Stopping retirement contributions

[Broken Arrow]

Well, I'm mostly in the "Do what gives the most bang for the buck" camp. So, even though I am debt-free right now, that has never been my real goal. It just ended up that way, because my debts at the time were costing me more than anything else.

I did still maintain retirement contributions, because my previous employer offerd 28% contribution, and my current one is offering 50%. But once maxed, I move on to something else.

Another factor that's been touched on is risk. Risk from having debt and risk from certain types of investments. Risk of debt, for example, also affects risk on our monthly budgets, which is something else to think about....

Sorry I don't have clearer thoughts right now, but I'm also a bit preoccupied with work. But my point is that, in light of these factors (and more I can't think of right now), I end up doing a combination of things at any one time.

[Scanner]

It's all philosophical.

I can't remember the classic book (Maybe "Richest Man In Babylon"), but the philosophy of the book was "Pay yourself first."

The idea is, and it's true for the most part, you will always have some form of obligation to someone (debt) in your life. It's just something that comes along with you for the ride in life. If you wait until you are debt-free to invest, you will never invest.

I've invested at some of the most "leveraged" times in my life and never really regretted it. For instance, when I graduated chiropractic school, I had $53,000 in debt, a new mortgage and was starting a business. Yet, that year(s), I max out my wife's and my Roth IRA.

Do you know how golden of a decision that was?

What if I had done a "Dave Ramsey" and decided to just pour everything into debt reduction?

So, I do mostly agree with the mantra - "Pay Yourself First." In that, I may be kinda "anti-Dave Ramsey."

[LivingAlmostLarge]

I guess my take is if you are living on nothing, and have cut everything like cable, groceries, eating out, cell phones, then fine; do cut the retirement.

You are obviously serious about debt repayment. But otherwise? If you have luxuries in the budget, why are you cutting retirement instead of the luxuries?

[lovcom]

The exception to this is a 401k match, since that amounts to 50% earnings. I'm sure nobody has a CC charging 50% interest. So I would go along with dropping contributions beyond what is needed to get the maximum match and putting all other available funds toward debt.

Something else to think about, though, is the tax issue. If you are in the 25% bracket, what you lose to taxes might outweigh what you save in interest depending on the rate on your debt.

Then the market goes south and one loses 50% value in their 401k, and thier massive consumer debt is no less decreased. Or worse, the market goes south, AND they get downsized out into the street...401k half gone, no job, and consumer debt is no less decreased.

I think getting to zero debt is a huge value even in it's concept, and getting there means one is less vulnerable to being downsized or fired..to me that is more valuable then the employer's contributions even if they're 50%.

I think sometimes one has to leave $$ on the table in the short run to get security for the long haul.

Of course I would not turn off 401k contributions for longer then 12-18 months, and for the reasons you stated.

[ceejay74]

This is a really interesting subject! I've kept putting a minimal amount (6%) into my 401(k), even when my employer stopped the matching program. I have my husband put the minimum needed to get his matching at work. And I put aside $120 per month for my partner who's currently unemployed, just because it feels really weird not to have her building retirement at all.

But I've considered whether I should up those contributions or not...By next month, I'll have eliminated another high-interest (8.99%) debt, and then my highest-interest debt will be a student loan that's at 6.8%. I still have a lot of debt but the rates are all low: 6.8%, 6.55%, 4.5%, 3.99%, 3.9%, 3.875%, 2.5%, 1.49%, 0%. Also, all but one are either mortgage or student loan, so they all have tax benefits associated.

At what point does the compound factor of retirement outpace the interest you pay on debt? Does that make sense? Or does the interest on debt compound negatively at the same rate? Can you tell I don't know what I'm talking about??

[MonkeyMama]

Wait, has anyone ever recommended to stop retirement contributions, but keep luxuries, to get out of debt? Never heard that one.

Usually, it's all of the above.

As others mentioned, debt could be a rather losing battle at high interest rates - better to just tackle it and move on. Thing about retirement is that it tends to be a large figure. Probably larger than most things you can cut in your budget.

I also agree with the sentiment of cutting retirement, because to us, some of our retirement is necessary, and some is luxury. Putting 20% to retirement is a luxury we choose over other things. It's easy to cut if times get tougher. We've never put in less than 10%. I'd consider 10% the "necessary" part. The other 10% I would cut in a pinch. It's easy to cut and it's a large figure.

[LivingAlmostLarge]

MM, a lot of people come and ask about cutting retirement? Then when they post a budget there is cable, car loan, cell phones, eating out, etc.

What the heck? Why are those in the budget but the retirement gets cut?

And lovcom, if you cut the retirement, have you cut everything else? No clothes shopping, no car loans, etc? Did you make all other sacrifices first?

[maat55]

There are two good reasons for this. First, motivation to get out of debt comes from different areas, paying things off faster and wanting to get back into the investing game as quickly as possible.

Second, paying down certain types of debt may get better results than investing. These are two good reasons to consider focusing on the debt first.

[lovcom]

MM, a lot of people come and ask about cutting retirement? Then when they post a budget there is cable, car loan, cell phones, eating out, etc.

What the heck? Why are those in the budget but the retirement gets cut?

And lovcom, if you cut the retirement, have you cut everything else? No clothes shopping, no car loans, etc? Did you make all other sacrifices first?

When I suggest temporarly cutting retirement contributions, yes, I would expect one to cut everything else first and to the bone until the consumer debt is paid off. To cut retirement only and keep everything else status quo would be wrong IMHO.

