When It’s Time to Stop Saving for Retirement, it may be prudent to cut current expenses. Contributions to retirement funds may need to be paused. However, before you reduce your retirement savings, make a strategy for when and how you’ll resume your savings practises.
When It’s Time to Stop Saving for Retirement
During a Health Emergency
If you unexpectedly find yourself with medical bills that aren’t covered by your insurance, you’ll most likely have to pay them out of pocket. “In the early stages of a health problem, pausing savings in your 401(k) plan can be advantageous,” says Jay Ferrans, president of JM Financial & Accounting Services in Southfield, Michigan.
Consider putting the money that you would normally put into a 401(k) into a savings account until you need it. This manner, Ferrans explains, “you will have liquid cash to spend on the care as needed later on.”
If you don’t need the money right away, you can put it aside for retirement.
You might invest the funds in a standard IRA or a Roth IRA.
If the funds are used for medical expenses, you can resume regular contributions to a 401(k) once the crisis has passed and you are able to incorporate retirement savings into your monthly budget.
Getting Out of Credit Card Debt
If you have significant credit card amounts that aren’t being paid off every month, it may be in your best interest to put your retirement savings on hold while you pay down the debt.
“The interest costs (from credit cards) would most likely eat into and more than likely exceed whatever profits you could have in your retirement plan,” says Brett Keener, a financial counsellor with Pacific Advisors in San Diego.
Let’s say you owe $15,000 or $20,000 on a credit card with a 15% or 20% interest rate. If your retirement funds earn 5% or 10%, the returns on your money invested will be less than what you are paying on the loan.
“You’d be better off suspending or reducing your contributions until you can pay off your credit card debt on a monthly basis,” Keener advises. After you’ve paid off your debt, you can resume your long-term saving practises.
Unemployment Periods
If one of a married couple’s members loses their work, it may be time for the other spouse to put their retirement funds on hold. You can put the additional money towards expenses that your spouse’s income would normally cover.
“When your spouse gets new work, remember to get started saving as soon as possible,” Ferrans advises.
When it comes to starting a business
You may need capital to purchase merchandise, materials, equipment, or office space to get a new firm off the ground. “If you’re beginning a new business, you might want to put your retirement savings on hold,” adds Keener.
You can resume saving for retirement once the company begins to generate profits.
However, you should think about the potential consequences before shifting retirement savings to a new firm.
According to Keener, “the money in a retirement plan is truly designed to remain locked away for decades.” If you take it out and the business fails to make a profit, you risk falling behind on your retirement savings goals.
When it comes to saving for a house
If you aim to buy a house in the next several years, you’ll most likely need to save money to cover the upfront fees.
“You may want to lower your retirement contributions to make a higher down payment or to ensure you have a cash reserve when you close on your home,” says the expert.
When It’s Time to Stop Saving for Retirement, Create an Emergency Fund
If you don’t have enough money in your savings account to handle unforeseen bills, you may want to put your retirement plans on hold. You can construct an emergency fund with the money you normally set aside for retirement.
“The present pandemic and its impact on many people’s short-term finances has highlighted the need for a reserve fund,” adds Keener. You can decide to save aside money every month until you have enough to pay three to six months’ worth of living expenses.
When you’ve saved enough, you can put your monthly savings into a retirement account.
When it Comes to Student Loan Repayment
If you’ve recently graduated from college and want to get rid of your student debt, you might use money set aside for retirement to pay down your loans.
You can pay off your student loans in a short amount of time if you concentrate on getting rid of them. The monies you were paying toward student loan amounts each month can then be diverted to long-term savings.
While the Children are in College
You can explore ways to help pay for your children’s education when they start college. While you may want to continue saving a certain amount for retirement, such as employer-matched contributions, you may prefer to use the extra income for school fees rather than retirement savings.
“Pausing unmatched contributions to retirement plans while children are in college could be done to pay for more of the education expenditures out of income rather than putting on debt,” adds Keener. You can resume saving for retirement once their college years are over.
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