Updated on 04.19.11

Do Extreme Savers Even Need to Worry About Retirement?

Trent Hamm

I got a wonderful email from Alison about extreme saving practices and how they impact retirement. I originally intended to include it in yesterday’s mailbag, but my response grew so long that I felt it needed a post of its own.

Take it away, Alison:

I’ve recently read Your Money or Your Life and wanted to ask you a question about some of their unstated implications. I was raised in a typical Millionaire Next Door family–except not the kind that spoil their kids and ruin the cycle (both my maternal grandparents and my mother are MND types and I’m on my way). When I read MND, one thing that stood out to me is that the “Balance Sheet Affluent” take every tax-advantaged opportunity they can. This rung true with me and I’m currently maxing out my 401k while also fully funding a Roth IRA. But, while never explicitly saying so, YMYL seems to tell the reader not to focus on retirement type plans as that money, nor any of its interest, is not available for withdrawal until 59.5–far beyond what they think is necessary to do the 9 to 5.

Do you draw the same conclusion from the text?

Applying it to my own life, at age 27 I have substantially (50%) more in retirement funds than non-retirement savings. I appreciate that my early saving is going to, with a little luck, maintenance and further contributions, make me wealthy some day. But at the same time, my husband and I are getting tired of the East Coast grind that makes our high-salary/high-savings lifestyle possible and will probably move back home to the midwest and start a family in the next year or so. We would love to have the lifestyle freedom described in YMYL so I’m thinking we will pull back on the 401k contributions to have a larger down-payment on our future (house, slower paced careers, parenthood, etc.).

Ultimately, what I suppose I’m concluding here is that these two books that are both very well respected in the personal finance arena have some fundamental differences. MND is about harnessing frugality and ambition and using the gap between to create large amounts of wealth whereas YMYL is about harnesesing values and “integrity” (or a short spurt of maximum income production) and using the gap between to create a self-sustaining, contented lifestyle. I guess for now, I live in the grey area in between!

Just some thoughts, I’d be interested to hear what you think YMYL says to us about the traditional modes of retirement savings.

I think you hit upon the big difference between the philosophy described in Your Money or Your Life and the one described in Millionaire Next Door. Let’s look at the difference between the two by looking at how each side views a lifetime of saving.

From my perspective, Your Money or Your Life advocates what I would call an “extreme saving” lifestyle. It encourages people to live in a very lean fashion while focusing on enjoying the free and low-cost things in life. Along the way, the person should be putting their money into very stable investments that bear a regular return until they reach a point (as early as possible) when those stable investments bear enough fruit to provide income. At that point, the person is free to do whatever they wish with their life, from volunteering to writing the Great American Novel and everything in between. Because of the extreme nature of the saving, this “crossover point” can happen pretty early in life, well before traditional retirement.

On the other hand, The Millionaire Next Door advocates “balance sheet affluence.” In other words, the focus of the financial moves in the philosophy here is to maximize one’s balance sheet throughout life, minimizing debts and maximizing assets and avoiding taxes. Over a lifetime, this creates a very powerful safety net and one that can be easily passed on at death.

So, where do they diverge? One big area of difference is with retirement accounts. For MNDers, things like a Roth IRA are incredibly important because they simultaneously maximize assets and avoid taxes. The restriction on withdrawals until age 59 1/2 isn’t that important because a MNDer is seeking to maximize their net worth in many different areas and restrictions in one area aren’t that big of a deal.

On the other hand, people who strictly follow YMoYL have a lot less use for accounts that they can’t touch until age 59 1/2. They’re seeking to reach that “crossover point” as young as possible. The only use a Roth IRA might have for a YMoYL follower is a place to get a bit of a tax advantage from savings as they approach retirement. A true blue YMoYLer has no real need for traditional retirement savings as they intend to have income-bearing assets to cover their lifestyle long before traditional retirement age. At the same time, they’re really not all that worried about maximizing their net worth, as they’re more interested in generating consistent income. When they finally reach a point when they need additional help, then they can begin cashing in the assets they’ve lived on for so long.

Which one is right? I don’t think it’s as simple as right or wrong. I think it has more to do with the individual values of the person.

For example, when I think of someone who might be a hardcore YMoYLer, I think of my good friend Rachel. Her life isn’t centered around money – it’s centered around social work. She makes a low income, but she spends even less and is carefully banking the excess. At some point, and I’m pretty sure that point will come well before retirement, she’ll be able to spend her time volunteering for whatever cause is closest to her heart because she’ll have the assets in the bank to support her. If income happens to come in, those assets become a way to add to the savings and future-proof herself a bit more.

On the other hand, when I think of a MNDer, I think of my wife’s grandfather. He spent a lifetime of work building up a collection of assets that are serving him very well during his twilight years and will likely lead to leaving behind an estate for his children. He lived in a way that accumulated assets, particularly land, and now he’s able to live happily and comfortably because of those accumulated assets.

I think they’re both “right.” They’re both using sound financial principles to live a good life in accordance with their own values.

Should an ordinary person think about retirement? Absolutely, because most people don’t live their lives in a way described in either book, let alone the voluntary simplicity described in Your Money or Your Life.

