Life Doesn’t Begin at 59 1/2
You know the recipe by heart:
1. Build an emergency fund.
2. Pay off your debt.
3. Max out your workplace retirement plan.
Add in exercise and eating your fruits and vegetables and you have the complete formula for a long and healthy life. Some even double-down with “backdoor” Roth contributions, the investment counterpart to daily kale shakes with protein supplements.
There’s just one wee little problem though. Is it possible that you are saving too much for retirement? Is maxxing out your retirement account always the right choice?
This is what I have seen in my own practice and have heard from other advisors. A middle-aged household with high income, a nice cash cushion and an abundant 401(k) balance. The problem with the picture is that something really big has popped onto their radar that they never anticipated. A medical emergency. A desire for a second home or a major renovation to their existing home. A need for a sabbatical. A dream of early retirement.
And despite their seven-figure net worth, they have no ability to meet the moment. All their wealth is tied up in primary home equity and retirement plans that cannot be touched without penalty until they are 59 ½ years old.
I do understand why; saving for retirement is comparatively easy. The deposit comes straight out of your paycheck. You probably do not have an overwhelming number of investment choices, and in fact the selection may have been made for you.
You didn’t need to do complicated math to decide on the right amount to save; the IRS tells you the maximum amount that you can contribute each year and who are you to argue? This last point, however, is where the problem sometimes arises.
If you have not done the math to estimate how much you need for retirement, then there is every possibility that the IRS maximum is not the “correct” goal line for you. In the past, I wrote about how for some high earners/high spenders, the max is not enough. Now I am flipping that coin over and asking you to contemplate if the max is too much.
I feel as if I am wading in dangerous waters here. I do not want to be the cause of anyone YOLO-ing their retirement plan away. However, I do want my savings champion readers to consider introducing flexibility into their long term investing plans.
Yes, retirement plan saving has tax advantages. It is less efficient to invest in a taxable account. But that tax benefit is not cost-free; you pay for it with the loss of freedom to decide when to use your savings.
It doesn’t have to be either/or, by the way. You can assuage the guilt that you may feel by not maxxing your retirement plan by mentally earmarking your new taxable investment account as “for retirement.” It’s just that maybe, just maybe, you will use it earlier.
Here is your to-do list:
Do the math. Understand what your retirement dream could actually cost. (Don’t forget long term care costs!) This is a simple calculator that I like, but there are thousands of others.
If — and only if — the math shows that you do not need to contribute the maximum amount allowed to your retirement savings, reduce your contribution a bit. Route that “bit” to a regular investment account.
Invest your maybe-not-for-retirement savings accordingly. That is easy for me to write and honestly, it is not that hard to do. But it does require some thought to match your possible purpose for these funds to the right investment choice. That’s something that I wrote about here.
I get it. The universe tells you when and how to save for retirement and puts the forms in front of you to sign to get started. You barely need to give it a thought and for most people, it’s probably better that way. But we are complicated beings; simplistic, turnkey solutions are bound to come up short for some.
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