Is it possible to save too much in retirement accounts?

Choosing the right accounts to save into can help younger and lower-asset households, according to a recent report by Hearts & Wallets.

“Saving allocation across account types is an important financial decision with long-term consequences,” Amber Katris, Hearts & Wallets subject matter expert, said. “Opting for too much in retirement accounts can result in households struggling to achieve other goals like buying a house or paying for college. The data identify the importance of saving and into which accounts, especially for lower-asset and younger households.”

According to the report, 132.2M U.S. households controlled $88.2 trillion of investable assets, representing 58% of household wealth, as of year-end 2024. Within this $88.2 trillion, a 2-to-1 taxable-retirement split occurs at the national level, with $56.2 trillion in taxable accounts and $32.1 trillion in consumer-controlled retirement accounts.

Investable assets are the leading component of total household wealth of $150.8 trillion, according to the report. This is followed by net equity in real estate (No. 2 at $34.7 trillion or 23%), and private business and promised future DB pension benefits. In percentage terms, net equity in real estate has grown in relative importance to other components of household wealth, up from 17% in 2015. Of the 4 components, net equity in real estate is also growing the fastest--at a 7-year CAGR of nearly 14%.

“Financial services firms should ensure advice and investment solutions are as robust for taxable accounts as for retirement,” Laura Varas, CEO and founder of Hearts & Wallets, said. “Furthermore, beyond investable assets, real estate should be an important aspect of advice since many households have equity in their homes and other real estate that is equal or greater than their investable assets.”

Household awareness of allocation of savings across account types is on the rise, the report said. At the national level, bank savings/certificates of deposit (CDs) account types are the most common destinations for saving, used to some degree by 55% of households, followed by employer-sponsored retirement plans (ESRPs) and IRAs. These are used by 42% and 30% of households, respectively. The 5-year trend at the national level shows a rising incidence of saving into ESRPs and IRAs, both up 5 percentage points, and bank savings/CDs, up 4 percentage points.

The importance of knowing how to save

So, why is knowing how to allocate savings so important, especially for lower-asset households? Hearts & Wallets believes that saving assets into the right type of account is an important question, said Varas. Fortunately, consumers are starting to become much more aware of how they allocate their savings.

Household awareness of allocation of savings across account types – an important financial decision about which little advice is currently available – is rising, Varas pointed out. Two thirds (67%) of households today save annually and know how they allocate their savings across account types, up 7 percentage points from 60% in 2019. Average portfolio allocation by account type varies with household assets. Taxable brokerage grows in importance with assets. ESRPs, commonly known as defined contribution (DC) plans, are very important on the lower end.

At the national level, bank savings/CDs account types are the most common destinations for saving, used to some degree by 55% of households, followed by ESRPs and IRAs, used by 42% and 30% of households, respectively, Varas said. On average, households that know their savings allocation devote 40% of savings to bank accounts/CDs and 40% to retirement accounts (ESRPs/DC and IRAs).

Lower-asset households put far less of their savings into taxable brokerage than higher-asset households. The opposite pattern is true for bank savings/CDs, where lower-asset households put 40% to 50% into these accounts, and the $3 million-plus households put less than 20%.

“ESRPs become an important destination for saving at around $75,000 to $100,000 in investable assets and remain an important destination until you get to households with higher assets,” Varas added. “For higher-asset households, most of their dividends and gains are in taxable brokerage.”

The consequences of savings allocation

Looking across asset segments, lower-asset households are putting most of their money into bank savings or CDs, added Varas. They are compounding this problem of not getting any exposure to equity. “They're getting 4% in interest, which feels like a lot when you are used to getting 0 in the prior rate environment. But it's not going to fuel their growth to wealth the way other asset classes do,” she pointed out.

Another big mistake that many households make is allocating much of their savings to retirement accounts to take advantage of the current tax breaks. “Tax breaks are great, but households often find themselves hamstrung when they want to use savings toward other goals, like college, a home purchase or other important objectives,” Varas said.

“You often can’t withdraw money from retirement accounts to fund other goals, or you’re limited in the amount you can withdraw, until you hit a certain age,” Varas pointed out. “Those barriers impact lower-asset households even more than higher-asset households because lower-asset households have fewer overall savings to draw from to meet their goals and needs. If you have children who will be attending college, allocating some savings to 529s can help build the nest egg to support your children’s education as well as provide tax breaks. If most of your savings were allocated to retirement accounts, you’re going to have tax consequences for early withdrawal from your retirement accounts to fund college. I personally made this mistake.”

Helping lower-asset clients make wise decisions

It is very important to cover the topic of savings allocation in financial- advice experiences, said Varas, in pointing out some of the steps advisors can take to help their lower-asset clients make wise decisions about allocating their savings. “It's devilishly complicated, but getting the right assets into the right accounts can have a huge impact on the well-being of households.,” she added.

“Within the Hearts & Wallets Inside Advice® Database,” Varas pointed out, “we find that only 9% of advice experiences fully address savings allocation. Fully addressed means providing a specific recommendation about how much to save, into which account, after a detailed process with the capability to show a start date for an increase in saving when there's a time-limited spend like college or insurance premiums end.”

“Even in the very best experiences we’ve seen,” Varas added, “only 34% of them fully address savings allocation. This is an important area that we encourage everyone in the industry to keep working on. And make sure your advice, experiences and investment solutions are as robust for taxable accounts as they are for retirement.”

The wealth tide is rising, and it is rising for a lot of boats, Varas pointed out. “But it's not rising for all boats, especially for lower-asset households who don’t have much exposure to equity markets. More advice about saving allocation will help to address this.”

The Portrait of U.S. Household Wealth 2025: A Closer Examination of the Increase in Investable Assets and Household Finance provides the foundation for sizing U.S. retail investors and is based on government data and the Hearts & Wallets Investor Quantitative Database. The latest wave was fielded from July 17-Aug. 9, 2024, with 5,989 households

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