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How Do You Balance Saving for Retirement With Other Goals?

It’s perhaps the biggest financial quandary facing every young saver: Personal finance advice –- including our own — implores you to save as much for retirement as possible. But the younger you are, the more likely you have other important goals ahead: Repaying student loans, buying a home, getting married, taking time for extended travel, starting a business – the list could go on.

So what’s the right answer?

I spend a lot of time wrestling with this question myself. Like most people, my retirement savings got off to a rocky start. I put a little bit away in 401ks in every job I worked, but never more than the minimum required to qualify for my employer’s match. And I didn’t increase my contributions (or open an IRA) until my late 20s when I had paid off the lion’s share of my debt.

Over the last few years, I’ve been playing catch up and maximizing my retirement savings. This year, I’ll try to max out my SEP-IRA (a kind of retirement account for the self-employed). I’ll divide any remaining savings between 529 plans for our kids and brokerage accounts designated for those “other” goals – most likely a vacation or two and a new house with a little more space for our two growing kids.

At the moment, I’m incredibly lucky that there’s enough money to max out retirement accounts and save for some other things, too. That hasn’t always been the case. Most of the time, we have to prioritize our goals and allocate our savings accordingly.

Here’s a rule that can help you balance retirement savings and other goals: Take the total amount you can save each month and allocate half to retirement and half to other goals until you’ve maxed out your allowable annual retirement savings, then put additional money towards other goals.

I realize this is a dramatic simplification. Some of you will want to save more for retirement to take advantage of the tax benefits, while others will need to save more for non-retirement goals and life events. I arrived at the 50/50 split because — for common income levels and savings rates — it provides the best chance of saving enough for retirement without exceeding IRS maximums for common retirement accounts. In the following chart, you can see how the 50/50 split works compared to saving 20 percent for one goal and 80 percent for another:

Aim to allocate 50 percent of your savings to retirement.

How much you’re actually able to save for each goal depends on two things:

  • Your income
  • Your savings rate.

Your savings rate is the percentage of your gross income that you save. Working on continually increasing it should be a priority. As you can deduce from the above charge, somebody earning $50,000 and saving 25 of her income annually is saving more ($12,500) than somebody earning twice as much but only saving 10 percent ($10,000).

What follows are three scenarios and proposed savings rates for retirement and non-retirement goals. Of course, personal finance is personal, so how much you allocate towards non-retirement goals will depend largely on what you’re saving for and how soon you want to get there. If you’re getting married in a year and need $10,000 for your wedding by then, you may have to increase your non-retirement savings rate temporarily. Likewise, if you’re saving for a “someday” goal without a pressing timeline, you can save a little less because you have more time on your hands.

Beginner: 10 percent

We all have to start somewhere, and if you’re scraping by with an entry-level salary and student loans, it doesn’t make sense to stretch an already-thin budget by over-saving for retirement. If your budget is tight, first decide on what percentage of your income you can save. Let’s say you can afford 10 percent. I would put 5 percent into retirement and 5 percent towards other goals like paying down debt, building an emergency fund and other goals. If you earn $27,000 a year, for example, that’s a total of $2,700 — $1,350 towards retirement and $1,350 for other goals.

As your income grows (or you trim other expenses), focus on increasing your overall savings rate and use the additional savings for your nonretirement goals.

Intermediate: 15 to 20 percent

So you’re more established. You don’t subsist on Ramen anymore, and maybe you have six months’ living expenses in a savings account for emergencies. You don’t have credit card debt, and you’re focused on the next big thing: A down payment, wedding, paying cash for a new car – whatever it may be. Here’s where I would try to stretch your savings rate from 10 percent towards 20 percent. If you earn $50,000 a year, aim for at least $5,000 towards retirement and $5,000 towards other goals.

Advanced: 20 – 25 percent (or more)

You’re the one your friends think “has it together.” Congrats. Perhaps you’ve paid off all of your debt. Or maybe you just have a healthy income and your expenses in check so you don’t worry about money as much and have a nice amount left over to save. You’re comfortable with a savings rate of 20 percent or more. You may have maxed out your IRA or even your 401k in years past, but you’re wondering if you can save some of that money for other things you’d like to do. If you earn $75,000 and aim to save 25 percent, that’s $9,375 in both retirement and non-retirement savings accounts.

If, however, you don’t have a 401(k) at work and can only take advantage of an IRA – savers under the age of 50 will only be able to contribute $5,500 towards retirement (with tax advantages). In this case, you would save $5,500 for retirement and $13,250 in other accounts. (You may, of course, wish to designate more than $5,500 for retirement even though you can’t put it in a tax-advantaged account.)

What if I don’t have specific savings goals?

Ok, so maybe you’re a powersaver but you’re content: You’re happy where you live, you have some emergency savings, and you have no plans to spend a big chunk of money anytime soon. You should just funnel all of your savings into retirement accounts, right?

Maybe not.

Although it’s certainly smart to take advantage of retirement accounts’ tax advantages – we have to remember that once your money is in a retirement account, it’s no longer liquid. With few exceptions, withdrawing money from a retirement account before you’re age 59 ½ will incur taxes and a 10 percent penalty.

Liquidity gives you options in the short term.

Lots of times, you hear about people withdrawing from or borrowing against their retirement savings to buy a home, fund a mid-career sabbatical, or start a business. If you’re savvy about your saving now, however, you may be able to have the cash on hand to do something like that without the need to sabotage your retirement savings.

