While sitting in my brother- and sister-in-laws’ kitchen about 90 minutes before picking up my nephew and niece after school, I’d been working on a post about our trip to D.C. so far. But then I took a detour and started this post instead.
I’d been doing a lot of reading over the last 3-6 months (more than usual) and kept going back to a similar question in my head: are we saving too much in retirement accounts?
After slapping myself across the back of the head a few times (no really, I did), I asked myself “how the hell could I think such a thing?” There is no way that someone could have too much for retirement, right?
It depends and – with everything else in personal finance and personal lifestyle – it comes down to the respective individual or family’s unique circumstances, goals, and numerous other variables.
This prompted me to conduct the following exercise to review the current percentage of our net worth in retirement (i.e., non-taxable) vs. non-retirement (i.e., taxable) accounts. I then decided to (roughly) outline how Mrs. BD and I got to where we are today. I’d done this exercise about 3 years ago before for the first time, and we were surprised then.
I was surprised now, but for a different set of reasons.
Related: How We Got To Averaging +$1,000 a Month In Passive Income
Present Day – Current Exercise
To provide some context, I’ve outlined some parameters and related points.
Background
Utilizing our most recent (September 2017) Passive Income & Portfolio Update, it was quite easy to quickly identify our current net worth percentage of retirement vs. non-retirement account holdings: 95% in retirement accounts and 5% in non-retirement accounts.
When reviewing, I’m quite excited but also scared and a bit disappointed at the same time. On one hand, I feel we’re making great progress toward retirement, as we’ve managed to:
- Invest 20-25% of our income (about 1/3 of it Roth and 2/3 pre-tax)
- Plant the seeds of trees that will continue to grow and are now starting to make steady distributions which are reinvested
- Reduce our taxable income to lower our annual tax bill
On the other hand, retirement is so far away and it feels like there is nothing in between now and then:
- Mrs. BD and I don’t have a target date (yet) on when we’d likely “retire” (however one chooses to define it).
- Even if our passive income eventually exceeds our expenses, 95% of our assets are locked in retirement accounts that cannot be accessed (without penalty or meeting certain eligibility requirements) until the age of 59 & 1/2. (I’m currently 33, and Mrs. BD turns 33 next month – that’s 26 years away.)
- Excluding “discretionary” spending on entertainment, travel, and other non-essentials, non-retirement goals have taken a back seat (excluding emergency savings, which we’ll cover in more detail further below).
Assessment
Overall, I feel confident that our future selves will be able to have a secure retirement as we continue to save and invest. We just want to find that balance between now and then.
Related: Balanced Dividends Passive Income Analysis: 2016 vs. 2017
Summer 2014 – Initial Exercise
I had to go back into the memory bank for this a bit.
Background
In May 2014, I had just switched employers for the first time; I was scared as hell. Leaving my first “real” job out of college after nearly 7 years, I thought like I betrayed some former colleagues and those who had “invested” in me.
Starting at my new employer the Monday after my last Friday at my old job, I realized I had a relatively large (or what I felt like) nut saved after ploughing paycheck after paycheck into my 401(k) – both pretax and Roth.
But I then did my first exercise of what percentage of our net worth was locked in retirement accounts vs. liquid (relatively) in non-retirement accounts: 99.8% vs. 0.2%?
Yes, besides a couple grand in our Ally Bank checking and savings accounts (and that figure tended to fluctuate greatly – usually downward – depending on the time of month between pay periods, paying rent and paying off the full balance on credit cards), we had almost no cushion.
Related: 5 Ways to Balance Account Types To Balance Life’s (Un)known Milestones
This Scared the Crap Out of Me
- We didn’t have enough savings aside to cover one month’s rent – and in New York City no less.
- While the likelihood of Mrs. BD and I losing our jobs at the same time would have been rare, we wouldn’t have been able to cover other monthly expenses on 1 income for more than a couple of months – potentially the amount of time required to find a new job and start getting a paycheck.
- We wouldn’t have been able to have the freedom to decide where and when we wanted to move somewhere if a potential opportunity presented itself.
Looking to be able to cover unforeseen emergencies and to also save up for an anticipated move from New York City (even though, at the time, we didn’t know where to for certain), I didn’t contribute a dime to my new employer’s 401(k) plan.
Mrs. BD’s employer at the time also didn’t offer a match, so she didn’t contribute to her plan during that year. We decided to allocate all of our savings to establish a short-term emergency fund and savings for a potential move.
Assessment
As a result of our redirected savings over those 15 months:
- We now have ~6 months of living expenses in taxable accounts (about 2/3 in a short-term bonds and 1/3 in large cap value stocks across two Vanguard funds).
- Proceeds from the savings continue to be reinvested.
