Retirement

When Can I Stop Saving For Retirement

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 6 minute read

Putting off retirement investments can make sense in certain circumstances. The majority of people’s savings for retirement are held in tax-deferred accounts like IRAs and 401(k)s, which can have negative effects on one’s income if the funds are withdrawn too early. 

Although these vehicles offer tax-deferred growth, which helps your money grow, taking withdrawals from them before retirement can wreak havoc on your finances.

If any of the above describes your financial circumstances, you may wish to defer retirement contributions or switch to a Roth IRA, from which money can be withdrawn at any time without incurring a penalty.

When Not Saving for Retirement Is Okay

1. You’re Putting Money into your Career.

If you want to further your profession, you might have to accept an internship, change cities, or buy new clothes. If you make a large chunk of your salary from commissions or bonuses based on your performance, then your income could fluctuate as you climb the ranks and achieve success. 

If you work for a startup, no matter how promising it seems, you may have to pay for your own health insurance and other perks.

2. You’re Putting Together an Emergency Fund

You can’t predict when or how many surprises will show up in your life, but you can rest assured that they will. Things like vehicle breakdowns, roof leaks, and unexpected medical bills may throw any budget into disarray. 

Before even thinking about retirement savings, a smart person should have six months of their after-tax salary stashed away in an emergency fund.

3. You’re Getting Married

Everyday necessities like dishes, hand tools, furnishings, and kitchen equipment can be expensive even with two salaries. When one or two children are added to the mix, along with the loss of one salary, medical costs, baby clothes, and school fees, even the most well-planned individual budgets can quickly become unsustainable. 

Thankfully, these costs tend to decline with time, allowing more money to be put toward savings. Care for loved ones now is more important than retirement savings later.

4. You Are Taking Care of Your Family and Property

Unexpected occurrences that cause us to lose loved ones, bodily function, or material possessions are the worst kind, yet we must be ready for them because the consequences can be disastrous for our families. A good way to deal with the aftermath of disasters of this magnitude is to be well insured. 

Insurance policies such as health, disability, and life cover medical expenses and lost income in the event of disability or death, while property and vehicle insurance cover damage to your home or vehicle caused by natural disasters or theft. Paying insurance premiums that are absolutely necessary is preferable to saving for retirement.

5. A special needs child is your responsibility

Every parent’s top priority is providing for their child’s current and future needs, and this is especially true for parents of children with special needs, whether those requirements be mental or physical. Funding long-term care or assistance takes precedence over retirement planning in such situations. 

When it comes to government and private programs, tax and trust regulations, and sensible investments, parents of children with disabilities should obtain competent legal assistance to make the most of what’s available to their child.

6. You’re Purchasing a Home

Investing in a home is a smart choice for many reasons.

  • Feeling Safe Mentally. Your house is your stronghold, your personal fortress. Having a permanent place to call home fulfills a basic human need for security.
  • Coercive frugality. Long-term mortgages are used to finance the purchase of homes because of their status as long-term investments. Your home equity increases and your mortgage balance reduces when you make monthly mortgage payments. Refinancing, a HELOC through Figure.com, or a reverse mortgage can tap a retiree’s home equity, which is often their largest single asset.
  • Reduced Volatility in Housing Prices. The interest rate on a fixed-rate mortgage never changes during the loan’s duration. Inflation reduces the purchasing value of future payments relative to present ones, thus you might think of it as a discount on future payments. Tenants should expect rent increases over time as property owners try to keep up with rising costs caused by inflation.
  • Possibility of Asset Growth. In the years leading up to the recent economic downturn, home values rose steadily due to rising inflation, demand, and the rising costs of building materials and labor. In some parts of the country, property values have even gone down as a result of the boom and bust of the housing market over the past decade. It’s likely that home prices will resume their normal annual increase once the economy improves and housing markets stabilize.

7. You’re Putting Money Into Your Education.

U.S. Census Bureau data shows that men with bachelor’s degrees earn an average of $2,233 per month more than those with a high school diploma, while women with the same degree earn an average of $1,550 more per month. 

A master’s degree can increase a man’s monthly income by an average of $1,266 and a woman’s by an average of $875, as reported by the College Board Advocacy & Policy Center. 

Graduates from four-year universities had a lower unemployment rate, lower income drops, and greater access to higher benefitted jobs, even in economic downturns. A college education is one of the best investments you can make, and the time and money spent on it are sufficient justification for putting off retirement funds.

How to Pay for Your Children’s College Education

There has been a dramatic increase in the price of higher education. According to the College Board, the average cost of attending a public university within one’s home state in 2012–2013 was $22,261, while the average cost of attending a private university within one’s home state was $43,289. 

According to CNN, the average college graduate in 2011 had roughly $30,000 in education-related debt. Because of these astronomical costs, many parents put off contributing to their retirement accounts in order to provide financial aid to their children. 

The decision, while rational, is short-sighted for a few reasons.

  • Selecting a less expensive but similarly prestigious institution, spending the first two years of college at a local community college, and taking as many advanced placement classes as possible to reduce the number of required courses will all help keep college costs to a minimum.
  • Public and private (nonrepayable) scholarships and grants, as well as part-time work while at school, can help cover the costs of higher education. Many forgiveness programs exist, each of which can wipe off several thousand dollars in student loans if you’re in the right field of work.
  • Those who need financial assistance to attend college can get it from their schools, private lenders, or the federal government. To further alleviate the financial strain placed on recent college grads joining the job for the first time, the federal government launched the “Pay as You Earn” initiative in January 2013.
  • Unlike other stages of life, retirement does not come with any financial aid options. The increased yearly earnings made possible by a college education can be used in a number of ways, including paying off your child’s full college debt. Retirees, on the other hand, are completely stuck. It’s ideal to boost contributions to tax-deferred accounts in your thirties since that’s the age many parents are when their children start college so that you can reap the benefits of compounding over the next quarter-century or more.

Bottom Line

Common sense tells us that the best way to guarantee you will have financial security in your senior years is to save as much as you can as early as you can and to make sound selections about investment possibilities, even while there are rational, reasonable reasons to defer retirement savings. 

Refusing to invest immediately reduces the amount of money you could save over time. But the choices you make about your finances today can have a multiplicative effect on the rewards you reap tomorrow. You can set yourself up for a secure and comfortable retirement by making smart decisions now.

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