Yes, I’m serious. I’m a financial advisor telling young people to stop saving for retirement.
I’m also a Millennial who recognizes why the relentless pressure to save more for a far off future feels completely disconnected from our reality.
Even though we each face different circumstances and desire different things in life, supposed experts continue to implore our entire generation to save in retirement accounts.
This constant call to save has contributed to a 75% increase in the number of Millennials participating in defined contribution plans (like 401(k)s) in the last 10 years, according to Fidelity Investments.
Unfortunately, only focusing on saving for the future means we might neglect more present financial issues like credit card debt or emergency expenses.
In addition, such savings rules disregard life cycle preferences that differ from those of generations past.
Rather than cashing out after working in the same job for 40 years, many of us would rather enjoy a more entrepreneurial career while earning well beyond typical retirement age.
Instead of putting every extra dollar in a 401(k), Millennials should first review the reasons why it might make sense to stop saving for retirement.
Invest In Yourself
The constant specter of not having enough decades from now leads many of us to think saving in a 401k represents our only option to reach financial security.
There’s nothing inherently wrong with saving for the future and using the tax advantages of retirement plans. It’s mathematically true that starting to save now improves our odds of having enough later.
Still, we need to recognize the cost of missed opportunities. While saving reflects the safest choice, doing so might hold us back from taking any financial risk to pursue more entrepreneurial endeavors.
Many of us have allowed financial fears of an unrealized future to define our career choices.
We might leave college with ideas and initiative to take risks and build great businesses, only to soon default to the safety and stability of a traditional 401k plan and career.
This is not to say we should all avoid stable jobs or great retirement plans, but to avoid sacrificing passion because we think we’ll otherwise fail financially.
In reality, taking a risk by investing in yourself to build a business could not only lead to greater wealth, but could provide a far more fulfilling life along the way.
Deal With Debt
We also need to make savings decisions in the context of every other financial issue going on in our lives.
A sweeping recommendation to save more for retirement doesn’t account for important factors like our debt balances.
Many Millennials graduated college during the Great Recession with massive student loan debt. In fact, the latest Fed Bank of New York report on household debt revealed student loan balances climbed by $29 billion in first-quarter 2018. On top of student loans, 46% of Millennials also carry high interest rate credit card debt, according to an NBC News/GenForward survey.
Even though we leave college debt-laden, the constant drumbeat for young people to forsake all else to take advantage of company 401(k) plans continues to drive young borrowers to misallocate any extra resources. Yes, 401(k) plans provide incredible benefits, from tax incentives to “free money” as your company matches your contributions. But many people contributing to these plans subsequently can’t pay down debt after monthly expenses. Meanwhile, the interest rate on credit card debt likely exceeds the rate you can earn in your retirement account, which means the growth of your debt balance will forever outpace your long-term savings.
Ensure Your Insurability
Many of us see no reason to get life insurance coverage when we’re not married and don’t have kids. In reality, purchasing an inexpensive term life insurance policy when we’re young and healthy allows us to lock in lower rates than we’d get in the future.
Any medical issues later in life could result in much higher premiums or worse—becoming uninsurable.
Unfortunately, many of us choose to forgo coverage and instead save in retirement accounts or spend our discretionary dollars elsewhere.
Ultimately, life insurance is about relieving the anxiety of leaving behind a family to face financial crisis.
Proper coverage means your current or future spouse and kids can afford things like paying for college, the mortgage and daily expenses.
If you don’t have insurance and you’ve put all of your discretionary dollars in a 401(k) plan, your spouse would miss out on any insurance proceeds and would need to pay tax on withdrawals from the retirement account before accessing the money.
Save For The Short Term
Since so much of what we hear about saving relates to retirement, we tend to overlook the importance of saving for shorter-term needs.
Yes, we’ll probably need money stashed away a long time from now, but young people will face many different expenses before that time comes.
Again, it’s great to take the tax advantage of your company 401(k), but significant tax penalties for early withdrawals make it prohibitive for us to use that money when we might need it for things like starting a business, a new car, a down payment on a house, or any substantial emergency expense.
For short-term savings, we can simply use our bank savings accounts to build up some extra reserves. In addition, other retirement account types provide more flexibility.
For example, a Roth IRA lets you pay Uncle Sam on your up-front contributions rather than your future withdrawals.
Therefore, young people in low tax brackets pay taxes now, but won’t need to pay when we take out money while working well through traditional retirement age in a higher tax bracket.
Unlike 401(k)s or traditional IRAs, you can also withdraw your Roth contributions (but not the interest earned) in full when you need the money.
Ultimately, our different needs and preferences should define our financial plans, not any of the many generalized “rules” we often hear.
While we shouldn’t completely abandon long-term savings, we should take a second to think about how best to use our extra dollars—both to establish our financial security and to find more fulfilling careers and happier lives.
