275 | Why We Stopped Contributing to Our Retirement Accounts

My husband and I stopped contributing to our retirement accounts.

Personal Finance 101 says you should max out your retirement accounts or at least contribute enough to get the employer match.

But we decided to cut our contributions altogether. Are we making a big mistake?

In this episode, let’s talk about the reasons behind our decision and what we’re doing instead.

• • why we stopped investing in our retirement accounts
  • how we determined how much money we need for retirement
  • the restrictions around accessing money in your retirement accounts
  • what we’re doing with the money we’re no longer putting into our retirement accounts

Email me: hello@rhothomas.com

Connect with me on LinkedIn

You’re listening to Personal Finance for Lawyers. I’m Rho Thomas, and as a busy wife, mom, and former Biglaw associate, I know all too well the tension between the culture of the legal profession and pretty much everything else you want to do in life. That’s why each week, I’m bringing you the information and tools you need to improve your money mindset and manage your money to create true wealth. Because ultimately, it’s not about the money. It’s about the freedom and flexibility the money affords.

Hey friend. Welcome back.

I hope you are doing well, having a great day so far.

Today we are talking about retirement accounts and specifically why my husband and I decided to stop investing in our retirement accounts.

Now, let me preface this conversation by saying this is not financial advice. This is not me telling you what you should do. Definitely consult with a financial planner, a tax professional, someone who can give you specific, personal insights on how you can navigate this decision for yourself.

But this is what my husband and I decided to do, and I just wanted to share why we decided to do it and our reasoning behind it in case it is interesting for any of you out there.

So we decided to stop investing in our retirement accounts for two primary reasons.

The first being that we have invested enough that it should grow to more than what we need in retirement. The way that we figured that out was using a compound interest calculator.

We put in the balance of our accounts and the assumed interest rate which we used 8% and then we said that there would be 0 contributions, and we looked at how much it would grow to in 30 years, and it was going to be way more than what we needed.

And so that was one thing that we’re like, OK, maybe this is something that we can do.

The other piece of that is you want to know how much money you would be able to pull out of your retirement accounts per year.

We’ve talked about this before on the show, but there is a rule of thumb that you can pull out about 4% of your account per year. So 4% of that balance per year to live on, and presumably you will not run out of money.

And so we looked at what 4% of that balance that it’s supposed to grow to in 30 years would be. We’re like, OK that looks great.

And then the final thing we did was we discounted it to see what that amount would be in today’s dollars. And so looking at how much we would be able to pull out per year and what that equates to in today’s dollars, again, it was more than what we anticipate that we’ll need.

So we felt good about the decision from that standpoint.

The second reason that we decided to stop contributing was because of how long your money is locked up, and that limited access that you have to it.

So with retirement accounts, typically you can’t access it until you are 59 1/2 or you will incur fees and taxes and all of that kind of stuff.

We don’t like that. I want to be able to access my money if I need to, and there are ways in some instances to access your money.

So for example, there often are loans that you can take out against your 401K or your 403B or whatever retirement plan you have. Those loans typically are not available with individual retirement accounts, but they often are available through the retirement accounts that you would have at an employer. So that’s one way that you could access it.

Another way is with individual retirement accounts, if you have a Roth IRA, the contributions that you’ve made to that Roth account, typically you can withdraw as well, and that’s tax-free, penalty-free, all of that.

There are also other more complex ways that you can access the money and I won’t get into all of that because I am not any sort of retirement account professional or tax professional, so I don’t want to give you misinformation. So I’m going to stick with the basics of what I know.

But something that we learned recently is although the IRS allows for you to take loans on these accounts, and typically I think it’s 50% or $50,000, whichever is less, but your plan administrator doesn’t have to allow you to take loans on your account.

And one of my husband’s colleagues ran into this where she had a financial issue she wanted to take a loan against her retirement account, and the plan administrator was basically like, no.

We allow loans for if you’re about to lose your house. Right? It has to be a really extreme circumstance, and they did not deem her circumstances as extreme enough to allow for the loan.

I didn’t even know that that was a thing that the plan administrator could just say, “no, you can’t take this loan.”

And so that was another thing that we’re looking at where you’re putting money into this account, and then you can’t access it until you’re a certain age. For us, that’s, you know, 20, almost 30 years away.

And so, we were like, all right, what if we stopped contributing to our retirement account? What does that look like? And for us, we’ve been interested in investing in real estate and when I say we, it really is me. My husband is supportive, but he’s not that interested.
But we’ve been interested in investing in real estate. And so it was like, well, what if we stopped contributing to the retirement account and we use that money toward this other goal.

It’s still investing, it’s just investing in a different type of asset, and it’s still something that we could use in retirement.

So that’s what we’re looking at. And something that I do want to call out is we will lose some tax advantages because when you invest in most employer-sponsored plans, they are pre-tax contributions, and your income is adjusted by the amount that you’ve contributed.

So, basically you are not taxed on the amount that you put into your retirement account, and so your taxable income is lower.

So, because we’re no longer contributing to the retirement account, then we don’t get that benefit.

But there are also tax benefits to buying real estate so we’re like, OK, well, that helps. Right? That kind of cancels out or balances out that loss that we would take from not investing in the retirement accounts.

So that’s something that we’re thinking about as well.

All in all, I think it’s a good decision for us, obviously, because we wouldn’t have made it otherwise, but it’s something that everybody needs to think about for themselves. So I understand exactly why the laws are the way that they are around retirement account to dissuade people from going in there and pulling money out, and then not having money available in retirement, especially because we don’t have pensions like there used to be. Those are not as common as the they were back in the day, and so we’ve got to be setting aside money for our retirement.

But if you’re in a position where you have already set aside a good chunk of money, it’s going to grow to an amount that should be enough to support you in retirement, and you’re looking at other things that you can be doing to grow that money, then maybe it’s something to consider. At least that’s why we’re considering it.

And we will still continue to contribute to our personal investment account. So we’ve got a taxable brokerage account that we contribute money to each month, and we will continue to do that. So we’ll still be investing in the stock market, but we’re doing so in an account that we can actually access that doesn’t have all those restrictions on it.

So that is why we have decided to stop investing in our retirement accounts. Hopefully, you found that interesting. If you have any questions, please feel free to reach out to me.

My e-mail address is hello@rhothomas.com or you can always connect with me on LinkedIn.

All right, so that is it for this week’s episode. Please take a second and subscribe to the show. Leave a review if you have not done so already. Those things help the show to get seen by more people, to get in front of more lawyers, so they can get access to this information and get the help that they need with their finances as well.

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As we close out friend, I pray that you take the information you learn here, apply it in your life, and open up to the realization that wealth is available to you. As you do that consistently, week after week, you’ll continue to take steps to take back control of your time, build wealth, and live the life of freedom and choice you deserve.

Talk to you later.