HomeInvestingStop contributing to your retirement accounts now!

Stop contributing to your retirement accounts now!

Like I mentioned in yesterday’s post, Girl Ninja and I recently took $14,000 out of our savings account and transferred it to a taxable investment account. Many of you were curious as to why we would do such a thing considering we only contribute to one Roth each year (instead of two) and I don’t max out my 401k. Here was a reader question from that post:

What is your rationale of investing in brokerage accounts prior to maxing out both Roth IRA’s? I’m new to figuring out my investment plan but the way I see it Roth IRA’s are the best of both worlds. You can still have your contributions available for withdrawal if you’d like to spend it in the future. But gains are allowed to accumulate tax-free. I figured the gains will be minimal for the first few years that I wouldn’t really “need” to use it but I’d be slowly gaining wealth.

It’s a fair question and a perfect example of how “PERSONAL” personal finance can be. What makes sense to one person, might seem silly to another.

If you didn’t already know, here is how we do things: 

    • Contribute 10% to my 401k (employer matches 5%)
    • Girl Ninja contributes 5% to her 403b (employer matches 5%)
    • Max out my Roth IRA ($5,500 this year)
    • Put any additional funds in to my taxable investment account (hence the $14,000 contribution)

Just because I do things this way, doesn’t necessarily mean you should too.

Max out your 401k(s) first:

Sam, over at Financial Samurai, sings a different tune. He’s all about maximizing one’s 401k contributions, up to the $17,500 threshold, then investing in a traditional IRA up to the max. He is not shy about hating on the Roth IRA.

Max out your Roth(s) first:

The commenter above, it seems, believes in the Roth IRA. He wants us to throw another $5,500 at a Roth for girl ninja. Then, if we needed to down the road, pull money out of our Roth for a second house or kids’ college tuition.

Sure I can pull my Roth contributions out at any time without penalty to pay for college, but that would be silly. Withdrawing $50,000 from my Roth at age 40 would deal a huge blow to my accounts ability to compound. That $50,000 withdrawal could easily end up costing me $150,000 or more in lost gains. No thanks. Retirement accounts are for retirement.

I don’t follow either of these practices for one simple reason. 

I’m scared of OVER investing in our retirement accounts. 

Yes, I just used the term “over investing”.

The Math: 

Let’s assume we earn an average 9% return on investment over the next 40 years (historical average is more like 11%). We’ll knock off 3% to account for inflation, so let’s call it a 6% ROI.

If I maxed out my 401k every year for the next 35 years, I’d end up with $4.1 million waiting for me at age 62.

401k max

If I followed my blog readers advice, and stuck to 10% in my 401k but then maxed out BOTH mine and my wife’s Roths, we’d end up with $1.6 million in Roths, and $2.4 million in my 401k. In other words, a total retirement portfolio of about $4,000,000.

Sounds freaking wonderful doesn’t it? 

But why the crap would I want $4,000,000 waiting for me in my 60’s? I mean, my cost of living will almost certainly be lower by that age. All of my children will be grown and out of the house and we should no longer have a mortgage payment.

Imagine how little you would need to make today if you didn’t have to pay rent or a mortgage. Now add a few million to your net worth. You’d literally have more cash than you knew what to do with. 

  • Maxing out our Roths and 401ks does very little to help our 40-year-old selves.

You’ll probably say I’m wrong, but I think we’re already doing enough when it comes to retirement. Using the same 6% ROI above, we’re looking at having about $3.3 million in our retirement accounts. Sure, its $700,000 to $1,000,000 less than if we followed the advice above, but need I remind you, IT’S STILL THREE MILLION DOLLARS. 

I’ve got 60-year-old me covered. Our new taxable investment account will serve as a means to get 45-year-old-Me equally on point.


Remember, you gotta be thinking about ALL stages of life, not just the last stage.


It really comes down to a simple question:

Would you rather go hard investing in your retirement accounts and have $5,000,000 waiting for you at age 60, or mix things up and have $1,000,000 waiting for you at 45, and $2,500,000 waiting for you at age 60? 

I’m picking the latter every time, even if it means my retirement account balances are halved.

p.s. I should also note that as a federal employee I will have access to a pension come retirement to further supplement my income. Around $30k/yr.

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  1. As long as you are hitting your financial goals then you’ll be fine. The main reason for hitting he retirement accounts as hard as you can when you are young is of course for the compounding part. So you contribute the max for a few years and then can drop the contributions to a minimum to pay for the higher expenses in latter life.
    Of course the question should of been, why aren’t you maxing out your 401k, IRAs and investing 20% of your income?

    • Yeah I agree on the hitting them while you are young thing. Started when I was 21 and will probably start to taper off once I hit 30. Need to get the brokerage accounts snowballing.

      If only we had the funds to max 401ks, roths, and throw another 20% in brokerage accounts 😉

  2. Why not max out Girl Ninja’s retirement instead of yours then? It might be nice to have equality across both of your retirement accounts

    • Well we have no plans to divorce each other so it doesn’t really matter who holds the Roth funds.

