Saving for retirement isn’t your emergency fund

Saving for retirement early on in your career is something we stress to clients, friends, family and anyone who will listen. Getting on track for your financial future is really key and using the power of compounding can greatly improve your financial status in your post-working years. But, it’s important to remember that this is not the same as your savings account in the bank. Retirement funds are savings for your future income when you’re not working anymore – it’s going to be your monthly paycheck in retirement. Shockingly, 59 percent of 18 to 34 year-olds have tapped into their retirement.

Many people view their 401(k), IRA or other retirement savings as another savings account, however it should really be thought of as long-term money. It can be hard to see that money sitting there and not dip into it, but if you take funds out even for qualified exceptions, you’ll be missing out on decades of potential returns from market growth on those dollars. The chart to the right from JP Morgan demonstrates the power of compounding over the years and to make up for withdrawing funds, you’ll need to save more later than you do today.

If you don’t have a savings account outside of retirement funds, start one now for emergencies so you don’t have to pull from your future income-generator. If you’re strapped for cash and can’t afford to put more away than you’re saving for retirement, start by splitting the difference. Save half for retirement and half for emergencies until you have 3-6 months of expenses built up. It may take a while but it’s important to start somewhere. You’ll need that reserve of cash for emergencies in case something unexpected happens, so you don’t feel the need to pull from your retirement funds.

When changing jobs, roll over that defined contribution account – don’t cash it out! You may think it could help you pay down debt, buy a house or pad your savings further, but you could incur a 10 percent penalty for early withdrawal and you’ll have to pay taxes on those monies as regular income which could bump you into a higher tax bracket.

The best thing you can do for your retirement savings is forget it is there. Contribute automatically so you don’t see that money coming out each month and you can set yourself up for the future when the time comes to retire.