When I think about the retirement savings trajectory of a typical American, I imagine that his rate of saving for retirement increases basically monotonically throughout his life. In his 20s and 30s he doesn’t save anything; in his 40s he wises up and starts putting money away; in his 50s he panics and saves as much as he can given the lifestyle he’s become accustomed to; by the time he’s about to retire he’s putting away quite a significant fraction of his income, the most in his life. (I’m not recommending this path, it’s just what I think of when I reflect on retirement savings literature, most of which is aimed at middle-aged and older people who are striving to save eight times their salaries or whatever.)
However, on my GRS guest post I got a great comment from Courtney H., telling how while she was in grad school she and her husband lived off his income and used her stipend to fund Roth IRAs. She concluded by saying “It is nice to have that cushion [in retirement accounts] since now that we have two kids in daycare ($1800/month ouch), we only contribute 10% of our income to retirement.” The way she phrased that last clause made me think that they used to contribute more to retirement, either absolutely or by percentage of their income, than the 10% they are currently saving.
Her comment struck me as a possible example to emulate. Saving 10% toward retirement in your 20s/30s is still no slouch, but they were able to feel comfortable taking it down to that rate based on their high retirement account balances accumulated before their children went into daycare. Right now Kyle and I are saving 17.5% of our gross income into our Roth IRAs because we wanted to get an early start on saving for retirement and we don’t have anything better to do with it. It’s certainly possible that when we have more expenses, like a house and kids, we won’t be able to save such a high percentage so easily (though in absolute dollars of course we will be saving much more). At that time we may evaluate where our accounts stand and choose to cut back on that retirement savings percentage.
Basically, Courtney H. and her husband bought themselves a more relaxed retirement savings rate because they pushed so hard at it when they were younger, and I’m thinking we might be giving ourselves the opportunity to do the same. This goes right against my notion above about how we should always increase our retirement savings rate right up until we start drawing from the accounts.
Childcare expenses – This was Courtney’s example, and $1,800/month is quite a high rate! The good part about this motivation is that it’s a temporary period if your children go to public school. In a limited number of years you can switch that childcare money right back to retirement accounts.
Paying off debt – This is a controversial one. Dave Ramsey, for instance, argues to stop saving for retirement entirely while paying off non-mortgage debt. Other financial advisors say to contribute to get your full match but no more. I think the interest rate on the debt plays a role in this decision – the higher the rate, the more it behooves you to sacrifice saving to get rid of the debt.
Saving for a house – If equity in a house plays into your long-term savings plan, it could make sense to switch your aggressive savings from retirement to a down payment fund. I can certainly see us dropping our retirement savings contribution for a limited time to save up for a house as we plan to move to a city with high housing prices.
Gaining an employer contribution – If you switched jobs and your new employer is contributing much more to your (vested) retirement account than your old employer, that might be reason to reduce the amount you’re contributing. It’s part of your gross compensation package, after all.
Maxing out tax-advantaged accounts – People who have high and quickly-increasing salaries will find that maxing out their available tax-advantaged retirement accounts will amount to a decreasing percentage of their gross income year after year. In that case I think it could be reasonable to keep saving for retirement in a taxable account or to save for more general goals, whatever they may be.
It seems that the scenarios in which I favor reducing your retirement savings rate are generally ones that are limited in time by the situation that brings them about, but I recognize that you might also decrease your savings rate when coming off a period of unusually high savings instead of starting one of unusually low. A good reason for that might be reaching financial independence!
Kyle and I have only ever increased our retirement savings rate (percentage-wise and absolutely) as we still aren’t maxing out two Roth IRAs. I think 17.5% is a bit of a high rate since we started so young and aren’t striving for early retirement. However, as we have a tiny income it doesn’t actually amount to much in dollar terms. I expect in our future we’ll save less by percentage but more absolutely, although I’ll try to hold out for saving at least 15% for as long as we can!
Have you ever or do you plan to decrease your retirement savings rate and what situation would motivate that? When you consistently max out the tax-advantaged retirement accounts available to you, what will you do with excess savings?
photo from Free Digital Photos