      And even if we did divorce, WA law says she gets half anyways.

  3. By trying to be consistent about your financial goals and hitting your retirement while you’re still young is a very good decision too. Me and my hubs are trying to balance our contribution and looking for a prospect investment.

  4. I agree with you. There’s no point over investing for retirement. While you still need to ensure that retirement funds are growing nicely, you also want to have investments that you can access at any stage of your life without penalty and to use for whatever you wish whether it would be buying property, shares, paying for further education, taking time off work or travelling, because you don’t know what tomorrow will bring. It’s about finding a balance that works for you.

  5. Money today vs. Money tomorrow. It’s a horrible debate because there are pros and cons for each.

    Personally, I’m opting for money tomorrow and am maxing out both our Roths and my 401(k). I’m good with living a middle class lifestyle today and living it up when I’m 60. My house will still be paid off and the kids will be through college. I look forward to being a crusty, rich old man, living on the beach, driving my Bentley to the golf coarse each morning.

    Like you said though, it’s all personal.

  6. This is a good move, in my mind and something we are also doing. Unfortunately, no 401K at my employer and my wife stays at home. We max out our ROTH accounts and put a couple of thousand into taxable investment accounts each month.

    Ideally, I don’t want to wait until 59.5 to retire. What if something were to happen health wise and we needed the money to retire early? All of that retirement money would be killing us with a 10% penalty to take it out.

    With taxable accounts, it buys more freedom.

  7. You may have mentioned this in another post, but is Girl Ninja going to stop working once Weston is born?

    I really enjoy following what you are doing with money/life since we have very similar situations, but you are probably 1 or 2 years ahead of me on most big life changes, house, kid, etc.

    • Yeah she is done working in June. She may substitute teach a few days here and there after baby comes, but will probably be out of the work force for the next 3-5 years.

  8. The retirement researcher Wade Pfau has come up with what he calls the “safe savings rate,” as a counterpart to the more familiar “safe withdrawal rate” normally discussed in terms of retirement. His blog is worth looking up.

    The problem remains however that there are a great many variables that make retirement success difficult to predict with any certainty. As someone who is now 65½, this directly affects me in a way that may not hit as closely to home as for younger people. But among the more obvious variables that have to be considered are your life expectancy, your expenses and debt picture, the state of your health, how you’re allocating your assets, market conditions at the time of retirement (your chances of retirement success are greater if you retire at the start of a bull market than a bear market), whether you’ll be receiving an inheritance, whether you wish to leave an inheritance to your heirs, your marital status, your tax picture, the cost of living in your state, whether social security and Medicare will survive in anything like their current forms, whether you choose to buy an annuity, and doubtless more.

    Too often, retirement success is presumed to depend on whether one reaches a certain “number,” rather than a dynamic process of making decisions based on factors like those I have listed above. However lovingly Mr. Samurai constructs his little charts, they are all based on the “number” fallacy. But if your expenses are low, a small “number” may ensure a more successful retirement than for someone with a higher “number” but greater expenses.

    As for the Roth IRA, I wouldn’t dismiss it so quickly. Among other benefits not usually mentioned, withdrawals from a Roth do not figure into the taxation of SS benefits or the formula for computing Medicare Part B. These could be big tax advantages over a tax-deferred account.

    The only solution, I believe, is to continually reevaluate one’s spending and retirement picture over the years as conditions change and develop, and adjust accordingly.

  9. Actually you can withdraw Roth gains (and subsequently a rolled over 401k) if you plan to retire early through a 72t. Yes it has restrictions but that’s okay with me. You can always withdraw your contributions anytime without any penalty.

    It really depends if you plan to work forever at the same income level or higher. Since it seems like you do, and you don’t really need to reduce taxes since you are in the 15% bracket, then your advice is sound for not maxing out your 401k. Personally, I expect to drop down to a lower income bracket in ~5 years or less by having one or both of us drop out of engineering. I’m also making up for 2 years of missed contributions while I was unemployed. For that reason our strategy for the next few years is to max out both our 401k’s and Roth IRA’s (which we just started last month). Even if we do withdraw money early due to taking some time off and pay the penalty we will drop from 25% bracket to 15%. Then with penalty is added we will be paying the same net tax. For this life plan I don’t really see a downside. However, if you really enjoy your work and plan to work until you’re 60 this is definitely not the way to go.

    Ideally yes retirement funds should be for retirement. But if you’re contributing more than you need then its not for retirement anymore its extra. My plan, which is subject to change any day, is to save for a downpayment or opportunity fund using a Roth IRA and withdraw it without penalty. The gains will just be extra money that can compound over time which is fine with me. Yes, I understand we can lose money this way but its not for an immediate downpayment. I’m hoping to start a brokerage account soon but right now there is still some student loan debt and increased emergency fund to tackle first.