With my retirement balances catching up to where I want them to be for my age – I’ll be following this strategy this year and allocating about 10-15 percent of our income to retirement and 10-15 percent towards saving for other goals.

Why we shouldn’t skip saving for retirement

Finally, if you’re young and hell-bent on a big wedding or a down payment on your dream house in the next few years, it may be tempting to delay contributing to your 401k until that goal is met.

Don’t.

Saving something in a 401k or IRA – even 5 percent of your salary – is more important than ever. Yes, there are tax benefits and yes, that money will compound for 30 or 40 years. But the most important reason to take advantage of retirement accounts is to get into the habit of investing — in other words: make it automatic. Nobody loves saving for retirement. It’s such a faraway goal, and it’s painful to say goodbye to money we have 10 uses for now. But chances are you’re going to live a long time and programs like social security – if it’s around at all — will make up an increasingly tiny portion of support you can count on when you’re older.

How do you balance saving for retirement with other savings goals?

About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. BrightandBlissful says:

    An excellent article. Thank you, I find this one spot on.

  2. “How much you’re actually able to save for each goal depends on two things:
    •Your income
    •Your savings rate.”

    How much I am able to save depends on 2 things
    - my income
    - my debt

    My savings rate is low because my debt level is high.

    • David E. Weliver says:

      I would count any principal that you’re paying down on the debt towards your savings rate. Debt is basically just negative savings!

  3. Do you consider the money your employer matches in your 401k/retirement account in your calculation, as part of the money you contribute from your salary? My justification in including it in my percentage is that even if I separate from my employer, the money deposited cannot be reclaimed by my employer, as I am already vested.

    • David E. Weliver says:

      I didn’t include it Travis, but I could see it going either way. I see the employer match as a “bonus” on top of whatever percentage of your salary you decide to save, IMO.

      • I have also wondered the same thing, Travis. I am in an unusual position where my company contributes 12% (not a match, and yes, ridiculously awesome) to my 401k. That being said, I think my salary is a bit lower because of the high employer contribution. So, I try to see the big picture in this situation. I include the vested employer contribution and increase my total saving percentage from 20 to 25%, and possibly skew the retirement to savings goal to 60/40. Every benefit plan is different, and this is just my humble opinion :).

        (David, thank you so much for your blog. It is easily my favorite personal finance blog. I keep your 6 1/2 steps on my refrigerator at home, haha!)

      • I think if you want to count your employer contribution as part of your %-based retirement savings plan you should also count it as part of your gross income. So if you get a 5% match, you are actually making 105% of what you previously considered that you were and you should recalculate the rest of your budget according to that true compensation figure. Jaci makes the point well when she says that her take-home compensation is probably less because she gets that 12% contribution- that match money comes from somewhere!

  4. I’ve been wondering about peoples’ perspectives on this very topic and it’s been a bit tough finding quality articles. This is great, thank you!

  5. Thanks for sharing your thoughts on this matter – I’ve been considering it recently. My husband and I have been saving rather aggressively for retirement recently (started at 10% at age 22, now up to 17% at 27) but not for any mid-term goals. Our income is rather low now but will be increase after we finish grad school and we don’t want to feel too behind percentage-wise for retirement when we get that series of income hikes.

    We are still several years away from buying a house or even our next car, so we haven’t been concerned with saving for other goals. I have been thinking about starting to save for those mid-term goals when my husband gets his first post-PhD job and a bit of a pay boost later this year. I actually came to a 50/50 conclusion as well, along with increasing our overall savings to 20%, with the non-retirement part going majorly toward a house downpayment and minorly toward our next car.

  6. I’m just now starting to focus on my wife and I’s retirement plans. At the moment, we still have plenty of debt from not being smart enough about our money in our early 20′s, but we’re still putting 10% in short-term savings and 8% in retirement savings.

    The proverbial light at the end of the tunnel for me is that as we start to pay off some of our debts, that’ll turn itself in to extra savings since neither of us are really look for a lifestyle increase.

  7. My savings rate would be higher if I wasn’t paying extra towards my mortgage every month. Well, that and if I wasn’t working for a non-profit (my income would definitely be higher).

    I agree with Travis about including my employer’s 403b match into the calculations.

    Anyways here’s my breakdown.
    15% of income to “savings” – 40/60 roth/savings

    including my employer’s contributions
    22% of income to “savings” – 60/40 retirement/savings

    I don’t really have a specific goal for the savings stash, it’s just a nice soft cushion. My main goal is to be completely debt-free again by 35, which is where the extra principle payments come in.

  8. Here’s what we do. Each year we try to maximize the match on our 401k and our Roth IRA’s and make modest 529′s contributions for the kids. After those goals are done we put everything else into savings. It has worked well for us the past two years. This year I received a raise and since we felt we were doing fine with my old paycheck we decided to put 100% of my raise into 401k contributions above the match so this year if all goes well we’ll be able to max my 401k, 2 Roth IRA’s, and a contribute to 529′s. I worry that I am putting too much into retirement at my age (28) but the way I see it from here on out any increases in salary will go straight to my savings account since there isn’t anywhere else in retirement to put more money.

    For reference my wife and I live in Dallas, Texas, and are a one income family with two kids. It is possible if you have a plan and stick to it!

    David, I appreciate the perspective and opinion keep up the good work.