gap. (Taxation of money you pull from a Roth gets more complicated if you rolled over money from a regular IRA to a Roth or if you're withdrawing earnings from the account. For details, click here.)

One last bit of advice. No matter how far you are from retirement, it's a good idea to review your situation periodically -- say, every year or two -- just to make sure you're still on making progress. You can do that by going to the Retirement Planner on our site. Many 401(k) plans these days offer similar tools.

So keep up the good work on the retirement front, and tell Mom to relax. You've managed to build a good-sized nest egg for yourself at an early age. I can't imagine that buying a home is going to stymie you.

Walter Updegrave is a senior editor at MONEY Magazine and is the author of "We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World."  Top of page

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