When it comes to retirement most financial gurus emphasize one thing – save as much as you can as early as you can. They’ll tell you to put as much money as you can in the IRA, 401k, or other retirement savings vehicle. The classic advice is to save as much as you can as soon as you can. Yes, of course that is awesome financial advice. Advice that I completely agree with. Nevertheless, you might be in a situation where you think it might be wise to stop contributing to retirement, but you are finding it difficult to get any feedback on the implications of that decision.
Five Legitimate Reasons To Delay Retirement Investing
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To pay off debt.
Depending on your interest rates on your debt, you might be better off halting your contributions until your debt is paid off. There is something to be said for financial focus. Mathematically this also typically makes sense as you are paying off a guaranteed interest amount on debt in hopes of a possible return on your investment. Stop the retirement, pay off the debt, and then get back to saving.
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For spiritual reasons.
There may be times when you feel called to postpone your retirement savings so that you can use those funds to be a blessing to someone or for some other role in God’s kingdom. Regardless of the financial implications, if God is working follow God and not your financial advisor. I would advise that you seek godly counsel to ensure you are clearly discerning God’s will for your life. For some, this might mean they stop saving for retirement in order to give. Christians handle money in light of a spiritual reality. There are differences between biblical finances and personal finances.
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To pay off your house early.
It’s a common question, but while paying off your house might not offer as much mathematical reward, that is not to say it might not be a bad idea in your situation. There are some of us who don’t like debt, but there are others who downright hate debt. They wake up at night with worry and concern – even over a home mortgage. In this case, though you might not financially be better off, emotionally it might be worth the cost to pay off the house before continuing to save for retirement. If you’re trying to decide if you should pay off your mortgage you’ll need to look at more than the math. I have noticed a trend that when people get closer to paying off the house they seriously consider this option just to get it over and done with. If you want to pay off the house early you should try one of these four ways to pay off your mortgage.
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Storm clouds on the horizon.
It may be a baby along the way or a poor report from the doctor. These things do not come without increases in expenses. In life you will need an emergency fund. If the storm clouds are close you might consider stopping your retirement contributions to get a little financial padding for when the financial train wreck arrives. The worst case scenario is that the storm is avoided and then you just invest the money into retirement at that point.
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To follow a dream.
For some, it is an adoption. For others, start a new business, or just trying to get out of the rat race. If delaying your retirement contributions allows you to pursue a dream, then put it off for a short period of a couple of years. There may be some financial implications at retirement (like working part time), but to chase a dream you might just be willing to risk extra work during the retirement years.
Photo by Kass and Rachel.
{ 12 comments… read them below or add one }
Interesting angle Craig – I’ve been asking myself the same question – if it’s legitimate to stop saving for retirement to do other things.
Do you think it’s better to just reduce the savings to do some of these things or is it better to quit altogether? I have a hard time justifying saving zero, but I know it’s a personal decision.
I may cut back on other things like social life, or some material items but don’t stop retirement. Also don’t fit into those categories you mention, but I do agree that you should enjoy your life now, so definitely feel free to save for that goal of yours while retirement as well.
While I agree with most everything you write in this post, I think Dave Ramsey probably gives the most balanced approach: stop retirement to get out of debt and get the 3-6 months expenses saved for an emergency fund. Then get the retirement accounts fully funded before saving for other needs or paying off the house early. Time is of the essence in getting maximum returns on your retirement investments. The longer your contributing to them, the more shares and hopefully more money you will have come retirement age.
your points are well-taken although i am not sure you have spelled out all the consequences of NOT saving early for retirement such as:
1) lost matching contributions (if available) from employer. You are leaving free money on the table which is a guaranteed 50-100% return on your contributions depending on the level of match.
2) compounding effect of gains over time lost. personally i wish i had started investing in my 20s as i am now in my late 30s and just got on track a couple years ago. i have a LOT of time to make up which will require me to save more to reach my retirement goals.
having said that, i agree it is not a black-n-white decision, but it needs to be made clear that you cannot make up for lost time easily and the consequences can amount to tens-to-hundreds of thousands of dollars lost.
I agree that if you’re paying 19% interest on your credit cards and you have a substantial amount of debt, it may make sense to focus on paying off this debt before contributing to your retirement accounts. Even if your 401k was returning, say 15% a year for instance, you’d still be losing out 4% on a purely percentage basis.
