I'm a huge proponent of saving for retirement early and often. But there are times in our lives when it might not make sense to save money for retirement, if only for a short time. As a caveat, I would never advise someone to pass up an employer's 401(k) matching contribution. Try your best to take advantage of a 401(k) match, regardless of the situation you are in. Here are five situations when it may not make sense to save for retirement.
You have excessive credit card debt. If you have credit card debt (or any other high-interest debt) racking up interest charges each month, then you should quit retirement contributions until you can pay off that debt in full or at least until you can significantly lower the interest rate. The interest you are paying to service that debt is likely above 15 percent. This expense will typically negate any gain you are getting from your retirement contributions. Pay off your credit card debt and don't charge up any more debt that you can't pay off in full each month.
You don't have an emergency savings fund. To help you avoid going into debt in the future, you need a financial safety net. This emergency fund will provide the extra cash needed when you lose your job, experience a major medical need, or encounter any other major financial hardship. A good emergency fund is going to be big enough to cover six months of your monthly expenses. Those who are more conservative will probably want a bigger fund. If you don't have this fund established, stop retirement savings until you do.
You are experiencing an emergency. If you are currently in the middle of one of life's emergencies, such as unemployment or a major out-of-pocket medical expense, then it may be a good idea for you to stop retirement savings and put all financial hands on deck. Once the dust settles on the situation, you can re-evaluate whether continuing retirement contributions is a good idea.
You've reached your annual retirement account maximum contribution limits. If you are savvy enough to reach your annual retirement contribution limits early each year, you might want to consider shifting money into a different investment or pre-paying your mortgage until you reach the end of the year. Unless you are close to retirement age, there is likely no reason you should be contributing more than the tax-advantaged contribution limits. If you want to keep investing, send money to a more flexible taxable investing account.
You've surpassed your retirement savings goal. If you are a super saver who reaches your retirement savings goal before you are ready to leave the workforce, then consider putting future contributions elsewhere. A good first step would be to invest a few dollars to sit with a fee-only financial adviser who can help you ensure you have enough saved and give you guidance on where to shift future savings contributions.
Phil Taylor is the author of the popular 52 Ways to Make Extra Money. Find out how to save more money and get the latest news on the best online savings accounts and the best online stock brokers at his blog, PT Money: Personal Finance.