Recent survey results that show a continued high rate of loans against 401k retirement accounts and account closures due to change or loss of employment underscore the critical role short-term savings play in a successful retirement savings plan.
401k plans: easy and automatic
401k retirement plans are popular because they are easy and effective. Just sign up and forget it. Many 401k programs today are automatic opt in, so an employee doesn’t even need to sign up to participate. No discipline is required; plan participants never see the money. Retirement contributions are withdrawn automatically from each paycheck and deposited in the retirement account. In most cases, employers match all or a portion of the employee’s contribution up to a certain percentage of annual earnings.
Slush funds instead of retirement accounts
Because they are easy to implement and require no discipline to maintain, retirement accounts are the only savings many Americans have. When that is the case, retirement accounts become slush funds that are tapped whenever there is need for extra cash.
Retirement accounts are intended to be long term. Retirement investment fund strategies are structured for a period of 20, 30, or 40 years or more. Borrowing from retirement accounts or closing them when there is a change or loss of employment compromises the effectiveness of long-term investment strategies as well as reduces the amount of money invested. Interest paid on program loans may not replace gains that could have been realized had the money remained invested. This has been particularly true over the last few years as the stock market averages have soared. A decision to close an account due to a change or loss of employment subjects the plan participant unduly to market swings. Many who lost their jobs during the Great Recession closed retirement accounts when the stock market was at or near its low point, suffering huge losses unnecessarily. In addition, money from retirement accounts that are closed gets spent and is no longer available for retirement funding.Order True Prosperity: Your Guide to a Cash-Based Lifestyle at the special discount price of $6.00 per book. Free Shipping.
Short-term savings protects integrity of retirement account
Short-term savings eliminates the need to borrow from retirement accounts or close them when there is a change or loss of employment. Money for down payments, medical deductibles and co-pays, living expenses during a period of unemployment or reduced hours, relocation, and such comes from short-term savings rather than the retirement account. Short-term savings allows a retirement account to remain a retirement account invested for the long term rather than a slush fund that is tapped when ever extra cash is needed.
Save for the short term as aggressively as you would save for retirement. It takes a lot of short-term saving to keep from accessing a retirement account. You will need an emergency fund equivalent to 6 months of living expenses for use in the event of an interruption in income due to a layoff, accident, illness, or reduction in hours. You will need to save for unpredictable expenses such as medical co-pays and deductibles, house and automobile repair and maintenance, and appliance repair and replacement. You will need targeted savings for a replacement vehicle, vacation travel and expenses, Christmas gifts, room addition, swimming pool, big screen television, a down payment on a house, and so forth.
Short-term saving produces increased retirement saving
Unlike an employer sponsored 401k retirement plan, short-term savings requires discipline. Money must be set aside every month to fund the various short-term saving accounts. To do this consistently requires the use of a budget to plan spending in order live on less than you earn so money is available each month to save. The discipline to save for the short term will make you a better saver for retirement, as well. The control you exercise over your spending to save for the short term will allow you to increase the percentage of income you set aside for retirement savings.
Short-term savings make successful retirement saving possible.
K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based Lifestyle, Double-Dome Publications, 224 pages