I made a pretty impulsive move yesterday. I decided to reduce my 401K contributions from 8% of my gross salary to 5%. *Gasp* Yes, that does mean I am going to have less in my retirement accounts, but don’t worry, I have a ninja-riffic plan in the works. If you read my post on Monday, you know I’m flirting with the idea of living outside of my spreadsheet. As a result, my net worth come retirement may be a little lower, but I think my overall quality of life will improve.
There were a few things that lead to my decision to decrease my contributions.
1) I was contributing 8% to my 401K and fully funding my Roth IRA each year. At my current income ($50K) that works out to 18% of my gross income being invested in retirement accounts. If you keep up with PF blogs, news stories, and TV shows, you’ll notice almost all ‘experts’ recommend a 20-something individual save between 10%-15% of his gross income for retirement. I was contributing 3% more than the average recommendation. Obviously, the more you contribute, the richer you will likely be. But I don’t really care if I have $3MM or $4MM in my account come retirement, as long as I have enough to live a comfortable lifestyle I’ll be a happy ninja. Oh, and the government only matches 5% anyways.
2) I essentially just gave myself a 3% raise. I have contributed 8% to my 401K since my first day of work (at the ripe age of 22). I’ve totally learned to manage my money being 8% poorer than I could be. I now will be taking home about $1,200 more per year (after taxes). That’s $1,200 I can use to save for a house, take a vacation, buy a moped, or rent out an entire movie theater for a private viewing of Twilight III. Sure, most of those expenses are not necessary, but don’t forget, I’ll still be socking away 15% for my gray hair days ahead.
3) The third, and probably most important, reason I decided to reduce my retirement contribution by 3% is this: I had no plans for the short term. Sure saving 18% for retirement is great, but guess what? That doesn’t make me rich until I’m 60 years old. What if I want to have a good chunk of change accessible in my 40’s? What if I want to retire early, but don’t want to be penalized for withdrawing from my retirement accounts? Well my friends, this is where the ‘short-term’ investing game comes in to play. I have to start exploring other means to grow my money. I have been so focused on retirement, I completely forgot to establish a game plan for my 30’s, 40’s, and 50’s.
Sure, I am taking away 3% from my retirement accounts each year, but that doesn’t mean I’m going to waste it. Instead I will transfer that money in to an investment vehicle of my choosing (stocks, bonds, etc). I need to start growing money for a 5, 10, and 20 year time horizon so I can do things like pay cash for the next vehicle I purchase, move up in house as my family size grows, pay for my kids college, and basically enjoy pre-retirement life.
As long as I contribute 15% of my gross income towards retirement, I have no need need (or reason) to contribute more. I’ve realized for me, anything above that 15% mark can be better served in short term mutual funds, real estate, cash, and bonds.
If you aren’t sure what percentage of your income you should be setting towards retirement, ask yourself this question. Would you rather have access to $6MM at age 60, or access to $1MM at age 45 and $3MM by age 60. I use to think I wanted $10MM all at retirement, but I now think I’d be just fine with $3MM in retirement if it meant I had $1MM available to me much sooner.
I have a couple questions for you all, how much do you contribute to retirement (if any), how much would you ideally like to contribute to retirement (if you are currently meeting that goal), and would you rather have $6MM at age 60, or $1MM at 45 and $3MM at age 60? What strategies have you established for pre-retirement goals? What short term investment vehicles do you recommend? Do you think I’m crazy? Any helpful hints, tips, and criticism is greatly appreciated