Stopping Retirement contributions?

[Deleted]

The couple in this story are 41 and 43 and one of the advice giving to them is to stop their 401K contributions to build a emergency fund.... money.cnn.com/2011/05/23/magazines/moneymag/budgeting_for_emergency_fund.moneymag/index.htm

With a combined income of $225,000 and a nest egg of $330,000, Rick and Amy Mendez, 41 and 43, seem like they are in good financial shape. But a closer look reveals that they're lacking something crucial: emergency savings.

As a result, when they needed a new roof in 2009, they had to borrow from their 401(k)s. Credit cards got them through other jams, but they've run up a $20,000 balance.

"It's too risky for them to go without a safety net," says Framingham, Mass., financial planner Cheryl Costa. At minimum, she says, they need to tuck away $25,000, which equals three months' worth of expenses.

Easier said than done.

"After the bills are paid, the piggy bank is empty," says Rick, who works as a director of marketing for a medical device firm. (Amy is a customer service liaison.)

About $1,800 a month, pretax, goes to retirement. Preschool and child care for Averi and Alexander, ages 2 and 5, cost $2,300. Mortgages -- for their home and two underwater investment properties in Florida -- plus payments on 401(k) loans and car loans eat up $4,450.

The Mendezes need help finding room in their budget.

The solution

1. Slice the budget.

Cutting back on vacations and meals out should save $400 a month.

Also, in the fall Alexander starts kindergarten and Averi goes to preschool, so nanny hours can be halved to save another $1,000 a month.

They should have these funds automatically transferred to a money-market account for emergencies.

2. Turn off the 401(k) -- for now.

While Costa rarely tells anyone to stop saving for retirement, she says building a cushion is the Mendezes' top priority.

By halting contributions, they'll free up $1,300 more a month.

On top of the other savings, this should get them to $25,000 by early next year. They should set their 401(k)s to re-up then.

3. Tackle the plastic.

By the time their emergency fund is at the baseline, they'll also have paid off the 401(k) loan, so they'll be able to funnel about $2,000 a month to the credit cards.

If they also apply Rick's bonus to the balances, they'll be debt-free by the end of 2012.

[Savoir Faire-Demogague in NJ]

Based on the little info provided, I'd say this family is living well above their means. Perhaps paycheck to paycheck at best.

[Deleted]

They have previously taken 401k loans? I'd the underwater properties before the retirement contribution, because it sounds like they are already underfunded in their retirement.

[Deleted]

I'd be concerned that they would just use the money to continue their current lifestyle.

[daisylu]

May 23, 2011 9:23:38 GMT -5 @anne81 said:

I'd be concerned that they would just use the money to continue their current lifestyle.

Of all the places they could trim or get out of the debt, who in their right mind would suggest stopping their $1800/month retirement savings to free up $1300/month?

[DVM gone riding]

it all depends on how much of a wake up call they have had. Somehow I doubt they would do it and really cut back but I could see the advice. The problem is they have also seriously underfunded their retirement too and their children are still really young as apposed to middle schoolers. (just for the parents ages)

[Deleted]

I was thinking
- cut eating out $400/month
- when the kids goes to preschool that is another $1,000/month
- Sell the two underwater properties

Also, my wife and I are contributing $1,800/month towards our 401K's and we make 90K. So it's not like they are contributing the max or even near enough to replace their current income in retirement

[Wisconsin Beth]

DH and I are 41/40 with a 3 year old and an 18 month old. We put 20% into 401/457. I work for local gov't so when the dust settles on the lawsuits/delays here in Wisconsin on the budget repair bill, I'll be required to put 5.8% into the City's pension fund. We're probably going to reduce my 457 contributions in order to cover it. I don't want to do that but at least it's all retirement money...

[Deleted]

"Mortgages -- for their home and two underwater investment properties in Florida -- plus payments on 401(k) loans and car loans eat up $4,450"

This number needs to be broken down further. FL is a recourse state so unloading these properties may cost a lot.

"Preschool and child care for Averi and Alexander, ages 2 and 5, cost $2,300"

I would love to know how much the wife makes. If she's only making 30k a year they can't afford childcare expenses like these.

[Deleted]

Ouch, they probably took the 401k loan after the big sell off and missed out on the recovery. No mention of the employer's 401k match either - which I would think would be a critical factor. I maybe could see lowering the 401k contribution to the match amount.

