Saving for retirement is a big job, which is why most people work there as soon as they can. Even in the best-case scenario, it may take three to four decades to invest some of your paychecks to get the cash you need.
Setting a monthly savings goal and putting your funds into a retirement account is a smart move for most people, but there are exceptions to every rule. Here are three types of people who would be much better off skipping the retirement account right now.
1. Those who do not have emergency funds
An emergency fund should be everyone’s primary financial goal, even above retirement savings. It’s the money you rely on to help cover unforeseen costs like an emergency room visit, appliance breakdown, or your daily expenses following a job loss.
Without emergency funds to lean on, you could go into debt, which would prevent you from saving for retirement and also lead to more immediate problems.
You should save at least three to six months of living expenses in your emergency fund before tackling other financial goals. Some people prefer to save even more than that, especially if they think they would have a hard time finding a new job if they lost their job.
Keep your emergency fund in a high yield savings account rather than investing it. Investing is risky because the stock market is volatile in the short term. When you have an emergency, you often have to withdraw your funds at any time, which can mean selling your stocks when they are going down. By keeping your money in a high yield savings account, you eliminate this risk of loss while earning a reasonable interest rate.
Once you have your emergency fund, you can start saving for retirement. But whenever you run out of your emergency savings, it’s a good idea to make it your top priority. You should also remember to update your emergency fund as your life changes. If your living expenses go up, you should also increase your emergency fund.
2. Those with high interest rate debt
Credit cards and payday loans usually charge you more interest than what you will earn on the stock market each year. If you only make the minimum payment on your debts and put the rest of your money into your retirement savings, you’re probably turning back the clock.
Instead, focus on eliminating your high interest debt first. There are several ways to approach this. You can take out a personal loan or use a credit card with balance transfer. Or you can just spend all of your extra money on your debt each month.
Make sure you pay at least the minimum balance on all of your credit cards to avoid late fees. Then first throw the extra money on the card with the higher interest rate. When that is paid, switch to the card with the highest interest rate – and so on – until everything is paid off.
It’s worth noting that you don’t have to be completely debt-free before you start saving for retirement. Mortgages, for example, usually have low interest rates, and they’re usually not something you can pay off quickly. So it makes sense to save for retirement while you’re trying to pay off that debt rather than waiting until you own your home completely.
3. Those who plan for early retirement
Retirement accounts offer valuable tax savings, but they come with conditions. One of the most important is that you will pay a 10% early withdrawal penalty if you withdraw funds from most of your retirement accounts before you are 59 1/2. This is problematic for those who plan to retire early.
One way around this is to keep some savings in a taxable brokerage account instead. These accounts don’t offer the same tax breaks, but they don’t have any limits on what you can invest in or when you can withdraw your funds.
If you choose to add a taxable brokerage account to your pension plan, you should aim to grow it to the point that it will cover what you feel you need in retirement until age 59 1 / 2. A retirement account is probably a better choice for the money you plan to use after this age.
Saving for retirement should be high on your financial priority list, but it’s important to take a step back and make sure you don’t miss out on any other goals that should be tackled first. Once you’ve completed these other tasks, saving for retirement should just be a little easier.