Updated on 02.19.10

Making Retirement Savings Tangible

Trent Hamm

Monica writes in:

The one financial thing I haven’t done for myself yet is start saving for retirement. The problem is that I don’t ever want to retire and if I imagine a situation where I actually am retired, I just don’t want to envision it at all. I just can’t convince myself to take money away from my needs now for a future that isn’t very bright.

Monica is a forty year old single woman with a career she clearly loves. Other than the retirement thing, she has her financial house very nicely in order, with only a mortgage on a townhouse as an outstanding debt, a nice emergency fund, and a great paying job that she never wants to leave.

So why should she be saving for retirement?

I think that “retirement” is the wrong word for Monica to be using when she thinks about saving in this way.

Let’s look at what a Roth IRA actually is. A Roth IRA is an investment account to which you can contribute money each year (in whatever way you want – weekly, monthly, one lump sum). Once the money is in the account, you can withdraw your contributions whenever you’d like with no penalty – but you can’t put them back.

The big catch is with the gains on that money. If you withdraw them before age 59 1/2, you pay a stiff penalty – you have to pay all taxes on those gains, plus an additional 10% tax penalty. On the other hand, if you wait until you’re 59 1/2, you can withdraw it completely tax free.

The Roth IRA is often viewed as a retirement vehicle because people who are of that age are often planning to use it for retirement.

But it doesn’t have to be a retirement vehicle at all.

I look at my Roth IRA as my “second life” vehicle. When I turn sixty, my worries about choosing a job or career path that provide me a stable income go away because I now have access to my Roth IRA money. In effect, that Roth IRA money becomes a huge emergency fund – a big enough one to last for years and years of living expenses.

What would you do if you suddenly had an emergency fund that would cover years and years of living expenses? I plan to spend my time doing volunteer work and trying to make a second career out of writing fiction (something I deeply enjoy on a personal level).

That’s not retirement. That, to me, means a lot of options that wouldn’t have existed before.

Instead of thinking of retirement savings as truly retirement savings, instead look at it as an opportunity to save for a big dream you have down the line. For Monica, that means twenty years from now. Whatever that dream is, whether it’s retirement or something entirely different, a retirement savings account will be there for you.

Good luck.

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  1. Des says:

    If I were giving advice to Monica, I would say that if you’re not keen on investing in your retirement, put that extra cash toward the mortgage. I know that’s not the generally accepted “one-size-fits-all” advice, but it would be something tangible, and owning her house outright will still help her in retirement.

    When she pays it off in full, she can revisit what she envisions retirement to be, and she will be closer to it then so it may feel more real. She will arguably end up with a comparable effective return on her money, depending on what her mortgage is at and what her risk tolerance would be if she invested the funds elsewhere.

  2. Molly says:

    I’m currently using a Roth as an “investment vehicle” in that I put my house savings in it. I know that I could probably do better with others, but this is a way of diversifying, too.

  3. Meagan says:

    I agree with treating a ‘retirement’ fund as an extended emergency fund if you still work. Something could happen that she couldn’t work at her perfect job and have to get by.

  4. Nicole says:

    It’s also an emergency fund– you don’t know if you’ll be injured or chronically ill, if your company will go out of business, if you’ll stop getting cost-of-living raises. Even if you want to work until you die, you don’t always have that job security. And, as you get older, it is more difficult to get hired (empirical fact) if you lose/leave your job. Funding a Roth or 401(k) provides an extra cushion in case of long-term emergency.

  5. chacha1 says:

    I have an alternative to suggest. While a Roth IRA can be a great non-retirement savings choice, so can a Health Savings Account (HSA).

    An HSA works much like an IRA with one big exception – you can use the money in the account at any time for health expenses, and after age 60 for any purpose. The only catch is you have to have a high-deductible health plan. (Write your congressman! Everyone should be able to have one of these.)

    Since poor health is the number one reason people have to stop working before they want to, it’s worth looking at something like this. Putting extra money into building good health NOW while saving for the future? Win-win.

  6. Debbie M says:

    I agree that just because you don’t want to retire doesn’t mean you won’t have to retire anyway. It’s just another emergency fund.

    “I just can’t convince myself to take money away from my needs now…” I’m wondering what kind of needs. This sort of implies you might be living on the edge or at least paycheck to paycheck. If there’s any truth to that, then maybe you should be saving more (in some way) to insure against fluctations in pay and needs in the future.

    Or maybe your “needs” are actually a different kind of investment in your future such as making very durable fixes to your house and replacing currently workable things with things that will last a lifetime such as a leather sofa, antique desk, and exercise equipment. These things can reduce your recurring costs in the future and are a good idea.

    I’m also a fan of the Roth IRA as a way to pay my taxes now, while tax rates are relatively low, but be able to grow the money tax-free in a place that’s relatively easy to access. (You can withdraw everything you deposit at any time. All the restrictions apply only to your earnings.)

    Also, the way you’re writing reminds me of how people talk about wills. They don’t want to make them because they don’t want to think about death. It even feels a little like actually inviting death by proclaiming to the world that you are now ready. Let me assure you that having a retirement fund doesn’t mean you have to retire. And not having a retirement fund will not protect you from the horrifying things you are imagining when you imagine retiring.

  7. Maureen says:

    It would be great if we could all keep our youthful health till the day we die. Unfortunately life isn’t like that. For example, at age 52 my sister was diagnosed with lupus and can now work only sporadically. In her early 60’s my sil fell and fractured her skull, requiring surgery. Fortunately she is recovering well, but I’m sure she is grateful she doesn’t have to worry about finances. My sister’s best friend retired at 55 and then suffered a stroke 6 months later. Take steps to proctect your physical and financial health, keeping in mind that surprises can happen.

