Save for Retirement or Save for Now?
“The Lord will guide you always and satisfy your thirst in parched places, will give strength to your bones And you shall be like a watered garden, like a flowing spring whose waters never fail” (Isaiah 58:11).
Should I save for retirement, or should I save for immediate needs or wants?
Good question.
The answer is “both,” but as with everything, it is nuanced and depends on your personal situation. I want to propose an order of importance, with a few exceptions mixed in. As we all know, God equips us for what we are called to. Sometimes, He provides for our future financial needs right now and calls us to save responsibly. This responsible saving will look different for every individual and family, which is where prayer and discernment come in.
Emergency Fund
Your first priority should be to create an emergency fund: money you would use if you lost your job, had unexpected car or home expenses, found yourself in a medical situation not covered by insurance, or other urgent situations that you do not have time to save and plan for financially. Typically, the recommendation is to have between three and six months of your necessary expenses in this fund.
You also want to keep this fund safe and accessible. It should be money you can access within a week at the most, and the amount should not fluctuate drastically. Typically, I recommend that clients consider a high-yield savings account or money market mutual fund. This fund can take some time to build, and I would recommend getting it to at least 50% of your goal before saving concurrently within a retirement account—with one caveat (listed below).
Retirement Accounts
There are numerous types of retirement accounts, and it is important to understand the specifics of the account type and plan your employer offers. (If you’re an entrepreneur, you may want to read this article.) That way, you can make the most educated decision on when and how much to contribute. Once your emergency fund is close to 50%, I recommend that you start splitting your savings with 50% to your retirement account and 50% to your emergency fund.
Retirement accounts have tax benefits; however, because of those benefits, they also have restrictions and penalties if you withdraw money before you turn 59.5 years old. For the most part, if you need the money before then, you will have to pay a 10% penalty, in addition to taxes and fees. It can also take a while to access the money due to compliance requirements and forms that you’ll need to fill out. For these reasons, you should not consider a retirement plan to be your emergency fund and should only access it in worst-case scenarios.
Here is my caveat: If your employer has a matching program, take advantage of it as soon as you can. You should still build an emergency fund, but when your employer matches 100%, you make a 100% return on the money you put into the retirement account. If you put $100 in, they put $100 in, and you have $200 in the account without investment growth. The old saying goes that the quickest way to get rich is to take advantage of “free” money—in this case, your employer match.
Every retirement plan is different, but I encourage you to work your way toward saving whatever percentage of your salary maximizes the employer match. However, this match usually comes with a vesting schedule, so be sure you understand that as well. If you leave your job before you are fully vested, you will lose a portion of the employer contributions. Also, because you will be penalized if you take money out of this account before you turn 59.5, it’s important to make sure you have some money for the unexpected somewhere else. Consider splitting your savings from the start. Exactly how much to which account will depend on your individual situation, and it will help to discuss it with a financial professional.
Taxable Investment Account
After you fund your emergency fund, I encourage you to work your way up to saving 20% to 25% of your salary between your retirement account and a taxable investment account. Having both options gives you the most flexibility. Saving for retirement allows you to be prepared for the future, but retirement could be a long way off. A taxable investment account allows you to participate in market growth and still be able to access the funds when and if you need them. Maybe you need a new car or want to go on a family vacation. Maybe you want to make a generous donation or upgrade your home. This account is perfect for your “opportunity fund.”
As an investment account, this account’s value will fluctuate based on the securities (stocks, bonds, ETFs, mutual funds, etc.) that you hold in it. In the long run, this fluctuation is great; according to Morningstar, Inc., over the past 15 years, the S&P 500 (an index that tracks the top 500 companies’ stocks in the United States) has made an average 11.74% annual return (as of the day this article was written).
There will be bumps along the way and years where the account loses value. Be prepared and informed. If you are not comfortable picking the investments, find a trustworthy financial professional to help you.
You can also use this money in retirement. We encourage clients to have money in both account types, as it allows us to navigate tax situations when a client reaches retirement age.
High-Yield Savings Accounts or Money Market Mutual Funds
If you have a short-term (within the next two or three years) expense that you are saving for (e.g., a new car, home down payment, or a vacation), I recommend using a high-yield savings account or money market mutual fund. Historically, these funds have never gone down in value, which makes them a safer investment. Right now, they are earning between 3% and 5%, which is much better than a regular savings account and gives you some security that you will not lose money.
Let God Guide You
As you think about all these different options, it can become overwhelming. Please understand that not everyone can do all of this, and God is not asking this of every family. Bring your finances, your budget, your investments, and your retirement to God, and ask Him to guide you. Ask Him what His will is for you and your money. He will guide you to the right path. Sometimes, God will take you to the right financial adviser to walk with you, and sometimes, He will empower you to do it on your own. Either way, remember to always walk with Him in faith.
Erica Mathews is a CERTIFIED FINANCIAL PLANNER™ Professional with Financial Counseling Associates, a small, family owned, independent, financial planning and investment management firm. She is passionate about helping families and individuals build their wealth so they can live the lives they are made for. As a wife, mom of four, and businesswoman, she understands the complexities of family life and helps relieve the burden of financial stress with organization, a plan, and automation so her clients hit their goals. She lives in Colorado with her husband and four kids. They love everything outdoors including gardening, hiking, biking and simply exploring nature. If you would like to reach out to Erica, her email is erica@fca-inc.com.