Despite the general rule of thumb – that it is vital to save regularly for retirement – there are times in a person’s life when it may make sense to pause this. Before such action is considered, I strongly encourage you to put together a financial plan to assess your retirement preparedness and model the impact of halting contributions on reaching your goals. That being said – here are a few instances where it may, possibly, make sense to pause saving for retirement:
The Overfunded
There comes a time when certain households, due to social security, pensions and current funding, may actually be overfunded for retirement. In addition – some retirees are almost certain to be in the same tax bracket in retirement as a result. As such – it may not make sense to defer taxes and further fund a retirement plan for these individuals and they may prefer save in other ways.
The Credit Card Challenged
Some households find themselves in a vicious cycle when it comes to high interest credit card debt, yet they continue to fund their retirement accounts well above and beyond the company match. It may be in their long-term best interest to drop down that 401k contribution in order to create the cash flow needed to finally eliminate credit cards. I caution that this needs to be done with a very specific plan – the worst thing many investors can do is stop saving for retirement and continue to carry a large debt burden.
The College Years
This is a four year window of time, if properly planned for, that it may make sense to reduce 401k savings in order to focus on college tuition costs
The Tax Diversified
This savvy saver wants to continue accumulating for retirement, but doesn’t want all their assets to be taxable as ordinary income once withdrawn. As such – above and beyond any company provided match – they prefer to save into their after-tax accounts. This may also make better sense for legacy minded individuals who want to pass wealth to the next generation due to the 10-year withdrawal rules on inherited IRA’s.
Getting Back on Track
For those who have previously paused retirement contributions and now need to get back on track – step one is to create a goal. When do we want to retire, when can we realistically retire, what will we be getting from social security, and what will we be getting as a match from an employer? From that point on, we can calculate what we need to set aside to achieve that goal. We can then recalibrate as reality requires. Whatever the savings percentage is that you can start with – many 401k plans have a great feature: automating a 1% increase in contribution each year from the current base level. For those who typically count on at least a 1% raise each year – this is a great way to save without noticing too much of a cash flow burden. It automates “saving the raise” (or at least a part of it). If your plan doesn’t automate this – you can set a reminder to increase your contribution annually.
Representatives do not provide tax and/or legal advice. Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate.
Chris Kampitsis is a registered representative of and offer securities, investment advisory and financial planning services through MML Investors Services, LLC. Member SIPC. www.SIPC.org 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000 CRN202211-274242