Is there value in reading either book? I think that Your Money or Your Life and The Millionaire Next Door are two of the most powerful personal finance books a person can read. You don’t have to absolutely subscribe to either philosophy, but by simply reading the ideas and stories contained within both books, you’ll grow substantially as a person.

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  1. KC says:

    I understand your way of thinking – it is nice to have a large cash cushion of money you can use now and not wait til retirement. Moving is daunting as well – you are never quite sure how much money you will need for expenses, down payment, etc. In your case I would reduce your 401k contributions to the point where you still get the employer match. Depending on what your employers match that could be an extra $15-20k annually between the 2 of you. But I would continue to max out my Roth as long as income level is low enough to be eligible for one – because if you are truly on the road to being a millionaire your income will eventually reach the point where you are no longer eligible (investment income really adds to you annual income). You will still be on fine footing for retirement, but it will give you piece of mind as you look towards a life-altering move.

    From experience I can say that the move will be easier than you think. You may have an employer paying moving experiences, you may find new jobs that pay more and/or you may find living expenses are considerably less in your new hometown. But it certainly helps you sleep at night to know that if you need to you can pay for everything without accruing any debt. When you get settled in your new home/job you ramp back up your 401k, continue to max the Roth and invest what you did not spend on your move (or pay down the mortgage).

  2. George says:

    72T provides a small loophole to early withdrawl of an IRA: A TAXPAYER WHO RETIRES BEFORE AGE 59.5 is exempt from the 10% penalty if the distribution is part of a series of substantially equal periodic payments. An employee who quits his or her job, however, must be at least age 55 to avoid the penalty.

  3. Allison says:

    Yes, agreed. The more that I’ve thought about it, the more that the primary issue seems to be setting goals for your own life and then finding the sound financial tactics that help you achieve those goals. There are many, many personal finance tactics but not every one is appropriate for every person’s goals. Once you have conquered the basics, like paying off high interest debt, accumulating an emergency fund, etc., it becomes more pressing to really have those goals stated so you can choose the appropriate tactics.

    I wonder if so many of us stress about tactics because it’s easier to fret over the long list of tactics than it is to cast a real vision for our future and set goals for getting there. It can be easier to just know we need more, more, more than to answer the question why, why, why?

    Anyhow, great post, thanks Trent!

  4. To add to what George said – if you’re an employee and quit your job before 55, you could rollover your 401(k) or 403(b) to a Traditional IRA and still have access to the 72(t) election.

    Money in tax-advantaged accounts is not locked up until you’re 59.5. But there are some limitations on how to get it out without penalties. It’s certainly possible for someone who has enough money to retire early and wants to do that though.

    So go for the tax savings if it makes sense for you. You’ll be able to get your money early if you want.

  5. Ginger says:

    Also, you can take out contributions to a Roth IRA before 59.5. Though I am working towards to the crossover point I see no reason not to take advantage of the tax system to help me.

  6. Josh says:

    Traditional retirement still makes no sense to me. Why would you want to store away money in a place where you can’t touch it?

    I would much rather put my money in a place where it grows tax free and at the same time I can use it without penalty anytime I need to.

  7. Tom says:

    I need to read YMoYL, not for the a-ha moment if gave Trent, but because I’m interested.

    I just finished MND a month or so ago. It holds up surprisingly well for being 15 years old now, though I did find it a bit repetitive. My big takeaway is that public perception of wealth (expensive cars, big homes) often does not equal wealth, and in the long run limits your option.

    In a way, you could restate what you said about YMoYL (“It encourages people to live in a very lean fashion while focusing on enjoying the free and low-cost things in life.”) as a concept that comes up in MND. If you spend money on high cost items, you become a slave to high earnings.

    MND, from what I recall, certainly doesn’t tout passive income to become wealthy, the focus is on business owners who aren’t retiring early, but it does talk about the small business owner having multiple revenue streams (as in numerous customers) vs. a single income as an employee.

  8. done that says:

    @Josh – I think the point of traditional retirement investments is that you can often get higher returns and a tax advantage.
    I started late so I’m currently putting most of my salary in 403b and deferred compensation. I get a high rate of return while living off my savings which aren’t particularly earning much right now. I probably would do it differently if I were younger but there is a “catch up” law that allows people nearing retirement age to sock away $22K a year. And next year my income taxes should be close to nil.

  9. Bill says:

    From my perspective, YMoYL followers will also have the benefit of living well below their means so will never need as much money to follow their dreams. While it’s true that MND types live below their means, YMoYL subscribers do so even more intensely.

  10. Micki says:

    Trent says that most people will not live their lives similar to MND or YMoYL lifestyles, and my first thought was ‘Why not?” Personally, I love simplicity, I love feeling that I am in control of my life and it’s direction. There is so much less pressure this way.

    But the more I thought about it, the more I agree. I actually have a hard time time finding people who are happy living on less.

    I have dear friends that I don’t see as often as I like, beacuse while they always say they need to get control of their money….We can never just have a day hiking, or a potluck, or laying at the beach. It has to be dinner and drinks, or shopping, or one of those tacky ‘Come to my party! I am selling Pampered Chef, or some other really expensive knick-knacky thing’

    It is kind of sad…I love my evolution into thriftiness, it is a lot of fun for me. But I wish my friends believed that it can be fun, and would give it a try, some of them are in pretty precarious financial straits…

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