Saving for retirement is critical to achieving financial security. However, there are times when you may have to temporarily pause retirement account contributions to address a pressing financial issue.
Whatever your reason, it’s important to understand the long-term implications of redirecting money away from your nest egg. Consider working with a financial advisor who can help you balance saving for retirement with your other financial priorities.
Here are seven scenarios in which it makes sense to halt retirement savings and focus on other financial goals.
1. Health-Related Emergencies
If a health crisis prevents you from working, you may have to skip saving in favor of paying for medical care and basic living expenses.
If you can continue working during a health emergency, put the money you would have saved for retirement into a savings account and use that cash as needed for medical expenses.
If you end up not needing that money, you can invest those funds later in a traditional IRA or Roth account. If you do use the funds to cover health costs, you can resume your 401(k) contributions once the crisis passes and you’re able to fit retirement savings into your monthly budget.
[When a Retirement Hardship Withdrawal Makes Sense]
2. Paying Off Debt
If you have a substantial amount of high-interest debt and struggle to keep up with bills, contributing to a 401(k) may not be the best short-term move.
“What (retirement savers) do, often, is seek out high-interest debt to plug their budgetary shortfalls because they’re overcontributing to retirement based on their income and expenses, “Lucas Seely, a certified financial planner at benefits platform Brightside in Chandler, Arizona, said in an email. “While (saving) is great on the surface, it’s actually detrimental month to month.”
In cases like this, it’s wise to focus on reducing or pausing retirement contributions and using that cash to pay down debt, pad your emergency savings fund and balance your budget, according to Seely.
[Read: Should You Use Your 401(k) to Pay Off Debt?]
3. Tuition and Student Loans
For graduates, pausing retirement contributions to pay down student loans can free up future cash flow and reduce debt faster. Once your student loans are paid off, you can redirect that money to your retirement account and catch up on saving.
To help their children avoid taking on student loan debt, some parents may choose to pause their retirement contributions and put those funds toward their child’s school tuition. However, not all financial experts agree on this approach.
“Remember that you can borrow for college or an emergency, but you cannot borrow for your retirement,” Kim Gattis, a wealth advisor at UMB Bank in Derby, Kansas, said in an email.
She believes there’s a way to make room for paying for your kids’ college while still saving for retirement, “It’s easy to see how saving for retirement on top of other priorities can be challenging. Don’t let your priorities compete with each other. Always aim to save toward your retirement, even in small amounts.”
4. Unemployment
During periods of unemployment when you must rely on savings and financial assistance, temporarily cutting retirement contributions can be a smart decision.
“Similar to a health crisis, if you find yourself in an unexpected situation like losing your job, make sure to prioritize your family’s living expenses,”Jordan Mangaliman, founder of Goldline Financial Services in Los Angeles, said in an email. “This is where an emergency fund can really be a lifesaver. Resume your contributions once you start your new work position.”
5. Starting a Business
To get a new business venture off the ground, you may need funds to purchase inventory, supplies, equipment or office space.
“If you’re starting a business, it might be better to put money toward those initial expenses than to keep making retirement contributions in the short run,” Hector Castaneda, a certified public accountant in Spokane Valley, Washington, said in an email.
“Keep in mind the returns on a retirement account will be devalued over time due to the concept of the time value of money, but it may very well be that the opportunity of starting a business has a greater current value,” he added.
However, before redirecting retirement contributions to a new business, consider the potential drawbacks. If you take out that cash and the business doesn’t turn a profit, you may miss your retirement savings goals.
6. Saving for a Home
If you plan to purchase a home within the next few years, you’ll likely want to build up funds to cover the initial costs.
“Redirecting some of your retirement savings temporarily toward a down payment on a house could help you get homeownership sooner, which can be a big component of long-term financial stability,” Castaneda said.
[Should You Buy a Home With Retirement Savings?]
7. Building an Emergency Fund
Having adequate emergency savings is a foundational component of your broader financial health.
“Building an emergency fund should be a very high financial priority,” said Michelle Kruger, director of financial planning at Gratus Capital in Atlanta, in an email. “For someone with limited financial reserves, it may make sense to pause retirement savings to try to build an emergency fund as quickly as possible.”
A lack of emergency reserves can lead to future financial headaches.
“Those who don’t have an emergency fund may find themselves more vulnerable to high-interest debt, such as credit cards or payday loans, which can balloon into large balances that can create significant financial hardship in the long run,” Kruger said.
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7 Times to Stop Saving for Retirement originally appeared on usnews.com
Update 09/06/24: This story was published at an earlier date and has been updated with new information.
