5 Signs You’re Investing Too Much for Retirement


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We have two great retirement questions today.

The first comes from Kevin, who says, “My wife and I have loved your podcasts for years and are taking every possible step to build our financial futures. We’re in our early thirties and max out our Roth 401(k)s by contributing 25% of our paychecks. If we struggle to maintain savings for emergencies and a new car, do you think we’re investing too much?”

The second question is from Michael M., who says, “I have been listening for many years, and you deliver good advice in a very understandable way. I have a 401(k) with a former employer, a SEP-IRA from a previous business, a traditional IRA, and an HSA. What tax and penalty changes should I be aware of since I turned the magic age of 59.5 a few weeks ago?”

Thanks for your questions, Kevin and Michael! I love that you both have prioritized investing for retirement, which is the most critical money goal everyone should have.  I’ll answer Kevin’s question by reviewing five signs you may be investing too much. We’ll also cover what Michael should know about rule changes for various tax-advantaged accounts after age 59.5.

While many need help saving enough for retirement, sometimes you could be over-saving, depending on your unique financial goals. In a recent podcast, 5 Steps to Achieve FIRE (Financial Independence Retire Early), I reviewed various methods to consider if you want to retire early. Most require aggressive saving and investing so you can grow a nest egg as fast as possible and then scale back or stop working.

Kevin didn’t mention when he and his wife want to retire or how much they’ve already saved. Since they’ve already developed the habit of regularly investing by their early 30s, I know they’re financially disciplined. However, they may need to step back and take a look at all their financial goals and reallocate enough funds for them.  

Here are five signs that you may be spending too much on retirement compared to other critical financial priorities.

Image Credit: Jacob Wackerhausen/istockphoto.

1. You need more emergency savings

Kevin mentioned struggling to keep enough cash in the bank for emergencies and his upcoming vehicle purchase. Based on your income and expenses, decide how much you should keep in the bank for unexpected needs, plus planned purchases like a car. 

In general, keeping three to six months’ worth of your living expenses–such as food, housing, healthcare, insurance, and minimum debt payments–in an FDIC-insured, high-interest savings account is wise. For instance, if you spend $4,000 monthly on living expenses, make a goal to keep at least $12,000 in savings. 

Since most investments can fluctuate significantly in the short term, your emergency funds and the money you want to spend in the next year or two should never be invested. Investing means taking some risks with the expectation of future growth; therefore, it’s best for goals you want to achieve in at least three years.

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2. You have high-interest debt.

If you have expensive consumer debt, like credit cards with double-digit interest rates, you may be investing too much for retirement and need to reallocate funds. For instance, you could temporarily increase your debt payments or take out a fixed-rate personal loan to pay off higher-rate unsecured debt. 

The rate and terms a personal loan lender offers usually depend on factors like your income and credit. Remember that even though a personal loan may cut your interest, the shorter your repayment schedule, the higher your monthly payments will be. 

You might move unsecured debt to a new or existing balance transfer credit card with a 0% APR promotion that may last up to 18 months. Every transfer is subject to a fee, such as 3% or 4%, which gets added to your balance.

Once a transfer promotion ends, your interest rate increases and could be very high. Therefore, it works best when you’re sure you can pay off the entire balance before the promotion expires. 

Shop for a balance transfer credit card with the lowest interest, transfer, and annual fees. Choose an offer where you come out ahead, even accounting for the transfer fee.

Image Credit: Jacob Wackerhausen/Istockphoto.

3. You have enough invested by age.

One way to make sure your retirement planning is on track is using age-based goals, such as:

  • Save the equivalent of your annual income or salary by 30.
  • Save two times your income by 40.
  • Save four times your income by 50.
  • Save eight times your income by 60.
  • Save ten times your income by your mid-60s.

That’s a rough guideline, and you may need more or less each decade based on your unique goals. Plus, you may have pension income or high expenses to factor into your retirement plans. 

If you’re ahead of typical milestones, you may be investing too much for retirement. For instance, you may be a super saver if you’re in your 30s and have invested two or three times your annual income.

Another point Kevin brought up is whether having lower age-based retirement targets is OK if you invest in an after-tax Roth instead of a pre-tax traditional account. Most benchmarks assume retirees must pay income taxes on withdrawals.