- We’ve been able to increase other short-term savings goals (also from increased income and a reduced cost of living) via Acorns, Qapital, and Robinhood.
Related: 2018 Goals Overview: What Do You Want To Do This Year?
Back to Present Day – What to Do Now?
I began this post about feelings toward retirement vs. non-retirement. I do sleep better at night knowing that we’ve built up our emergency savings and are meeting other short-term goals.
But what about everything else?
This might include:
- A down payment on a house or rental property
- Potential college savings for potential future family members
- Creating passive income streams
- Furthering personal education and growth
- An exotic trip or experience
Admittedly, we know life is about prioritization and sacrifices. Regardless of what one chooses to do with his or her money, there is an opportunity cost for every action (as well as inaction).
After reflecting, I just reduced my 401(k) contribution to obtain the minimum employer match. A part of me is screaming to NOT touch additional future retirement contributions, as this should be the most important priority and goal.
After all, time and compound interest are our best friend when it comes to saving and investing for retirement.
It’s also the same voice that I heard over 3 years ago when we decided to stop ALL retirement contributions and build up our short-term emergency savings. But I realized something this time – this is not permanent, and we felt happier when we built up our emergency savings.
We can always redirect our future savings toward retirement; our goals are to plant additional seeds and grow new trees outside of retirement accounts.
Related: 5 Ways to Balance Account Types To Balance Life’s (Un)known Milestones
Looking Ahead and Next Steps
With future savings being routed away from my 401(k) – excluding the minimum to get the full employer match, we’ll be allocating across our existing taxable accounts for the next 3-6 months. New funds or investments won’t need to be opened; we have a variety and balanced mix of holdings across our accounts.
We’ll just direct the additional funds across our existing accounts. Our goals will be two-fold:
- Expand investments in non-retirement accounts to increase passive income accessible prior to retirement.
- Allocate savings based on non-retirement goals yet to be prioritized (more to come on this soon).
Overall, retirement is and remains a priority for us; we’re just looking to reduce our dependency on waiting to 59 and 1/2 to potentially be able to access those funds by seeking opportunity and passive income elsewhere. We continue to find our balance.
Readers, how do you balance saving for today vs. tomorrow? Which do you consider more important? What are you focusing on now?
Related:
3 Lessons Why “Assumption Is The Mother of All F*ck Ups”
How We Got To Averaging +$1,000 a Month In Passive Income
Passive Income & Portfolio Updates
Our favorite free financial tool is Personal Capital. We use it to track our net worth, manage our spending & savings, and to monitor our investments. It’s simple and free to use.
Hello just found your blog nice post! My two cents would be to figure out what it is you are missing out on if you want to go on a trip save up and take it and scale back your savings. The one thing I disagree with is not utilizing the tax advantage space first. There are ways to access the money ahead of the traditional retirement age. Tax drag on the taxable investing is impactful! Great job adjusting to make your life happier no matter what it may be.
Thanks for your comment! I definitely hear you on the tax advantaged accounts and tax drag. I do agree there are different ways to access retirement savings (especially ROTH accounts) without penalty ahead of the existing 59 1/2 age; we actually planned to utilize the ability to withdraw ROTH IRA contributions (perhaps not intelligently looking back) prior to us having adequate emergency savings (which was also not smart). Fortunately, we didn’t need to over the last few years. We’ll likely ramp up retirement back to full-speed (maxing out 401k and IRAs) in 2018; we almost nearly did it in 2017 – but it still hurts a bit to not get the tax benefit. Thanks for the visit! I’ll checkout your site as well.
Seems like you are on a great path no matter what, the main point is you are investing heavily, the rest is just optimization based on your personal goals! Thanks for checking out the site.
My wife and I also live in the greater NYC Metro area and we plan to semi-retire and move to the Finger Lakes region in upstate New York within the next 2 years. I just turned 42 my wife is 39. So we at some point will need some of our retirement money before we turn 59.5. At first I had gone through the same thought process – is it possible we were saving too much for retirement? In our case although we have since made a conscious effort to allocate more money towards passive income streams, we have 2 rentals, my wife still allocates the max to her 401k and I did as well until I started consulting 2 years ago. What put me at ease was finding out about Substantially equal periodic payments (SEPP). I knew if we ever got in pinch we could always draw from our retirement accounts without penalty and the SEPP is now part of our retirement plan. SEPP are one of the exceptions in the United States IRS Code §72(t)(1) that allows receiving payments without the 10% early distribution penalty from a retirement plan or deferred annuity before the usual 591⁄2 age restriction under certain circumstances.
Congrats to you and your wife for being close to semi-retirement – that’s very exciting. And thank you for mentioning the SEPP. Interestingly, I literally just came across this earlier today on another site. I haven’t reviewed in detail yet, but it seems to be an important and very timely discovery. Thanks for your comments.