  8. Deborah Johnson says:

    I never thought of a Roth IRA in this way. Thanks for this post. You’ve given me much to consider.

  9. Johanna says:

    Why does Monica describe retirement as “a future that isn’t very bright”? Is it really that she loves her job that much?

    Or does she think of “retirement” as sitting on the sofa all day watching soap operas and knitting ill-fitting sweaters? (Maybe she should try to meet some people living active, exciting lives in retirement.)

    Or is it that she’s afraid to envision herself getting on in years? (In fact, she’s going to get older whether she retires or not.)

    Or does she depend on her job not just for the money, but for her identity?

  10. Johanna says:

    Also, Trent: If you’re spending your sixties and beyond living off your Roth IRA and doing things that you find personally fulfilling without worrying about whether you earn any money from them or not, how is that not retirement? What do you think retirement is, if not that?

  11. Sara says:

    I think it’s pretty short-sighted to plan to keep working for the rest of your life in lieu of saving for retirement. Even if you have a great job you want to keep doing for the rest of your life, there’s no guarantee that you’ll be able to, either because of health problems or just because the job won’t be available any more.

    Monica is probably being a bit dishonest with herself, too. The part about not wanting to take money away from her needs now is probably a big part of it — the instant gratification that catches up with a lot of people. It seems like she wants to justify spending more now without setting aside any of her income for the future.

    Even if you plan to keep working for the rest of your life, IRAs are still great savings vehicles because of the tax advantages. You should jump on the opportunity to invest without being taxed on the gains!

  12. Leah says:

    I didn’t know that you could withdraw contributions at any time! Does that have to be after the first five years? In any case, I’m glad I’ve got my Roth IRA started — two years of reading here and JD prompted me to make the push. I can’t contribute much, but every little bit helps, right?

  13. That’s a great new take on the concept of retirement.

    And, by looking at it in this light, might motivate people to save more for it.

    I think most people’s perception of retirement is sitting in front of the TV the majority of the time getting fat and lazy.

    I think that the better off you are financially for these years, the more enjoyable they’ll be. It just seems to me that it is easier now to find enjoyment in life without necessairly having money, if that makes sense.

    Meaning, to have an enjoyable and fun reitement, you’re probably going to need some extra money

  14. Brittany says:

    Great post and great responses. This is loosely related to what economists call “discounting the future.” A dollar today always seems a lot more valuable than a dollar tomorrow, next week, or 20 years from now. In this case, those dollars represent different opportunities and options. Don’t sacrifice your options tomorrow for a couple extra bucks today.

  15. I use my Roth IRA as the utlimate emergency fund! What other financial vehicle can you put money in and not that the capital gains/dividends or interest taxed, EVER!

    You reader need to view the Roth IRA as a very clever legal tax avoiding mechanism for her investments in it(if she makes less than 120,000, after 120,000 she is no long eligable to participate).

    I agree with your line below mostly:
    “Once the money is in the account, you can withdraw your contributions whenever you’d like with no penalty – but you can’t put them back.”

    However if you withdrawal the contributions (for an emergency), and then put them back during the same year, I think that you can do this (at least with your current contributions for that year).

  16. I am pretty much convinced that I will be working until the day I die….
    Are there designated beneficiaries on Reitrement Funds (like Life Insurance)?

  17. deRuiter says:

    #16 Mobey Homemaker, You put a POD (payable on death) name on your ROTH, the name of the person you wish to inherit the money when you die. The money goes directly to the POD person, without having to be tied up in probate. You croak, they get the entire ROTH, they have access to it immediately.

  18. I like how you changed the way she can think about it! Perfect : ) I love when people love their careers! That is a wonderful way to live.

  19. Mary W says:

    It’s also important that Monica realize her view on retirment might change. At 40 I couldn’t envision ever wanting to retire. At 50 I could see retiring *some day* when I was *much older*. At 55 I was picking my optimum retirement date. At 58 I just happily celebrated my 1st year of retirement.

    Luck for me my mother taught me to be a saver so I saved my entire life even when I couldn’t imagine retiring.

  20. A couple of things to keep in mind for those with no desire to save for retirement:

    1. Unemployment rates for people in their 50s and 60s is through the roof. While women fare better than men, it’s still an ugly figure.
    2. Health costs grow considerably as we age and it is very difficult to find (sometimes impossible) outside of an employer. If #1 happens, #2 will be crushing.
    3. Dignity is something we take for granted when we’re young, but as we age our dignity can vanish in short order if we don’t have enough money. Unlike other developed countries (Western Europe), our system of caring for the elderly can be a frightening sight.
    4. Not having money and then becoming dependent upon family or the state is an unsatisfactory outcome that could be viewed as flat out rude if you make the conscious choice to not save for retirement when you otherwise could. Is it ethical to strain taxpayer resources because you didn’t want to save for retirement? Is it a good thing to suck resources away from your children or grandchildren?

    Saving for retirement is a must do, not a maybe or a ‘I don’t want to’. Granted, we don’t live in Australia, Canada, or Western Europe where tax rates are higher, pensions are more widely used, and a higher savings rate is mandated, but I don’t think anyone would want to end up being 67 years old, living solely on Social Security, and spend the final days of their lives in a Medicaid bed where maybe someone changes your bedpan and sometimes they don’t. Maybe you’ll get enough to eat, then again, maybe not. Oh, and if living like that is too much to bear and you’d like to be euthanized, tough luck because our laws don’t allow it.

    Just a few things to think about.

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