Today’s update is going to be very quick. We’ve got a storm, so the kids are home from school. My wife has 4.2 zillion Zoom meetings and I have a lot of snow shoveling to do. We haven’t had a storm in a few years, so finally the kids are old enough to pick up a shovel and help a bit too.
It was back in middle of January this year that I asked, Is it okay NOT to save for retirement. Some stuff happened since then*, and now it’s time to announce that we’ve decided not to save for retirement… at least for the next 6-7 months.
My wife won’t add funds to her government TSP plan (like a 401k). I won’t add funds to my solo 401k. We’ll still max out our Roth IRAs, but that is only because we can withdraw those contributions at any time without penalty.
Why the move now?
A lot of it has to do with the way the stock market has gone this year. I’m not referring to the drop in March. Back in January, I had felt like our retirement accounts were getting too high in comparison to the liquid cash we had on hand. It wasn’t like we were each 401k millionaires with 30 cents to our name, but it was lopsided nonetheless.
And here we are in December. I look at our retirement accounts and they are up 27% for the year.
We do have more liquid cash than we did at the start of the year due to less travel, grooming, and eating out. At the end of the day that 27% gain moves the needle even more past the point where I was questioning it before.
There are two other things weighing on the decision:
- More liquid cash now means my wife can choose to retire when she wants to. In some ways she can with a great pension already vested. There are some golden handcuff issues to consider. Also, sometimes she seems to be on the fence on whether she wants to retire or not. In any case, having more cash on hand makes that easier.
- If we invest some of this money in dividend stocks outside of retirement, we may end up paying fewer taxes down the line. If we take money out of a 401k plan we’ll have to pay taxes at our regular income tax rate. With my wife’s pension, that income tax rate may be fairly high. Well, it wouldn’t be too high, but it would be much higher than what qualified dividends get taxed at. Since our Roth IRAs are not taxed, we can pull out that money without considering tax rates.
There’s more detail in the original article that I linked to above. That’s about all I can do for today.
* Understatement of the year, right?!?!
I’ve been thinking about this too. Our 401k/IRA accounts are getting too big.
I need to figure out the crossover point somehow.
For now, we’ll keep contributing.
This was definitely an interesting thought exercise for me! We’ve had to adjust what we invest and save periodically over the years, but I don’t think we are anywhere close to this. We do keep quite a bit liquid–which we’ve certainly been criticized for in the past–but it seems like the right thing to do for us for now while everything is up in the air.
Hope the snow day goes well ;)
Lazy Man says
At 44, I think we are a little bit older and maybe had more of a bull run. I had always been a “if a little is good, much more is better” person. I need to work on moderation.
I have cut back on our 401k contributions, along with backing off the HSA contributions as well. I had already moved a lot of the money to a more defensive position because, having lived through the dot com bust, the current market is in similar shape. A few companies driving the values was beyond anything that makes sense, high debt, high unemployment, etc. I need to start putting more in my Roth based on what was mentioned, but the investment choices aren’t great either.
I’m also considering changing my 401(k) contributions, but instead of stopping them altogether, I’m thinking of shifting more into the Roth category. While I agree that things have run up a bit, I’m not confident in my ability to time things well and avoid psychological traps along the way. So I’ll probably just continue maxing the accounts out.
Lazy Man says
We shifted my wife’s TSP (government version of the 401k) to a Roth several years ago. The idea was to diversify our tax liabilities in the future.
We could still contribute to this Roth TSP, but at this point we’ve put so many eggs in the basket for the future and not enough for now. We’re looking at having $3M+ in retirement, $60K+ military pension, $40K in rental property income a year, and whatever side business income we make.
I’ve actually done really well whenever I time the markets, though I admit that it’s probably good luck. I don’t recommend anyone try it. I only time by changing asset allocation to be more conservative when markets seem high and less conservative when markets are low. For example, I sold bonds in March and started buying stocks. It’s worked out well.