[LivingAlmostLarge]

Can you really say it's a need to have a cell phone with all the bells and whistles? OR cable? More than retirement savings?

That some budgets build in eating out, kids activities, etc, but then cut retirement to pay debt?

How can you justify still spending, on what I think are luxuries above retirement?

[jIM_Ohio]

To truly evaluate this, a "time" aspect needs to be put with the money to evaluate the various dimensions of the problem.

Is the goal to "be out of debt the fastest"?
Is the goal to "have a high net worth?"
Is the goal to "retire as early as possible?"
Is the goal to "be financially independant as early in life as possible?"

For example- if someone has 100k of cc debt and has only 3k of retirement contributions...

if the "debt free" timeline by stopping retirement contributions is 10 years and continuting retirement contributions is 11 years, that adds some context to solution.

In another example if the debt is 30k and same 3k of retirement contributions, and debt free by stopping retirement contributions is 1 year, but if retirement is not stopped is 3 years... I would "argue" that you could invest more in years 2 and 3 (6K) that you lose in year 1 (3k).

And more examples would need to follow on goals which were not "get out of debt the fastest". My goals all center around being financially independant (not needing my employer) so that biases all decisions towards not stopping investing because to meet the true goal (having enough money where 3% provides my annual expenses) trumps being debt free now, being debt free in 5 years or any other "short or mid term financial goal". Long term goals take precedence.

[LivingAlmostLarge]

Great points Jim!

[jIM_Ohio]

This is a really interesting subject! I've kept putting a minimal amount (6%) into my 401(k), even when my employer stopped the matching program. I have my husband put the minimum needed to get his matching at work. And I put aside $120 per month for my partner who's currently unemployed, just because it feels really weird not to have her building retirement at all.

But I've considered whether I should up those contributions or not...By next month, I'll have eliminated another high-interest (8.99%) debt, and then my highest-interest debt will be a student loan that's at 6.8%. I still have a lot of debt but the rates are all low: 6.8%, 6.55%, 4.5%, 3.99%, 3.9%, 3.875%, 2.5%, 1.49%, 0%. Also, all but one are either mortgage or student loan, so they all have tax benefits associated.

At what point does the compound factor of retirement outpace the interest you pay on debt? Does that make sense? Or does the interest on debt compound negatively at the same rate? Can you tell I don't know what I'm talking about??

I missed this post when making my earlier reply...

this is a good example of my previous post...

what is your GOAL?

if goal #1 is to be debt free, then its obvious to chase the 6.8% debt... however I believe you have hit the tipping point where investing sooner helps you with most goals which have a 10-20 year time horizon.

If a debt payment is $600/month and you would pay "$400 extra" as a guess, you need to weigh the following factors:

1) If you paid $600/mo, when is projected debt payoff?
2) If you paid $1000/mo when is projected debt payoff?

3) is a delta (measure it in months for simple math)...

If you paid $1000/mo, how much do you "save" in interest? (The lower the interest rate, the less this savings is).

Then ask more questions
and make a timeline

If you paid $600/mo and invested $400/month
in 60 months debt is paid off
in 60 months you have $24,000 saved or invested
in 72 months you have $36,000 saved or invested (next 12 months is $1000/month invested)

If you paid $1000/mo
in 40 months you would have $0 saved
in 60 months you would would have $20,000 saved
in 72 months you would have $32,000 saved or invested

In this example, it shows investing gives higher savings 72 months from now. This example is really simple, with made up numbers, you need to plug better numbers in...

and this gets more detailed if you add in interest paid or interest earned (I am not adding that in to keep it simple).

[snafu]

Getting out of debt is a recent phenomenon, brought about by the recession and loss/or perceived threatened loss of employment. For the vast majority of N Americans, retirement is the elephant in the room. We know it's there but we don't want to see it. We are accustomed to instant gratification, enjoying a dinner out, watching our kids sport competition, mobile phones keeping us in touch 24/7, buying the latest electronic gadget or trendy garb [on credit].

There is no immediate gratification from retirement withholding or even employer match. Those that saw the value of their retirement plan plummet likely wished they'd gone on an exotic holiday rather than save! Don't you think?

There needs to be a lot more education about retirement now that defined plans that our parents enjoyed...have all but disappeared unless you are military, a poliician or government.

[asmom]

Okay, here's my story:

When I found out my husband's CC debt two years ago was $42K and growing due to late payments, fees and growing interest rates, I had to look at all the options.

First of all, I knew there was no way in he!! I was going to help him pay it off with my money because I didn't help him spend it. But I knew it was in my best interest to help him figure out how to pay it off. We keep our money separate but our financial fates are intertwined since if he is unable to work due to illness or there is an emergency then the whole family suffers. So it was imperative he reduce his exposure immediately. That meant cutting retirement temporarily, getting a cheaper insurance plan AND changing lifestyle.

So I put some of his debts on my 0% credit cards which gave him some room to breathe and pay down the principal. So now the family is at risk and my credit could be potentially damaged. Do you think I gave a care if he is a little short on the other end when he retires? Nope. He had to take care of us in the now AND he had to pay off the debt that was in my name. Besides he has a pension + he gets 1% in his TSP just for showing up to work. It ticks me off a little that he is so irresponsible but no matter what he is going to be fine.

After one year, when the fire had died down, I had him to resume his retirement up to the match only (5%). When the debt is finally paid off in about 1 year, then he can resume up to 10% or whatever.