Why I'm Not Saving For "Retirement"
This year, the company I work for implemented a new Simple IRA program for employees. This was very well received among my co-workers as they have been asking for it for years now. The company is even matching the up to the maximum allowed percentage for the program. Do you know what the odd outcome was? I was the only one, out of 37 employees, that didn't participate.
Weird, huh? Why didn't I participate? My reason is very simple. I don't want to lock my money up where I can't get it for over 30 years. This is a better strategy for me, in my opinion:
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Pay cash for my first home
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Live cheap throughout my thirties and save like crazy
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Invest wisely
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Become financially independent by age 45-50
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Live financially smart and not have to stress out about "retirement"
Pay Cash for My First Home
I've mentioned this before, but my goal is to pay cash for my first home. If I am 32, debt free, own my house and car and college education outright, but don't have a dime in retirement, "I'll be a rockstar". Looks like I would be able to "pocket" a mortgage payment every month toward "retirement". Let's just quickly plug in a mortgage payment size savings rate times 5 years into an investment calculator quick.
My pretend mortgage payment, were I to go buy the house I would buy today with 20% down: $974.28/month (Just went online and used a calculator.)
Number of months in 5 years: 60 months
$974.28 per month (x) 60 months, invested at:
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4% return = $64,809.08
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6% return = $68,315.42
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8% return = $72,064.28
So, that's saving only my "would be" mortgage payment, and only for 5 years. My point? I would be able to pile up massive amounts of cash if I didn't have any debt and no mortgage payment.
Live Cheap Throughout My Thirties and Save Like Crazy
Let's assume I was 32 and had a paid for house. Let's also assume I will make a decent living and therefore will be able to live below my means, like I am now. I will have to plan on potentially having a family to support as well. Even if I saved nothing other than my "would be" mortgage payment, I would be looking at having over $100,000 saved by my 40th birthday.
By 40, how many of those who started "investing in retirement" early, will have that kind of money saved? I bet not many. Why? Because they are not on a financial plan, don't have financial goals and are spending everything they make. That's why.
Even if by age 40, I don't have a single dime "locked up" in retirement but I am debt free, own my house and have over $100,000 in savings, I will not be worrying about retirement.
Invest Wisely
What I've learned from Dave Ramsey is that if you may need the money within 5 years, you should be saving and not investing. In other words, do not put the money into the stock market. Do not put it at risk. Instead, keep it in a savings or money market account where it is safe. The markets have been a disaster recently and messing around with putting money in there could results in big losses short term.
I agree with Dave that investing wisely is investing for the long term. Investing wisely is investing in a very diversified portfolio, like mutual funds. Even diversifying your mutual funds is a good idea. Real estate is another wise investment, again, over the long term.
If I invest wisely throughout my thirties and forties, I will hopefully not lose any money, but instead make some over the long term.
Become Financially Independent by Age 45-50
Having goals, being on a plan and budget and living within my means for twenty years will, in my opinion, allow me to be financially independent by age 45-50. I think it can be done, regardless of whether I save for "retirement", now or ever. Period.
Live Financially Smart and Not Have to Stress Out About "Retirement"
The point of all of this is that I honestly don't think the key to a prosperous future has much, if anything to do with how much you put in your Simple IRA, Roth or Traditional IRA or 401K. I think it has everything to do with how financially smart you live your adult life and how well you live within your means and save. I agree with Dave Ramsey again, when he says that personal finance is 80% behavior and 20% head knowledge.
Those that would yell at me about not "saving for retirement" think this is all head knowledge. Guess what, they're completely wrong.
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13 Comments
- Elizabeth T. says:December 19, 2011 at 6:15 AM
Ha! You're probably right! I'm pretty sure I won't have 100K in my retirement by age 40 even though I put some money aside in my early 20s. I think the main reason why people use those accounts is so they will save SOMETHING. They don't budget, so they need money forced out of their paychecks in order for them not to spend it. I think they can be a good thing, but shouldn't be emphasized more than using some common sense with money. What good is $50,000 in retirement if you have $50,000 in student loans and a mortgage balance of $100,000 or more? That's what I call crazy.
- Jason Stinnett says:December 31, 2011 at 1:28 PM
Kraig, You make a compelling argument. As Elizabeth commented above, company savings plans are nice because they are forced discipline. Right now I put double the match in my IRA at work (where many would argue I should put that difference into a Roth IRA), but for now I'm happy to trade a bit less money for a bit less responsibility. A few things to note on your math: - Remeber to calculate the compound interest on starting to save for retirement 5-10 years earlier. I read an article a few years ago that said the compound interest makes it exponentially harder to catch up if you start later in life. - Have you calculated how much you're losing in rent by waiting until you can buy your house outright? I'm not naive enough to think you'll ever get 100% of what you put into your house back, but it has to be 20-30%. What you spend on rent is gone for good.
