Beat Up My Approach: Slowing Retirement Savings Rate

[09deaconX]

Hi Bogleheads,

My household has been aggressively saving for a while. Due to part career success and part modest living, we save ~55% of our pre-tax income. A decent portion of that has been into maxing out all of our tax-advantaged accounts (401k / 403b / 457b / Roths / HSA - which we are treating as a de facto retirement account). Maxing out all of these amounts to ~85K / year going into retirement.

If we hope to retire in ~XX years, and a conservative return on our current retirement investments over that time period get us to our 25x number, are we OK to slow down (read: not stop) our retirement contributions?

As far as I see it, the drawbacks to this plan are:
1. Reduced Tax Deferral
2. Future Uncertainty
3. Lifestyle Creep Changing Our 25x Number

It seems these drawbacks would be mitigated by A) continuing to save some amount in retirement accounts and B) the fact that the cash made available would not be going towards increased spending, but rather lowering our future spending needs through:
-Paying down our mortgage faster (which I know is the source of some debate around here, but is something that we're interested in for our peace of mind)
-Ramping up 529 savings for our children (lowering our future spending need when they're in college)

All that said, I always appreciate the wisdom of the boards, so...
-What am I missing in my drawbacks list? What other considerations should I factor in?
-For those who did something similar, how did you think about it?

Thanks as always.

[Normchad]

There isn’t much to say without some real numbers.

If you’re 45, and have saved 55% of your salary for the mast 20 years, you’re probably good. If you’re 63 and have only dine tgis the last couple of years, you’re nit good.

I do think a lot of people on this board have saved more than they needed. So they could have slowed down in savings if it suited them.

[secondopinion]

It depends; how much is going outside of these retirement accounts as investment? I would count 529 plan no differently than investing in the typical taxable account if you knew that kids are going to college. Paying off a mortgage is a similar investment proposition. Essentially, I see no problem with using taxable account money for those things if the benefits are worth it; it is an investment choice still. It is not the same as buying a boat or something that is not helping you.

Taking from retirement account contributions to do this, however, I think is probably not a good deal because the tax benefits will probably outweigh the downsides. Implicit in the retirement making it to 25x by itself is making an income that pays for all expenses.

[Exchme]

Your proposal is just saving differently, not running out to blow the dough, so will not get any criticism from me. It's all one portfolio, whether you call it "house", "529" or "retirement". We paid our house off when the numbers said it wasn't a great idea, but it reduced our stress level, so was worth it.

[9-5 Suited]

That's more like shifting your savings to different vehicles rather than reducing savings, so it seems fine to me. Perhaps just a few general notes of caution based on your comments, but I think 'CoastFIRE' style plans can be a good balance of living for the now while being responsible for the future.

1. Be careful not to use your current expenses in today's dollars and a nominal future portfolio to create the 25x projection. For example if you spend $100,000 per year right now, and you project yourself to have $2.5M two decades from now, that would be a major error to consider that 25x spending. So make sure your future projections for returns and asset values are in *real* dollars, or conversely inflate your spending by an assumed rate of inflation.

2. Don't count on your plan working as expected. I see a lot of these plans saying something like "if I assume 8% returns, then I'll have $X in Y years". It would be nice if returns worked like that, but they do not. So if you are planning on 8% returns, you'd better run a similuation where you get 3% to see just how short you fall of your goals.

[steadyosmosis]

Hi Bogleheads,

My household has been aggressively saving for a while. Due to part career success and part modest living, we save ~55% of our pre-tax income. A decent portion of that has been into maxing out all of our tax-advantaged accounts (401k / 403b / 457b / Roths / HSA - which we are treating as a de facto retirement account). Maxing out all of these amounts to ~85K / year going into retirement.

If we hope to retire in ~XX years, and a conservative return on our current retirement investments over that time period get us to our 25x number, are we OK to slow down (read: not stop) our retirement contributions?

As far as I see it, the drawbacks to this plan are:
1. Reduced Tax Deferral
2. Future Uncertainty
3. Lifestyle Creep Changing Our 25x Number

It seems these drawbacks would be mitigated by A) continuing to save some amount in retirement accounts and B) the fact that the cash made available would not be going towards increased spending, but rather lowering our future spending needs through:
-Paying down our mortgage faster (which I know is the source of some debate around here, but is something that we're interested in for our peace of mind)
-Ramping up 529 savings for our children (lowering our future spending need when they're in college)

All that said, I always appreciate the wisdom of the boards, so...
-What am I missing in my drawbacks list? What other considerations should I factor in?
-For those who did something similar, how did you think about it?

Thanks as always.

I will just say, that by aggressively accumulating, I was able to retire from the rat race far sooner than I had imagined.

