Ask Money

Thoughts for a really good saver

Chris Farrell Feb 16, 2012

Question: I’m in my early 30s and work in the government sector. I contribute to a 401(a) and a 457 through my employer, and after discussing things with my wife, I have begun to think I may actually contribute TOO MUCH on a monthly basis. I contribute about 31 percent of my pre-tax income, including those two plus another ~5 percent after taxes to the 401(a).

I don’t need the extra money right now, so I’m not too concerned about that aspect, but my wife’s reasoning is that the odds are that by the time I actually retire, taxes will be higher than they are now, so I am taking too large of a risk by contributing so much of my pre-tax income. 

We have a mutual fund that had an acceptable return in 2011. Would I be better off lowering what I contribute to my 457 and 401(a) and increasing deposits into the mutual fund instead? I recently got a promotion with a substantial raise, so I thought now would be the time to reconsider where I am parking my money. Dan, Bloomfield Hills, MI

Answer: I’m glad you’re using your pay raise as a spur to evaluate your savings. It’s smart. You’re a good saver and that will influence my answer. We don’t get many questions from people who save too much! 

No one really knows what tax brackets will be 30 to 40 years from now when you and your wife might contemplate retirement. Many people (including me) agree with your wife that taxes will be higher to pay for Social Security, health care, and other government services. However, I also think the tax code will be very different as budgetary pressures force Congress to embrace major tax reform. 

But I like your idea of contributing less into retirement savings plans and more into taxable accounts. I’ll lay out my reasoning and you can decide whether you agree. What happens to taxes is irrelevant to my reasoning. 

My objection to putting so much of your savings into retirement plans is that you’re setting money aside for one major transition. Yes, retirement is a huge shift. But I think savings should be geared toward funding several transitions over a lifetime and retirement is only one such transition. Savings should be more than preparing for our elder years. Savings should be about funding career, job, education and lifestyle changes throughout a lifetime.  

With savings in taxable accounts, you can tap the money at any time for any reason without penalty. Of course, you’ll pay Uncle Sam something every year on your savings in taxable accounts, and depending on the investment, capital gains when you sell. I think it’s a reasonable price to pay for increased financial flexibility. 

In practical terms, I would consider setting up an automatic savings program that regularly puts money from your checking account into a variety of taxable accounts — not just one mutual fund. The savings could range from online savings accounts to broad-based equity index funds. This way you would have a choice when it comes to picking a pot of savings to tap. 

What do you think?

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