Are there really times when you shouldn't be saving for retirement?

4 Reasons to Stop Saving for Retirement

by David Bakke


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Saving for Retirement

This introduction may run contrary to the title of this post, but I cannot overemphasize the importance of saving for retirement. If you are saving now, consider saving more. If you haven't started yet, you'd better get going.

You can't start too early, and for the most part, you can't save too much. You may, however, be in a specific financial circumstance that justifies temporarily or permanently ceasing your retirement contributions. If you're in one of these four situations, then it may make sense to give your retirement account a break.

4 Reasons to Stop Saving for Retirement

1. If You Are Establishing an Emergency Fund

You'll find varying advice on exactly how much you should have in your emergency fund, but everyone agrees that you need one. If you don't have one, you should probably suspend your retirement savings plan and establish an emergency fund.

How much you save is really up to you. Most experts suggest an amount between three and six months' worth of living expenses. I would suggest setting an amount that you feel comfortable with.

No one can predict when a medical emergency will arise, when a car will break down, or when natural disaster will hit. That's just the beginning of the list of things that could happen, and you need to have some money available so you can deal with these problems.

If you have a retirement nest egg building, but nothing in reserve, you may have to pull from these retirement accounts to pay for your life emergency. Having to do this will cost you big time in the way of retirement account early withdrawal penalties and other tax considerations. Worse, if you don't have an emergency fund, you could end up with the worst of all situations, which is relying on credit to deal with a problem.

Make sure that your emergency fund is in some sort of interest-bearing account. Obviously, it needs to be somewhere that you can access instantly if you need it, but don't think that just because it is an emergency fund that it needs to be in some generic type of account. Consider a high-interest checking account like ING Direct or a money market fund that gives you instant access.

2. If You Are Paying Off Debt

If you already learned the hard way that not having an emergency fund can lead to heavy credit card debt, or if you're just carrying a high balance on your card, then it's time to rethink your retirement saving strategy. In fact, almost any high-interest debt, like a personal loan, may need more attention than your retirement accounts do.

Consider this simple example: If you are contributing to a 401k plan that yields roughly an 8% return, but you are currently paying 20% interest on a credit card balance, what's the sense in that? Suspend your 401k contributions until your credit card debt is entirely paid off, and then resume your retirement savings.

Do not make the mistake, however, of suspending retirement contributions in the name of getting ahead of your student loan debt. Though you may feel like your student loans are always looming over you, they're one of the few low-interest debts you can carry.

If you're only paying 3% or 4% on your student loans, resist the urge to make the whole thing go away, even if you have some extra cash on hand. Just grin and bear the burden and use the extra cash to contribute toward that retirement account with compounding interest. You'll be more pleased with the results in the long run.

3. If You Are Buying a House

The housing market has recovered to a degree, but now is still a great time to buy a home. Few financial moves are more important than putting down as much as you can afford for your down payment. The more you put down, the less you'll owe in interest over the life of your mortgage, and you can save thousands of dollars by committing just a little bit more up front.

If you are trying to save for a home purchase, consider shifting some of your regular retirement contributions so you can devote more funds to a down payment.

Keep in mind that once you have paid off 20% of the value of the home, the need for private mortgage insurance goes away. That additional incentive can help guide you toward figuring out just how much you want to have available for your down payment.

4. If You Are Managing Your Contribution Limits

This last point is not a reason to stop investing for retirement, but rather it's advice on what to do if you can no longer invest in your retirement in a particular tax year. You are subject to certain investing limits when it comes to funding retirement accounts. For the year 2011, for example, contributions to an IRA are limited to $5,000 if you are 49 years old or younger and $6,000 if you are aged 50 or older.

Your maximum annual 401k contribution limits for employer-based plans (and for a 403b too) is currently at $16,500 if you're under 50, and $22,000 if you're 50 or older. If you've maxed out these investment limits, first of all, congratulations! You are well on your way to an enjoyable retirement.

Secondly (and more importantly), if you reach these limits early in this tax year, don't stop saving. Shift your money into other investment vehicles (like stocks, bonds, or money market funds), or consider funneling this money into paying down your mortgage.

If you have this much early momentum in your savings habits, don't slow down. Just change the final destination of the money you're putting away.

Final Thoughts

Everyone should be investing for retirement. If you haven't started, or if you're in the middle of a "break," you should start or get back to saving. If you're in the middle of saving, consider the volatile state of social security and decide if you'd be comfortable contributing even more.

By the time you reach your golden years, you could very well be entirely on your own. But don't let the importance of retirement planning cloud your judgment during some key situations. Sometimes retirement saving isn't the most responsible move available, and it's okay to put your savings on hold.


David Bakke writes about retirement planning, investing, and frugal living on one of the top personal finance blogs, Money Crashers.

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