[rich126]

There isn't anything wrong with saving but sometimes people obsess in trying to get to the finish line and end up missing out on using the money to experience life. The goal in life isn't how fast you get to retirement but to enjoy life.

[Watty]

-Paying down our mortgage faster (which I know is the source of some debate around here, but is something that we're interested in for our peace of mind)
-Ramping up 529 savings for our children (lowering our future spending need when they're in college)

Paying down your mortgage and putting money into a 529 is just a different type of savings since they both increase your net worth.

If you could get your mortgage paid off by the time your kids get into college then you could use that freed up cash flow for college expenses.

If you won't be able to pay the mortgage off by then an option would be to save up a good lump of money then see of your lender will "recast your mortgage"(Google this). They are not required to do this but they usually will for a couple of hundred dollar fee or even for free. The way this works that if you do a recast and pay your mortgage down by 25%(or whatever makes sense) then your required mortgage payment will be reduced by the same percentage. If you just prepay your mortgage the payment will stay the same and only the length of the mortgage will change. if you can do a mortgage recast before your kids start college then you would have better cash flow when the college expenses are high.

As far as I see it, the drawbacks to this plan are:

....
4) You will be depending on your future income more. Be sure to review your life and disability insurance.

One big advantage of the plan is that you could use some of the freed up money to do things like travel while you can do that with the kids and your health allows it. One really nice thing about travel is that it is a one time expense and not permanent lifestyle creep. Especially when I was going through my 50s I saw more people than I would have expected run into health problems, dying, or the death of a spouse.

[ThankYouJack]

I personally wouldn't give up tax advantage retirement account space to prepay a mortgage (assuming the rate is reasonable) or fund a 529 (I would use Roth $ instead) but if it gives you peace of mind, I won't beat up on the approach.

[Normchad]

There isn't anything wrong with saving but sometimes people obsess in trying to get to the finish line and end up missing out on using the money to experience life. The goal in life isn't how fast you get to retirement but to enjoy life.

This is beautiful. +1.

[GuyInFL]

Once I was close to hitting my 'number' I eased off a bit and started traveling more. Still saving quite a bit!

[Pops1860]

This thread has been moved to the 'Personal Finance (Not Investing)' forum. Moderator Pops1860

[broncocountry25]

I am doing the same general thing.

Diverting money from traditional retirement accounts to pull forward expenses I will have before 60. We did a great job hammering the retirement accounts in our 20's. Still do Roth IRA's (backdoor), matching 401K amount, HSA.

Now in our 30's I want to front load 529(s) and load up taxable more. My goal is to have college funds and large taxable to retire in early 50's when kids go to college. I don't know anyone personally who retired earlier then 60 when they don't have the money in accounts like taxable/real estate/etc.

I am avoiding the OMY trap in my 50's that I know I would do.

We will own a family house until then, at that point I see selling that and buying a condo cash for whatever the equity is worth.

Then we will travel while still young in 50's.

That is our goal!

[09deaconX]

Very helpful replies - thanks everyone!

I totally agree on the need to be conservative on the growth assumptions (and incorporating inflation adjustment). And although it seems apparent after re-reading my original post, I do like the way several of you re-framed it as shifting from one form of saving to another. While we haven't made the shift yet, we may do so later this year. Thanks again, all.

[HenryG]

Yes, we slowed new retirement savings once our 401ks seemed to be on a well-funded trajectory. We primarily prioritized taxable savings (more readily accessible before standard retirement age). Our objective is wise use of funds across our lifetime, not highest retirement account balance.

[stoptothink]

We prioritized paying down our mortgage over investing in a taxable account (in hindsight, a really poor decision from a wealth-building standpoint). Now that we have had the home paid off for almost 3yrs and have a decent nest egg in the taxable account, we're slowing that down to squirrel away cash for a possible next home purchase (could be anywhere from 1-5yrs depending on the housing market). So, we've done what OP is considering on two separate occasions.

For us, maxing both our 401ks and family HSA are a non-negotiable, but everything else we play by ear.

[Reamus294]

Echoing what others said, refining the 25x number is what I’ve done as we’ve been saving: being more pessimistic about returns, looking at a higher x number or lower withdrawal rate to account for an earlier FI, expecting future expenses to be much higher, taking actions to help with SOR risk.

I also don’t want to be in the boat of saving too much at the risk of not enjoying life now and this line is different for every person. All that to say, doing something to reduce future expenses like mortgage and 529 are positive moves that hard to argue with. We aren’t at the point where returns will get us to our FI number and we paid of our mortgage early. It brings us peace of mind when layoffs, re-orgs, and bad leadership chatter starts. With interest rates high you can always build up some cash and make the decision when it gets to a certain point.