Is It Ever the Right Time to Stop Saving for Retirement?

“An emergency fund is a huge need for almost everyone, and far too few have a sizable one," he said.

As noted in the article, Mantell added, emergencies are the main reason that people tap their 401(k)s or cash them out when they leave a job.

“Once the money is in a tax-deferred retirement account, it really should stay there until retirement,” Mantell said. “But should you stop saving for retirement to build up an emergency fund? It depends on your age and how likely you could lose your job in the next year or two. I might rather suggest saving in-plan for retirement to capture at least some of the matching money.”

The article suggests that workers should have at least three months of expenses in an emergency account before shifting back to retirement savings, but Mantell advised otherwise.

“I believe as many workers as possible need a much bigger emergency fund — closer to 12 months in this environment,” she said. “It would be better to scale back on retirement savings to build a bigger emergency fund so you don’t turn around and raid the 401(k) when you lose your job, have an emergency, or need to jump out of the workforce for a while to care for a new baby, teens or your parents.”

401(k) vs. IRA

David Blanchett, the retirement researcher and PGIM DC Solutions managing director, noted the importance of being precise about the retirement accounts in question when assessing where to direct funds and for what purposes.

“I think there is a really important distinction between saving in a 401(k) and in an IRA if there is some kind of employer match,” Blanchett said. “Sure, emergency funds are really important, but if the employer is offering a generous match, I would typically recommend saving up to it, or some minimum level, versus abandoning the 401(k) to create an emergency fund.”

Shifting savings out of an IRA into an emergency fund, he observed, can make sense since an employer match won't be left on the table.

After-Tax Accounts

As to directing savings to taxable brokerage accounts when a 401(k) has been adequately funded, Blanchett said, those aiming to retire early may want to consider alternative forms of savings.

“But again, at what cost?” Blanchett asked. “If there’s a match in your 401(k), even if you end up paying a penalty, you could have a lot more money than if you used a taxable account, so I think it’s really important to differentiate between IRAs and 401(k)s when making these broader statements.”

Likewise, Blanchett suggested, those who have saved enough could stop saving — but abandoning the 401(k) outright could mean leaving free money behind.

“One thing I was surprised not to see mentioned in the piece is funding a health savings account,” Blanchett said. “HSAs are the most tax-efficient account out there as long as the monies are used for qualified medical expenses. I definitely think they could make sense for someone who is already saving in their 401(k), ideally up to the match, that wants another account that is even more tax advantaged than a 401(k).”

Mantell agreed that the tax question is “always important.”

“Having a $5 million IRA that is all taxable money doesn’t make folks very happy,” she observed. “This makes most of your Social Security benefits taxable and can easily push a retiree into a higher tax bracket. Not to mention much higher Medicare Part B premiums for your retirement years.”

Fnancial planning professionals and their clients should consider tax diversification as a key retirement planning strategy, Blanchett and Mantell agreed. It’s also important, they said, to view tax mitigation as a long-term effort — not an activity that looks at any single year’s tax obligation.

“Saving a lot is critical, but we need to do a better job saving across account types — some in tax deferred, some in Roth, and some in taxable accounts,” Mantell advised. “This gives retirees a lot more flexibility in how they construct income in retirement, at least until required minimum distributions kick in.”

Retirement Test Drive

In his critique of the USA Today article, Jamie Hopkins focused on an idea he has previously discussed with ThinkAdvisor: encouraging late-career clients with a healthy nest egg to “test drive their retirement.”

“I am a big fan of the stop-saving-for-retirement approach, but I usually position this as something to try a year or two before you think you want to retire,” said Hopkins, the CEO of Bryn Mawr Trust Advisors. “[It’s about] learning how to spend instead of just how to save. Additionally, if you can stop saving and spend that money on vacations and self-care items, you might be able to continue to work a year or two longer.”

For those who cut back on savings but work a year or two longer before starting to live off their accumulated assets, that will positively affect their retirement security.

“Lastly, you can reach a point when you have more than enough money in one type of savings account,” Hopkins said. “I believe that tax diversification across taxable accounts, tax-deferred 401k type accounts and after-tax accounts like a Roth are beneficial to increase flexibility and control — and to reduce long-term public policy risk [tied to Social Security’s finances].

“However,” Hopkins continued, “I think most people need to continue to save and are often under-saved for retirement. Ultimately, this is a personal planning decision.”

Pictured: Marcia Mantell, Jamie Hopkins and David Blanchett