Perhaps the title is a little misleading – saving for retirement is by no means my only financial priority, nor am I dismissive of the fact that I might never reach retirement (only the guy upstairs knows for sure, right?). But given the choice between saving for retirement in 4o1Ks and IRAs, and saving money in taxable investment accounts or cash accounts, I will almost always choose to save more for retirement.
Even though money is fungible (i.e. you can use money you’ve saved for X and spend it on Y – there’s no difference. The value of that money is still the same), the psychological impact of retirement savings and everything else is very different.
Because retirement is so far away for me, a twenty something – it’s easy and sometimes tempting to put it off. A 25-year-old may tell himself, “I can start saving when I’m 30, right now I am paying student loans.” A 35-year-old might say, “I’ll start after I’m 40, right now I have to save for a down payment.”
Every time you save for retirement, you’re making a choice to give up something now (a nicer car, a fancier apartment, a vacation to Paris) for an uncertain payoff decades down the road. That’s exactly why I stretch myself to put more in retirement. Because if I save for retirement first, the hard part would be done.
As an example, let’s say in a year I can comfortably save $10,000. I want to start saving for $40,000 down payment in 4 years. I could put the $10,000 towards the down payment, then try to scrape together some savings for the Roth IRA. Or I can put $5,000 in retirement, $5,000 in the down payment, then try really hard to save another $5,000 for the down payment.
If I really want a house, it would be much easier to forgo meals out and cute clothes if I see that the payoff is an extra $5,000 in a down payment. I might be able to push myself and save $15,000 instead. That payoff is more immediate than a retirement 40 years away. On the other hand, if I save for the down payment first, I might not be motivated enough to put another $5,000 in retirement funds. Saving for retirement is my biggest financial priority, because it’s always difficult to make immediate sacrifices for a far-off reward. But it must be done.
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I like the way you are thinking here and it's so true. We like the immediate payoff. It's hard to save for something that is so far down the line when there is something important to save for now as well.
In Ontario they have this program where you save for retirement, and then you can use that money to pay for your house downpayment as well. But you must pay it back within X number of years. I think it's a good program to encourage saving for retirement AND home ownership.
I am going to START contributing to my retirement savings this year. It may not be much but it's a start and one of my priorities for the year.
That program sounds really interesting, though I might be worried about the penalties if I couldn't repay the money in time. And congratulations for contributing to retirement this year – often the hardest part is to just get started.
That program sounds really interesting, though I might be worried about the penalties if I couldn't repay the money in time. And congratulations for contributing to retirement this year – often the hardest part is to just get started.
I tend towards this too. My natural inclination is to save every cent I can towards retirement. Got a raise? Great, more for the 401k!
However, I've been forcing myself to focus a bit more on cash so I have a little more freedom for my midterm goals. I still prioritize retirement, but I know my budget and I know what kind of cash I need to meet midterm goals in a reasonable (though still distant) time frame.
Striking the right balance is key. At 27, we have $225,000 set aside for retirement, but lately I look around and think "what's the point". Our kitchen chairs are pathetic, the couch is falling apart, and we keep getting outbid on houses in our area. So… what is all that money we've saved good for? LOL.
My point is, spend some of it while you're young and can still enjoy it. Our thing is going out for a nice meal a couple times a month and traveling. Yours may be Disneyworld and tango. I've been wanting to figure out exactly how much one would need in retirement. It is probably a lot less than you'd think. Especially if you stay healthy and live frugally.
Good post. I've found that since I started automatically having my retirement and savings come out of my paycheck, I don't even miss it. Then, when I check my accounts, I'm like "Whoa..I have a lot saved!" You tend to spend what you have, and if you don't see it, you don't think about it. If I have something come up where I desperately need money, I could look to my savings, but somehow, I find a way to stop spending my fun money, and pool it together for that fun thing I want or vacation or whatever. It's a great way to think about it, because I know if I take out of my savings, I REALLY have to think about doing it, and I tend to not go that route.
It's motivational to have all the cards on the table, so I'd at least put a little towards each.
In my case, I set a certain percentage to contribute to my company 401(k) plan. Since they match 50% for the first 10% (later they changed it to match 100% for the first 5% contribution) I jumped on it very quickly, this made the 401(k) choice a no brainer for me. If I didn't contribute, it would be throwing away free money…
But back then my wife was working too, so we were able to get a large enough downpayment to avoid the pmi insurance cost (it tooks us a year and a half to get the money saved for it). If my wife wasn't working at the time (or I wasn't married), it would have taken me at least 4 more addtional years to save up for a decent downpayment.
No throwing away free money!
100% for 5% seems like a high match to me – good for you!
Good Point. I have this problem. Right now I am saving for a down payment, but I'm that 30-something that keeps telling myself I'll save for retirement when I'm 40. I really just need to save for retirement and see if I can save an additional amount towards my down payment. Yikes! I'm way behind.
Getting started is the first step. Best of luck with your dual goals!
I read some article that said it's hard for our young-selves to imagine the needs of our old-selves. That's why retirement, in most people's mind, is not a priority. I save for retirement, despite having massive SL debts, out of fear. With inflation eating away the value of my retirement fund and the instability Social Security/Medicare, I am always fearful that I will never have enough to maintain even a minimal standard of living in retirement.
I think I remember that article you're talking about… New York Times, right? It's true… we become such different people as we grow old. It's difficult to imagine what a 60-year-old me would want, but I'm betting that no matter WHAT she wants, she'd rather have a hefty nest egg than not. Hence the retirement saving!
Good point, but I think you left out what kinda motivates me — By doing a little bit now, being young, means I won't ever have to sacrifice a lot later on in an attempt to make up for lost time. Maybe you did kinda hint at it and I missed it, but that's the big one for me.
If I get used to setting aside some money every year starting now, I can continue to do that every year never having to change but still coming out ahead of people who sock away more later on.
That’s a big one for me too. If I make the effort to save a bit more now, I’ll have more flexibility later on.
I am currently saving 28% of my gross income, with half of that divided between my HSA and 401k. I am presently doing half and half because I am young with 40+ years to save. The rest of my savings is dedicated to improvements on my house, saving for a new vehicle and saving to buy my next house with cash.
One of my methods behind long term wealth and retirement is to not have any debt, including mortgage debt, which is why I place a high value on paying off and maintaining the equity in my current home which will enable me to break the financing cycle with my next house in 10-15 years.
28%? That is FANTASTIC. How are you liking the HSA? I've heard about it but I've always had a PPO.
If you put saving off until tomorrow, tomorrow never comes