Do Extreme Savers Even Need to Worry About Retirement?

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.