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Why You Need to Save in More Than Just Retirement Accounts

By Christy Bieber – Apr 14, 2018 at 5:49AM

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Going into debt for vacation instead of saving for it could mean you miss out on $234,000 in retirement savings.

You've probably seen many articles about how important it is to save for retirement. There's a good reason for that: If you don't have enough retirement savings, you'll end up broke as a senior, since it's impossible to live off Social Security alone

Saving for retirement is undoubtedly one of the single most important things to do with your money, and you should ensure you're putting aside at least 15% of income to support yourself after you retire.

However, saving for retirement isn't the only saving you should be doing. It's imperative you set aside money outside retirement accounts. Here's why -- along with advice on saving for other goals: 

Smiling woman putting money into piggy bank.

Image source: Getty Images.

Why retirement accounts alone aren't enough

Saving money in something other than retirement accounts is important for many reasons. For one, emergencies will happen, and you must be able to pay for them. The money in your retirement accounts won't help when disaster strikes because if you're invested in a 401(k) or IRA, you can't withdraw without penalties.

Unfortunately, around six in 10 Americans have less than $500 saved for an emergency -- a recipe for financial disaster since 60% of Americans responding to a Pew survey experienced a financial shock in the past year, with the most expensive shocks carrying a median cost of $2,000. 

Among those families who experienced a major emergency, more than half hadn't financially recovered six months later. If you don't have a fully funded emergency fund -- one with money to cover three to six months of living expenses -- you could be one of them. If you end up in debt to cover your emergency, paying interest undermines other financial goals, including retirement savings.

While you may plan to borrow from a 401(k) to cover an emergency, this can be a big mistake. You'd be trapped in your job until you pay back the loan, and if you can't pay it back, you'd have to pay taxes on the unpaid balance plus a 10% penalty if you're not at least 59 1/2 years old. 

You should be saving for other goals

Besides an emergency fund, you should be saving for other things, too, including:

  • A down payment for a house. If becoming a homeowner is a goal and you don't have a 20% down payment, you'll waste hundreds monthly on private mortgage insurance and could find yourself underwater if property values fall, since you'll lack equity. 
  • A college fund for your kids. Putting aside money for college when your kids are young is essential due to rising costs of college education.
  • A new (used) car fund. Most people have car loans for almost their entire career. By driving affordable used cars paid for in cash, you could invest extra money from not having a car payment and end up with hundreds of thousands of dollars by retirement
  • Healthcare costs. More than a third of women and 22% of men put off healthcare because they don't have the money. You'll also need healthcare savings as a senior, since studies show a couple may need as much as $370,000 to cover care costs during retirement.
  • Repairs: Your house and car will inevitably need repairs. You don't want to go into debt to cover them, and the money shouldn't come out of your emergency fund since these are predictable expenses. 
  • Big purchases or vacations: Instead of going into debt for new furniture, a family trip, or holiday presents, save up. If you put a $3,000 vacation on a credit card at 17% interest and make minimum payments of $75 a month, it would take 60 months to repay the debt and you'd spend $1,460 in interest. If you instead invested $1,460 annually at 7% from age 30 to 67, you'd have over $234,000 by retirement.

Saving for all these expenditures must be done outside a retirement account since retirement funds should be left alone to grow and support you in the future. 

How to save outside of retirement accounts

To save outside 401(k)s and IRAs, decide what your goals are and how much to save. 

If you want to buy a $200,000 home in five years, you need to save $670 a month for a $40,000 down payment. If you're already a homeowner, save 1% of your home's value for repairs annually. While you won't spend that every year, you'll have the money for big fixes such as a new roof. 

Once you've decided how much to save, make a budget. Include savings as an essential, and work out how much you'll have left to spend on fixed and variable expenses. If you don't have enough to accomplish all your goals, adjust by increasing income, decreasing spending, or setting more-realistic goals. 

Next, decide which accounts you'll use to save.

  • If you can take advantage of tax breaks, do so. That means putting money into a 529 account to save for college and a health savings account to pay for healthcare costs.
  • If you won't need the money for at least five years, invest it so you can earn a reasonable rate of return. Use a discount online broker and invest in ETFs or use a robo-adviser such as Wealthfront or Betterment, both of which invest in a mix of diversified funds based on risk tolerance.
  • If you'll need the money in less than five years, put your savings into a high-yield savings account. Your emergency fund should also be in a savings account. While you'll earn only a little interest, the money won't be at risk. It should be kept in this savings account separate from your checking account so you aren't tempted to spend it.

Ideally, create separate savings accounts for each goal -- like your new-house fund and car repair fund -- so you won't be tempted to spend the money for other purposes and you'll be more motivated to save as you get closer to your goals. 

Saving for all your goals makes your financial life easier

If you're like most people, saving for retirement is hard enough -- much less figuring out how to save for all of these other things. The good news is, once you actually start saving, things get easier.

When you aren't stuck paying interest on debt from dealing with an emergency and you don't have a big monthly car payment, you'll have more money to put into savings accounts so you can accomplish your dreams. While it may be hard to get started, it's worth it in the end. 

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