On the other hand, pochax makes a few good points that if you stop contributing completely, you may miss out on possible company matches, and the extra time for your assets to compound and rebound from losses. And you also lower your taxable income when you contribute as well.
I guess it depends on how much debt you actually have. Maybe there could be a balance between contributing just enough to get the company match, and then using the rest of the money that you would’ve contributed to paying off the debt. I would also have a hard time justifying my savings rate to zero.
A finance professor of mine once said something to the effect of: “You can borrow money for many things, but it’s hard to borrow money for retirement.”
Of course, with that said, if you have a dream that you’d like to pursue other than a wonderful retirement, and would like to fulfill that dream within a shorter deadline than your retirement age, than I could justify holding back a little bit on contributing to your 401k. If you have enough savings to cover at least 6 months of expenses, then I would feel okay about pursuing that dream.
I guess it all depends on your goals, priorities, and what you actually want to do in your retirement years.
Walking away from the matched money is nearly always a mistake.
Other than that, I’d absolutely tell people to pay off any CC debt first, even 12% debt.
I understand the choice between paying off the 5-6% mortgage vs putting that money toward retirement. This is a personal choice and can go either way.
For some, the thought that this money costs 3% (say) after tax, and in a long time period, the S&P is likely to beat that number is reason enough.
For others, the comfort and biblical motivation to be debt free sway them the other way.
From here and other PF blogs, I now know to ask “How does this debt make you feel?” One can’t put a dollar figure on the weight on one’s shoulders that comes with debt. I get that now.
Hey all,
Thanks everyone for the great feedback.
I thought I’d give a little more detail here. There seems to be a hesitancy to give full endorsement to this post (and that is OK). If I wanted to I could have wrote about the 5,673 reasons to contribute to retirment NOW. But, that would be old and boring. Besides I’m considering one of these options and I wanted to decide there were any valid reasons.
One thing I should have clarified in the post is that these are 5 reasons to *temporarily* stop contributing to retirement. I’d put a cap somewhere between 1-3 years. If you can’t accomplish your goals within that time period there could be irreprible damage done (but, perhaps not, depending on your situation).
The decision MUST be made carefully. It MUST also be a decision made based on your personal situation.
I’m continually amazed at how often people think the most profitable decision is the right decision. I don’t think that is always true.
@Jason – if one could cut back that would be the best option. I actually cut back my retirement this year, but felt like I wanted to go further. Right now I’d rather purse a dream and take a year or two off – if necessary.
@Craig your mum did a good job naming you! Yes, if you can cut back and avoid stopping that makes sense.
@Larry – those guidelines sound right to me. Two thumbs up!
@pochax – you’re right I didn’t spell out all the consequences of not contributing to retirement. I felt like adding that section would add too much content to the post. I figured there were a lot of other posts on the web that did just that. Yes, you provide some very, very good reasons not to stop contributing to retirement. Thanks for adding that information.
@D – good points. I like how your comment explores the tension here. As I read you post I thought – exactly. This is basically a topic where there will always be “on the one hand” and “on the other hand” points.
@Joe (and Pochax) thanks for mentioning the employer match. I’ve never had a job where I’ve had an employer match so I wasn’t on my radar when I wrote this post. However, all the valid reasons are still valid even considering the match. It might, however, mean you need a stronger motivating factor to cause you to stop.
Craig, good post to ponder. Personally, I think the key is balance and I’m glad Larry brought up Dave Ramsey’s Baby Steps. I do believe in establishing a $1000 emergency savings, getting debt paid off and then a fully funded emergency savings fund as top priorities. And, let’s not forget giving. It’s important to take advantage of employer matching at a minimum, but I think it only makes sense if you can still give and make forward progress in these other areas. And yes, if you can’t make progress rather soon, such as in a few years or less, you may need to look at other options such as downsizing to get to the point of investing for retirement sooner.
Great article, i really like the fact that you stated obedience to God’s leading as more important than obeying financiall advisor Amen to this. @jason, yes striking the balance is Key.
this post title caught my eye. The bible says we are to plan and save for the future… So if you do stop to pay off debt, or whatever, My thoughts would be to start again as soon as you can. Don’t think that social security will be around in your golden years… technically it’s already broke and full of IOUs (There is money in it, Just IOUs.)
Enjoyed the article … just wanted to let you know that I’m sharing the link to it on today’s “This ‘n That Thursday” post on my blog.
http://myreasonstoblog.blogspot.com/
Hope you’re having a great day!!!
~ Joy