The 2 Times When You Should Stop Saving For Retirement

Saving for Retirement
Image credit: CalcXLM

There is plenty of talk about Americans saving too little for retirement. Almost half of those under 30 have saved nothing for retirement, and nearly half of those 55 and older have saved nothing for retirement.

But let’s talk about the other end of the spectrum. What about those who have saved enough or too much for retirement?

Here are two signs you should stop saving for retirement.

1. You are under 40, and you’ve saved at least $500,000 for retirement. 

Let’s say you are 38 years old and graduated from college in 2005. Since then, you have worked steadily and been able to nearly max out your retirement contributions most years since you graduated. If you had contributed $15,000/year since 2005 to an index fund that tracks the S&P 500, you would have $536,798 at the end of 2020. (I used the historical investments calculator at Financial Calculators.)

I’m going to assume that in this hypothetical, you currently earn $125,000 per year since, presumably, you would have to have a high-income job to be saving this much.

A few other assumptions include:

  • 3% yearly inflation
  • 8% annual returns up to retirement
  • 5% annual returns in retirement
  • Living at 75% of your current salary (adjusted for inflation)
  • No pensions or social security. 

If you stopped contributing to retirement age 38 and retired at age 65, you would have $4,502,374 in your account. Assuming you lived another 25 years, you would still have over a million dollars in your account if you died at age 90. 

This example shows the incredible power of compounding. Invest early and often. Then, you may even be able to stop saving for retirement before you turn 40.

2) You want to retire early.

It may seem counterintuitive that if you want to retire early, you should stop saving for retirement. But consider this: you can’t withdraw from your 401k without a penalty until you are 55 years old, and you can’t withdraw from an IRA until you are 59.5 (note that you can withdraw your contributions from a Roth IRA at any time.) So if you want to retire in your 40’s or 50’s, the amount you are putting away won’t actually be available for you to use in your initial retirement years.

In this scenario, you will likely have put some money away for when you are older than 55 (see the scenario above). But, assuming you have done that, it is probably time to start putting your money somewhere that you can access in the early years of your retirement.

When you want to retire super early, you need to shift from putting money in your 401k to putting money into a low-cost index fund or another investment vehicle. Money invested in a regular index fund can be withdrawn at any time. 

The Bottom Line

Saving for retirement is one of the most critical financial steps you can take. But, as with anything in life, sometimes there is a time to quit. If you invest well early or seek an alternative lifestyle from the “retire at 65” scenario, it may be time to start saving elsewhere.