Retirement pondering

[LivingAlmostLarge]

Okay so I have a friend who is 31 and not saving for retirement. I told her that she and her husband should save 15% for retirement because then you get used to living on less. Her answer was they have no extra money.

But then she said they are paying off their mortgage in 15 years because that way they can afford to save for retirement then in another 12 years. They wouldn't need much without their mortgage.

I said I think that was a bad idea to focus on paying a shorter mortgage but not saving anything for retirement. Her argument was the mortgage payment could be diverted into retirement savings.

What are the cons for doing this? What argument can I make that it's a bad idea to keep waiting to save for retirement? Her argument has always been that she's young and they needed to pay off their debts first. But they've been paying off debts for so long and still not saving.

How do people balance it? Why do people not want to save for retirement?

[annibe11e]

Well, she could run the numbers using online calculators. One calculation for the savings of paying down the mortgage sooner and two calculations to see the difference between starting the retirement savings now with that money or starting later with the total mortgage payment amount. Of course, if she's confortable the way she's doing it, then that's her business.

[bjl584]

The biggest con that I see is that once the mortgage is paid off there is probably a slim to none chance that the mortgage payment money will actually be diverted to retirement.

If they aren't saving and planning for retirement now, then there is a slim chance that they will be 15 years from now. Bad with money now, bad with money later.

I could be wrong, and I hope that I am, but it just seems that there is a good chance that 15 years from now there will be some other excuse or rational as to why your friend isn't saving any money.

[ua_guy]

I think that's it. It's her business, and nobody else's. For some, the notion of having a paid off house and no mortgage obligation sooner rather than later is more valuable than taking a chance on retirment funding in traditional 401k/IRA type investment vehicles. Also, the savings of shaving 15 years off a mortgage is substantial.

Personally I would focus on saving for retirement AND paying off the house, as that seems to more evenly distribute risk.

There could also be expected/promised inheritances that you are not taking into account. It's possible these folks could already be set for retirement. Probably not by the sounds of it, but something to think about.

[MonkeyMama]

This is actually a fairly common scenario.

Some points to argue:

--Doing anything "all or nothing" is risky. Doing a little bit of everything is a more balanced plan. Having nothing but a paid-off house is kind of useless (no liquidity). All risk is centered in real estate market. Heck, in one home in one single region. Retirement savings should be of much greater diversity.

--The more you put in earlier, the less you have to put in later. The power of compounding takes over. Can you find any articles about this concept? I've said around these forums many times that *always* putting at least 10% to retirement has us well on track for retirement. But, we started at age 22 or 23, and have never put in less than that (sometimes have put in more). Check the retirement savings rate you need when you *start* saving for retirement at age 45: Ouch!

--Tax considerations. They could be paying a whole lot of unecessary taxes. Or, they may be surprised that they get enough of a tax break by funding a 401k that they can work on both goals now without slowing down mortgage payoff pace. They'd have to run the numbers.

[MonkeyMama]

http://www.cbsnews.com/8301-505146_162-57334160/how-much-should-gen-x-and-y-save-for-retirement/

Here is an article that lays it out. I think it's likely your friend doesn't understand this in the slightest and would appreciate the eye opening. I personally couldn't sit idly by if someone told me this plan - I would be genuinely concerned.

[YLTL_Dan]

My biggest concenrs about waiting until later to invest are two fold. First, you're limited on how much you can save each year in your 401k and Roth IRAs. Second, if their company currently offers a match on their 401k, they're losing out on free money.

[disneysteve]

I think the biggest con is the loss of compounding time.

Let's say their mortgage payment is $1,000/month.

$1,000/month invested from age 31 to age 46 (15 years) would grow to $319,811 with a 7% return. Then if they leave it alone from 46 to 65, it will continue to grow to over $1.2 million.

If instead, they invest nothing until they pay off the mortgage and then start putting $1,000/month into savings from 46 to 65, they will only accumulate $478,000.