[Deleted]

May 23, 2011 10:29:45 GMT -5 @bonnap said:

I would love to know how much the wife makes. If she's only making 30k a year they can't afford childcare expenses like these.

True...
The son also start preK in the fall and that will save them $1,000/month

[yogiii]

I'm guessing that 95% of people who stop 401k contributions never turn them back on. If they were overspending in the first place, why should they have the discipline to re-direct money out of their pockets and back into the 401k?

[❤ mollymouser ❤]

What is the $330,000 "nest egg" mentioned in the article?

[Wisconsin Beth]

May 23, 2011 13:19:16 GMT -5 ❤ mollymouser ❤ said:

What is the $330,000 "nest egg" mentioned in the article?

I skimmed it but I took that to be the remainder of their 401K/IRAs/etc. although now that you mention it, it's not good wording for that.

ETA And maybe equity in their house?

[thyme4change]

I also disagree with the advice. They need to examine their entire budget and figure out why they can only save a grand total less than 10% of their total income, and still need to tap that for things you would expect to happen - like a new roof every 20 years or so.

I was watching "Till Debt do us Part" this weekend, and the financial advisor told this couple that was in deep debt to take $800 per month and put it towards their credit cards, and $200 per month and pay down their mortgage. No emergency savings, not retirement savings, not high interest rate consumer debt - yes, sure, pay down the low percentage fixed mortgage debt. WTF???!!!

[The J]

May 23, 2011 9:21:16 GMT -5 @craftysarah said:

They have previously taken 401k loans? I'd the underwater properties before the retirement contribution, because it sounds like they are already underfunded in their retirement.

How exactly are you going to underwater properties, in Florida no less, when you have no money to bring to the table?

[Wisconsin Beth]

The J! You're here. I haven't seen you on the boards in forever! Hello and how's it going? Ok, done hijacking thread now.

[azphx1972]

May 23, 2011 13:37:03 GMT -5 The J said:

How exactly are you going to underwater properties, in Florida no less, when you have no money to bring to the table?

I'm assuming that they'd have to do some short sales or foreclosures. In which case I'd bolster retirement savings because those accounts are protected from credit judgments.

There's no good reason for a family making 225k a year to cut back on their retirement savings. If anything, they need to save more because their post retirement expenses will be higher than most people's. If they can cut their expenses and bump up their savings, it will have the double impact of increasing their retirement funds and reduce the amount they will need during retirement, so that is the most prudent course for them to take.

[CCL]

Don't you sometimes wonder what in the world people do with all their money? That's $18,750 per month!

[iono1]

Investment properties imply an income stream. They may be worth less than the mortgages, but that doesn't necessarily mean that they're producing an income that doesn't pay the mortgage. There's not enough info to know whether the underwater properties are really a drain on them financially, or if it's beneficial for them to keep the properties.

[RoadToRiches]

May 23, 2011 14:46:02 GMT -5 CCL said:

Don't you sometimes wonder what in the world people do with all their money? That's $18,750 per month!

The more you make, the more you spend. Before you know, you have a lifestyle that you can't afford. So something has to hit you in the head to wake you up. That's what it was for me.

I sometimes think, if I just kept living on when I was making 20k a year. I would be wealthy right now.

[DVM gone riding]

cawaiu--Yeah the amount they have been putting away is really really low for their income, they barely have a years worth of income in "retirement" now granted I don't have a year's worth of income in it either yet, but I am 10yrs younger and have no children. So they need to drastically reconsider the budget. I would bet they would NEVER get to the savings level they want if all they do is cut retirement.

[Deleted]

May 23, 2011 15:24:20 GMT -5 DVM gone riding said:

cawaiu--Yeah the amount they have been putting away is really really low for their income, they barely have a years worth of income in "retirement" now granted I don't have a year's worth of income in it either yet, but I am 10yrs younger and have no children. So they need to drastically reconsider the budget. I would bet they would NEVER get to the savings level they want if all they do is cut retirement.

Exactly. They are not saving enough as it is to replace their current income but now they want them to cut it. Right, sounds like sound advice!

Also since they bundled up their mortgage payments with the other two properties, I thought they were paying more out than they were taking in.