While saving for retirement is important, there are times when it makes sense to delay making investments. Most people invest for retirement in a tax-advantaged plan such as an IRA or 401k with early withdrawal penalties and adverse income tax consequences. While these vehicles provide tax-advantaged growth that help your money grow, they can wreak havoc on your finances if you need to make withdrawals from them before you retire.
If money is tight and any of these situations apply to you, you may want to consider deferring retirement contributions or contributing to a Roth IRA instead – in which contributions can be withdrawn at any time without penalty.
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When It’s Okay Not to Save for Retirement
1. You Are Investing in Your Career
Pursuing your career may mean moving from one city to another, acquiring a new wardrobe, or accepting an internship in order to secure full-time employment. Becoming successful may mean you’ll experience periods of inconsistent income, particularly if you are working on commissions, or if performance bonuses constitute a significant portion of your compensation. If you work for a small company, even one with great potential, you may not have health insurance or other important benefits that you must purchase individually.
2. You Are Building an Emergency Fund
While you may not know the details of the unexpected events that will arise in your life, you can be certain that surprises will occur sooner or later. Cars break down, roofs spring leaks, and a sudden illness can play havoc with planning and create financial chaos. A prudent person prepares for the unexpected by building an emergency fund equal to six months’ worth of after-tax income before trying to begin retirement savings.
3. You Are Starting a Family
Even on two incomes, the cost of everyday items like dishes, hand tools, furniture, and kitchen appliances can be great. Add one or two children, the loss of one income, doctor bills, baby clothes, and school expenses, and even the best personal budgets can be destroyed. Fortunately, these expenses eventually decrease, freeing up income for savings. Taking care of family today is a higher priority than saving for retirement tomorrow.
4. You Are Protecting Your Family and Assets
Loss of life, physical function, or assets are unexpected events we all hope to avoid, but for which we must be prepared, since the results can be catastrophic for us and our families. The consequences of such disastrous calamities are best handled by purchasing insurance. Health, disability, and life insurances can protect you and your family from the financial consequences of illness and premature death; homeowners and automobile insurance indemnify for losses from fires, flood, accidents, and theft. If your choice is to pay necessary insurance premiums or make a deposit into a retirement fund, do the former.
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5. You Have a Child With Special Needs
Meeting the current and future needs of our children are paramount in every parent’s mind, especially if a child has a mental or physical disability. In such cases, retirement planning is secondary to building a fund for long-term care or assistance. Parents of children with a disability should seek professional legal advice to maximize the options available to the child through government and private programs, tax and trust laws, and prudent investments.
6. You Are Buying a House
Buying a home makes sense for a number of reasons:
- Psychological Security. Your home is your castle, the place you call your own. Owning a house provides a sense of permanence and stability that humans instinctively seek.
- Forced Savings. Houses are long-term investments and are financed by long-term mortgages. As you make payments each month, your equity in the house grows and the mortgage decreases. Home equity is often the largest single asset of retired individuals, and can be a source of cash through refinancing, HELOC through Figure.com, or reverse mortgages.
- Stable Housing Costs. A fixed-rate mortgage remains the same throughout the term of the mortgage. During inflationary periods, the money paid tomorrow is worth less in buying power than the money you have today, so future payments actually costs you less. If you are a renter, it is likely that rents will increase as time goes by as the landlord attempts to keep up with inflation.
- Potential Asset Appreciation. Until the recent recession, houses had enjoyed year after year of price appreciation primarily due to increasing construction costs of material and labor, unique location (a house takes up a particular space in a particular community in a particular town or city), and inflation. The financial successes of the last decade promoted an over-supply of housing nationwide followed by the mortgage security implosion; as a consequence, home prices have remained stagnant, even falling in some areas of the country. As the economy recovers, it is likely that residential homes will return to their historical pattern of annual price appreciation.
7. You Are Investing in Your Education
According to U.S. Census Bureau statistics, a male college graduate earns, on average, $2,233 more per month than a high school graduate, and a female college graduate earns $1,550 more monthly. According to the College Board Advocacy & Policy Center, a master’s degree is worth, on the median level, an additional $1,266 monthly for a male, and $875 for a female. College graduates are less likely to lose jobs or suffer wage decreases during recessions, and generally have access to jobs with better benefits. Investing in a college degree is one of the best decisions you will ever make in life and justifies delaying retirement savings.
Funding Your Children’s College Educations
The costs of a college education are exploding: An in-state public college with tuition, fees, and room and board averaged $22,261 for the 2012-2013 academic year according to the College Board, a private college averaging $43,289. And according to CNN, the typical senior graduating from college in 2011 owed almost $27,000 in school debt.
With such high costs, parents often defer funding retirement plans to help kids with their college costs. While understandable, the decision is short-sighted for a number of reasons:
- College costs can be lowered by choosing a less expensive, though equally prestigious school, attending a community colleges for freshman and sophomore years, and pursuing advanced placement in many courses, thereby cutting the number of hours needed to graduate.
- Funding can be secured through public and private scholarships and grants (which don’t require repayments) and part-time employment while attending school. There are also a number of “forgiveness” programs for particular professions or work that can eliminate thousands of dollars of student debt.
- Student loans are readily available to students wishing to attend college through schools, private lenders, and the U.S. government. In January 2013, the Federal Government introduced the “Pay as You Earn” program to further reduce the burden on new graduates entering the workforce for the first time.
- There are no loans, grants, or scholarships for retirement. Your child entering college has a number of options, including paying off the entire debt from the increase in annual earnings afforded by a college education. As a retiree, on the other hand, you have no options. By the time you’re in your forties, the age of many parents when their children attend college, you need to maximize your contributions into tax-deferred accounts and gain the benefits of compounding over the last 25 or 30 years of your working life.
While there are logical, legitimate reasons to defer savings for retirement, common sense tells us that saving as much as possible as early as possible and making good decisions about investment alternatives is the best method to ensure you will have financial security in your golden years. Electing to delay investment will have an adverse impact on the fund balance which you could potentially accumulate. On the other hand, making decisions today about the way you spend your income will multiply the benefits you can receive tomorrow. Security and comfort in the retirement years is really about the choices you make in the years preceding.
Are there any other instances in which you believe it is appropriate to delay saving for retirement?