- January 8, 2012 at 12:09 PM
Hi Jason, Thanks for the comment. I'm almost positive that if you crunched the numbers, they are in favor of contributing to a retirement account now, rather than later. The math also may be in favor of buying now vs. renting for 3-5 more years. My reasons for not contributing to retirement now are simply that I want to focus all my attention and energy on one goal, saving for a house in full. I feel that saving for retirement at the same time as doing that will leave me not able to do well at either. I'm thinking about this as a motivation and focus issue rather than as a math issue. I hope that makes sense. Kraig
- Jason Stinnett says:December 31, 2011 at 1:36 PM
Oh, and you should also factor in the free money you're losing by not taking advantage of the company IRA match. That alone could be an argument for saving the minimum: If the company match is greater than the taxes and early withdrawl penalties then you've made a profit even if you have to take it out next week. (should be less than 50% even in the highest tax bracket). Plus I believe you can withdrawl something like $10,000 from your IRA for your first home without penalty, which again is giving up free extra income that could be put toward your first home.
- January 8, 2012 at 12:17 PM
Jason, I agree with you here as well. I am missing out on that match money by not contributing. The company match is a single digit percentage though, while the penalty for early withdrawal is 10%, plus your tax rate. Also, up to $10,000 can be withdrawn early without the 10% penalty for a first-time home purchase. Taxes would have to be paid though at the regular rate. I'll look into this first-time home buyer exception some more and see if it makes a compelling enough case for me to consider contributing. Thanks for the challenge Jason. Kraig
- Meg says:January 25, 2012 at 6:50 PM
Just curious: Are you on track to be able to pay cash for a house in 5 years? That would be awesome! I'm still in the 'pay off student loan' mode, and probably will be for a few more years.
- January 25, 2012 at 7:12 PM
I'm actually on track to be able to pay cash for a house in less than 4 years. I've set my goal at my 31st birthday, which is a little over 3 years from now. I think it's possible, but I'm going to have to keep increasing my income and living on very little.
- Cindy CF says:March 9, 2012 at 12:43 PM
This is a very different way of looking at retirement. I think it's a head game. As Elizabeth mentioned, many use the company retirement because it's a forced savings they wouldn't otherwise do. Clearly you are disciplined enough to do it on your own so that isn't a factor. But based on Jason's points, why not contribute something to the company retirement for the free money/compound interest aspect, and continue saving on your own as described?
- Lisa says:May 30, 2013 at 5:27 PM
The other benefit (obviously) of a retirement account is that you tax advantages. Open a Roth IRA and you can trade and NOT pay taxes on your gains. (and ROTH IRAs let you withdraw contributions too, you only have to leave gains in, I believe). Traditional ROTH lets you earn on money you wouldn't otherwise have - taking pre-tax dollars and putting them into the account. You make money on the money you would have otherwise have paid in taxes. That said, you are still 'saving for retirement' and so long as you save and are conscious about it - i think you'll be fine. Curious as to where you live and what prices the houses are? I live in a very expensive area (Los Angeles)and a mortgage (particularly at 3.5% interest (30/yr), which gets deducted from my tax return every year resulting in a nice refund) is a great vehicle to do it. Even if I had extra $, I would invest it - I wouldn't put it towards the house. I can make better than 3.5% (even if I only make 3.5%, i still make out because of the mortgage interest tax deduction). Your money isn't locked up in a IRA, but it is locked up in your house. Just some food for thought - but again, anyone of us who wracks there brains about these things is probably going to be ok. because we all follow the 1 rule of wealth building: SAVE!!!! :)
- Nicole says:June 5, 2013 at 11:24 PM
People always look at me weird and challenge me when I tell them I'm going to pay cash for my house. I like being weird. Being weird comes with freedom and options.
- Kraig @ Young Cheap Living says:June 5, 2013 at 11:25 PM
You're right, Nicole. Freedom and options are the best!
- Laura says:January 10, 2014 at 1:57 PM
To be the devils advocate, read the Mad FIentist, Root of Good, and Millionaire Educator. I like root of good's explanation the best. They all say to max out your retirement to get the company match and to get what you would have paid in taxes. Then when you retire early you roll over your funds to an IRA. Your living expenses are so low that you won't pay taxes at all (or just a little if you withdraw a lot). There are no early withdrawal penalties the way they go about doing it. They, like you, do pay off the house before they retire. I think one of them showed how doing it this way gets a person to retire (who has a ten-year plan to retire early) one year earlier as opposed to doing it your way. If you really want to pay off the house first at least do the math for when the house is paid off. I think MMM saved in retirement vehicles and paid off the house at the same time and still retired in ten years.
- Kraig @ Young Cheap Living says:January 10, 2014 at 2:01 PM
Laura, Thanks for referencing those great articles. I agree with your plan and that it makes a lot of sense. I've since changed my thinking quite a bit. I still don't love the idea of "locking up my money", but I also do see the loopholes and how living on a lower income can help you avoid a lot of taxes. Take care,
