Dear Penny: I’m 31 With $180K Saved for Retirement. Is This Too Much?
I’m a 31-year-old woman who just completed a career shift out of corporate America and into academia. I worked for a large corporation for about four years and saved for retirement during that time, but I put my savings on hold while I was in grad school. Luckily, I accumulated no debt, but I took a very reduced salary.
Now, I've been lucky to land my dream academic job making $120,000 a year and I have tons of opportunities for retirement savings but am not sure where to turn. From my corporate days, I have about $150,000 saved in a 401(k), which I can no longer contribute to. I've also made sporadic contributions to a Roth IRA, totaling almost $30,000. Both of these accounts are invested in mutual funds targeting a retirement date in my 60s.
My current job doesn’t pay into Social Security but there are several other ways to save for retirement. I've signed up to contribute 8% of my salary (the maximum allowed) to a retirement savings account and also contribute $1,000 a month to a 403(b).
I recently learned that there is yet another option: a deferred compensation plan. I haven't opted in to that, but I'm wondering if I should. And/or should I keep maxing out my Roth IRA?
My husband and I try to be smart with money. We have about a six-month emergency fund, and we have no debt other than our mortgage.
However, we did just buy our dream home and have a small child, so our mortgage and childcare costs are a bit of a stretch at the moment. We aren't saving much, nor are we doing things we hope to do in the future (family vacations, nice meals out, etc.).
If I were to continue to pay my 8% retirement savings, $1,000 to my 403(b), and $500 a month to my Roth IRA to max that out, I’d be contributing about $2,300 per month to retirement. We can do it, but it'd be awfully nice to have some of that money to spend now instead. I don't plan to retire early (see above: dream job!!).
Do I really need to do that much? Do I need to do more? Which accounts should I prioritize?
-Too Much Retirement, Not Enough Cash
Dear Too Much Retirement,
You have my blessing to save less for retirement. You’ve already built a substantial nest egg at a relatively young age. You can afford to be a little less aggressive about investing so you can enjoy the present more, especially at a time when housing and childcare costs are so out of hand.
Typically, you want to save about 15% of your pretax income for retirement. You’re currently saving around 23%. Since your employer doesn’t pay into Social Security, I’m guessing you have a defined-benefit pension, which gives you a guaranteed payout in retirement. You say you can contribute to a deferred-contribution plan on top of your existing retirement accounts. But the 403(b) plan you’re already contributing to is also a type of deferred-contribution plan. A deferred-compensation plan is simply a retirement account that lets you defer part of your salary and invest it.
You always want to contribute enough to your employer’s retirement plan to take full advantage of any matching dollars. Once you’ve gotten your employer’s full contribution, aim to max out your Roth IRA. If you have extra money to invest, you can contribute more to your employer’s plan.
A Roth IRA tends to be a better option than making unmatched contributions to an employer plan primarily because of its flexibility. You can access your contributions (but not your earnings) whenever you want without paying taxes or a penalty. Since you have a young child, you may be able to use your Roth IRA for their education without penalty should you decide you don’t need it for your own retirement.
Because pensions can be so complex, it might be worth it to meet with a financial planner who’s familiar with your employer’s pension system. They can help you determine whether it’s worth it to contribute the 8% maximum for your salary, and also decide whether the 403(b) or whatever other type of deferred-compensation plan is a better option if you want to invest more.
The easiest option may be to simply drop the $1,000 you’re contributing to the 403(b) each month if the contributions aren’t matched, as these accounts often have high fees and limited investment choices. You can continue maxing out the other accounts, then resume if you want to later. Or you may want to consider whether some of that money should be invested in a 529 plan for your child’s college.
You’ve made good financial decisions. Go ahead and indulge, even if that means saving a bit less for retirement. You can afford to spend money now without robbing your future self.