A lot of people struggle to build retirement savings. And that's a problem, because without a nest egg of your own, you might really struggle during your senior years.
You can expect Social Security to take the place of about 40% of your pre-retirement earnings if you bring home an average wage. That assumes benefits aren't broadly reduced.
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But most people need a much larger paycheck than that to enjoy retirement and not have to worry about money all the time. And that's where your personal savings come in.
If you've been diligently funding an IRA or 401(k) plan since the start of your career and investing that money carefully, then you may reach a point in your 40s or 50s where you're happy with your balance. And while you may not have the desire to retire early, you may feel that you're in a place where you can stop funding a retirement account.
There are benefits to being able to hit the brakes on retirement savings. But before you do, make sure to think things through carefully.
There is such a thing as enough savings
Retiring in your 40s or 50s could be a risky thing, as it means your savings might need to last for an extra decade or two. But saying you'll no longer contribute to your IRA or 401(k) is a very different thing.
Let's imagine you've accumulated $1.5 million by age 45 and you intend to retire at 65. If you keep that money invested and earn a 7% yearly return for the next two decades, which is a few percentage points below the stock market's average, then you could end up with a nest egg worth about $5.8 million. And that may be more than enough money if you're retiring at a traditional age.
In a situation like that, it may not be unreasonable to say you're done funding your IRA or 401(k). And that could benefit you in a couple of ways.
First, it takes some of the pressure off. You may be able to take a less stressful job with a lower paycheck if you don't have to worry about maxing out your 401(k).
Secondly, it may allow you to enjoy more of your money during the second half of your career. You may have made sacrifices during your first few decades in the workforce, like taking inexpensive vacations and limiting discretionary spending, to fund a retirement plan. If you've done a good job and are happy with what you have, then you deserve to spend the next 20 years taking nicer trips and buying more of the things you love.
Proceed with caution before saying you're done
While it's not at all unreasonable to stop contributing to a retirement account at some point in your career, it's also important to make sure you've run your numbers correctly. For one thing, do keep in mind that over time, inflation may erode the buying power of your nest egg. So your annual living costs in the future may be higher when you account for the fact that things are likely to cost more.
There are also huge tax breaks associated with funding a traditional IRA or 401(k). Giving those up could mean having to pay the IRS more, leaving you with less money to spend on the things you want.
Plus, you never know if you'll be able to keep working until a traditional retirement age. Health issues or a shakeup in your industry could force you into an earlier retirement than you're expecting. So you may want to continue saving some money -- if not in a restricted account like an IRA or 401(k), then perhaps in a savings account, CD ladder, or taxable brokerage account.
All told, you may reach a point where you can say "I have enough" in the context of retirement savings. But rather than stop saving completely, what you may want to do instead is save less. That way, you're continuing to build your personal safety net while freeing up more of your money to enjoy in the near term.