    On a side note, one major pet peeve I have with 401k is people assuming they will receive the company match from the get go. Unless you are currently vested do not assume anything. People do not remain with the same company as long as they did 30 years ago. 3 or 4 year vesting may seem easy but things happen often that are out of control: budget cuts, layoffs, personal priorities change, bosses that aren’t on your side, etc. I was forced to leave my job 15 days before I would be fully vested in my accounts leaving 25k on the table.

  10. Agree with Angie, above. Keep in mind, Ninja … you can start enjoying all your Roth contributions at 45, penalty and tax free … while using all that time to accumulate tax free gains that could be enjoyed by the 65 year old you.

    Keep one keepin’ on!

  11. Whether or not this makes sense really depends on your income tax bracket. I’m near the top of the 28% tax bracket while single and will get pushed into the 33% tax bracket when I some day get married. But I’m pretty sure when I retire, I will be in the 25% or lower tax bracket and then at that time, I could convert Traditional money to Roth money and pay fewer taxes. Plus, maxing out my Traditional 401(k) and Roth IRA each year only represents about a quarter of what I save, so I’m not that concerned with that. So for those who are reasonably high income (>$100k/person), I would still be maxing out their 401(k) and IRA. I will probably have enough money in my retirement accounts to live off of after age 59.5 within the next couple of years, but I will likely keep contributing anyways to save on the taxes.

    • Totally agree. Obviously if you have the ability to max retirement, roths, and still throw a ton of money in savings/taxable accounts than that is a no brainer.

      Although, I’m still a firm believer that there is such a thing as over saving. $4,000,000 in retirement seems excessive to me. At the safe draw-down rate of 4% that would provide $160,000 in annual income. That’s double my current salary. Obviously nothing wrong with having so much set aside for the future, but I just don’t personally desire such a thing. Especially considering my expenses will be much lower by my mid to late 50’s when house is paid off and kids are grown.

  12. I think you missed the point of the reader’s post though, which was that even if you don’t plan to use them for retirement, Roth IRA’s offer a great tax benefit for the 45 year old you as well as for the 60 year old you. If you opened up a Roth IRA in Girl Ninja’s name and agreed that you were really doing so just on a 15-20 year time horizon, you could take out the principal at that point and the interest will still be shielded from tax (for your retirement, or for other uses your readers have pointed out). You’re not big spenders, so I can’t imagine you needing the interest anyway for something other than a qualifying expense like Weston’s education, etc. (who, incidentally, given the amount of wealth you will probably accumulate before he is 18, will likely not qualify for the most favorable financial aid packages). I get the whole “retirement accounts are for retirement” line, but if you weren’t planning to use this money for retirement, anyway, and the alternative is investing in a taxable account, that line doesn’t really apply.
    I would love to be able to invest in Roth IRAs given the flexibility they offer — we make too much to qualify — so I invest in a Roth 401K at work with the knowledge that it will become a Roth IRA if I ever leave this job. 😀

    • We invest almost $70,000 a year, almost all of it in tax-shielded accounts.
      $17,500 Roth 401K
      $17,500 regular 401K
      $5,100 Employer match (immediately vested)
      $28,000 529 plan for 3 year old (we are only doing this for the next 5 years or so so we can take advantage of compound interest when she’s approaching college age)

  13. I will continue to max out our retirement accounts and this year I’m starting to invest in taxable accounts. Pretty excited. Since we are in our 20s, time is on our side.

  14. I don’t fundamentally disagree, but I don’t think it is black & white: “Would you rather go hard investing in your retirement accounts and have $5,000,000 waiting for you at age 60, or mix things up and have $1,000,000 waiting for you at 45, and $2,500,000 waiting for you at age 60? ”

    Personally, I’m saving as much as possible for retirement now with no outside taxable investments (yet). I will do this at least until we have kids, then re-evaluate. What would I do with $1M cash at age 40, unless I was hoping to retire that early, or at least downshift to a less lucrative career?

    I expect to stop saving so much for retirement, and then just use the extra cash flow at each stage of my life where I need it. When we have kids, we’ll start college funds. I don’t anticipate any other enormous expenses until the cash flow stops (i.e. retirement). I plan to eventually save in taxable investments.

    I also don’t think your comment re: not wanting to take money out of a Roth (because “Retirement accounts are for retirement.”) is logical. If it is money that wouldn’t have ever BEEN in your ROTH if you’d followed your current approach, then why wouldn’t you feel comfortable taking it out? You could say NOT investing more in your ROTH now is “costing you” $XX in retirement gains… but it isn’t costing you, you are just allocating the money and gains for non-retirement.

    And you disregard inflation when you say that $4M would provide you a drawdown rate that is double your current salary. Using your 3% assumption you used in the calculator, your salary would be ~$180k. Your expenses will be lower, you’ll have a pension, your conclusion that $3M is enough may be sound – but you shouldn’t think of it as $160k/yr in today’s dollars.

    All that said, I don’t think it matters all that much. You are saving, and you are saving plenty, and you should be able to hit all of your financial goals.

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