If Kevin and his wife continue investing exclusively in Roth accounts, they’ll have tax-free income in retirement, which is terrific! So, the type of investment account you choose certainly makes a difference in your future retirement income and how quickly you reach your savings goal.

Image Credit: Jacob Wackerhausen/istockphoto.

4. You never reward yourself.

While there’s nothing wrong with aggressive retirement goals, remember to also reward yourself by enjoying your money. Unless Kevin and his wife genuinely want to retire early, investing 25% for retirement is about double my typical recommendation of 10% to 15%.

If you temporarily reduce your retirement contributions, you can build your emergency fund with extra for your next car. Once you achieve those goals, you can increase your retirement contributions. Having a couple of years where you don’t max out your 401(k)s won’t hurt your retirement as long as you regularly contribute a reasonable amount. 

Image Credit: damircudic/istockphoto.

5. You have too much money stress.

If you feel stressed about needing more money to reach all your financial goals, you may be investing too much for retirement. If Kevin and his wife reduce their 401(k) contributions by half, they’ll still be putting away a healthy amount for retirement. Again, they can boost their contributions after achieving other goals, like building savings and buying a car. 

If you need help knowing how much to invest based on your financial goals, get guidance from a certified financial planner or CFP. They can help you set realistic goals, choose investments, and know you’re on the path to a comfortable retirement. 

Image Credit: Ridofranz/istockphoto.

What Happens to Retirement Accounts at Age 59.5?

The second question from Michael M. is about what happens to various tax-advantaged accounts after reaching age 59.5 a few weeks ago. Happy Half Birthday, Michael!

The IRS set age 59.5 as a milestone for retirement planning. It allows you to withdraw from any retirement plan without a 10% penalty. That makes early retirement more attractive for those who saved enough before 60. 

However, withdrawals from a traditional account are subject to ordinary income tax. As I previously mentioned, Roth withdrawals are tax-free. With a Roth IRA, your original contributions are always tax-free, but you must have owned the account for at least five years before your investment earnings are also free of income taxes.  

An in-service rollover is another benefit of turning 59.5 when you have a 401(k). You can transfer some or all your funds from your workplace retirement plan to an IRA if you’re still employed. That gives you more control over your funds and doesn’t prevent you from continuing to make 401(k) contributions if you wish.

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What Is the Rule of 55?

Generally, if you want to retire earlier than 59.5, you can use the rule of 55. It allows you to withdraw funds from a retirement plan with your current employer with no 10% early withdrawal penalty if you leave your job for any reason in or after the year you turn 55. Certain government workers can start even earlier, at age 50. 

Remember that this exception applies to plans with a current but not former employer. You’re never allowed penalty-free withdrawals before 59.5 from retirement plans with an ex-employer. However, transferring retirement funds from an old job to your current 401(k) or 403(b) may be a workaround.

If you do leave your job to start taking withdrawals before age 59.5, you can always return to work later if you wish. In other words, you’re never forced to stay retired if you use the rule of 55. 

Also, note that the rule of 55 doesn’t apply to IRAs. However, you can avoid the 10% early withdrawal penalty if you take distributions as a series of substantially equal periodic payments, known as a SEPP plan. You can begin them at any age and must take payment amounts based on IRS life expectancy tables.

Even though you can take penalty-free distributions after age 59.5, it doesn’t mean you should. The earliest you can claim Social Security retirement benefits is 62. Waiting until your full retirement age or delaying benefits until age 70 means getting a higher monthly payment for life.

Image Credit: Andrii Zastrozhnov/istockphoto.

What Happens to a Health Savings Account (HSA) at Retirement?

If you retire early, remember that Medicare health insurance benefits don’t begin until 65, so you’ll have to purchase your own policy. Michael mentioned having an HSA, which he can use to pay out-of-pocket healthcare costs tax-free. While you can’t use an HSA to pay insurance premiums, you can use it for Medicare expenses after 65.

In addition, after age 65, you can use HSA funds for any reason. While you must pay ordinary income taxes on funds not used for qualified medical expenses, you skip the account’s hefty 20% early withdrawal penalty.

This article originally appeared on Quickanddirtytips.com and was syndicated by MediaFeed.org.

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