Of course, this isn't realistic because they have to pay their mortgage either way but it illustrates the value of compounding. 15 years of $1,000/month earlier in life gets you more than twice as much in retirement as $1,000/month for 19 years later in life.

[J.Apple902]

When you're talking about retirement, time is everything. They are making a huge mistake my forgoing retirement savings and spending extra on the 15 year mortgage. If they can, refinance I think. Regardless, both of them have to find a way to each start a ROTH and get their retirement portfolio started asap. cheers.

[jIM_Ohio]

Okay so I have a friend who is 31 and not saving for retirement. I told her that she and her husband should save 15% for retirement because then you get used to living on less. Her answer was they have no extra money.

But then she said they are paying off their mortgage in 15 years because that way they can afford to save for retirement then in another 12 years. They wouldn't need much without their mortgage.

I said I think that was a bad idea to focus on paying a shorter mortgage but not saving anything for retirement. Her argument was the mortgage payment could be diverted into retirement savings.

What are the cons for doing this? What argument can I make that it's a bad idea to keep waiting to save for retirement? Her argument has always been that she's young and they needed to pay off their debts first. But they've been paying off debts for so long and still not saving.

How do people balance it? Why do people not want to save for retirement?

The challenge is to see how others solve their problems and communicate to them in their language, not yours.

In this case, your friend is solving problems with cash flow as their mindset. The focus should then go to three things
1) how much do they make
2) how much do they spend
3) what do they spend money on

Note, people like this are very susceptible to pyramid schemes and sales pitches suggesting passive income streams (most real estate investors/ landlords think in terms of cash flow too).

Retirement savings is seen as an expense (what they spend money on) where the actual answer is them knowing the difference between #1 and #2.

A second technique to talk about this is focus on the objection and talk about it, for example "I have no extra money" is the objection. It is easy to make more money, it is easy to cut expenses, and it is easy to get educated to make better decisions.

[sblatner]

What if they end up moving in the next 15 years? They might end up having to start over on a mortgage for some reason. I wonder if they have an emergency fund. Not that I would ever use my retirement for an emergency but if there was a true dire emergency, I feel better knowing that I have retirement money to touch if I had to. I'm talking catastrophic. We have an 8 month emergency fund that is separate so I have no plans on doing this.

I think the best reason is that you are limited in how much you can save per year in tax deferred/tax free accounts. That is a really good reason to start now.

[LivingAlmostLarge]

I am not sure. I am going to ask and have her look at finances. I guess I worry more because she says her husband manages everything. I worry that she's going to blame him in 10 years or longer.

[greenskeeper]

Paid off mortgage is a guarenteed result

401k performance isn't

You can't go by past performance because the 40 year paper dollar experiment along with QE hasn't been tried before.

[LivingAlmostLarge]

But then you can never save for retirement the years past.

[TashaC.]

I'm not so sure on this one either. I have always liked the idea of diversification myself. If the real estate market tanks, I have a back up in retirement funds.

But I understand real estate. I see it as an investment and I can understand how it works. I can see where my money is going and I can live in my investment. So I have 3x as much money tied up in real estate as I do retirement funds. I just don't really get stocks.

I count my real estate investments to be part of my retirement fund. If I need the money in retirement (if my retirement savings fall short), I'll sell a house.

So I SEE where she is coming from. The danger is that she might retire in a very bad real estate crash. And her house is worth almost nothing if she needs the money. Other danger is that something happens- fire and she forgot to pay the home insurance bill. And the house is gone.
Or they get divorced, and split any equity in the house. Retirement funds are HERS and I don't think they can be touched by the spouse.


But again, retirement stocks is risky too. So I say stay diversified. She can pay down the mortgage to get it to a reasonable level for another few years. Age 31 is still young to be a homeowner, so maybe she is freaked out about the debt level. In 5 yrs when the actions (partying/heavy labor) of her 20's catches up to her body and she is feeling aches and pains, slowing down...she might switch her focus to retirement, which will seem like a much more looming issue at that time.

I'm curious to see if anyone else has added arguments.