What you should and shouldn’t do with your retirement savings

  • Almost all financial plans include a retirement strategy.
  • I recommend investing more aggressively if you have a long-term horizon and are comfortable with risk.
  • Avoid treating your retirement savings like a piggy bank — pretend it doesn’t exist right now.

In most financial plans, individuals set some type of retirement goal, whether that means volunteering, traveling often, spending time with family, or even working part-time. Whatever the goal, building retirement savings through a consistent investment plan is a prudent way to achieve it.

There are always more or less effective ways to achieve these goals — this is how I generally advise my clients.

What you should do: Start taking more investment risk to get higher returns if you have a long-term horizon

First and just to be clear, an individual should never take more investment risk than they exceed their personal risk tolerance. My suggestion is to make sure a person doesn’t invest too conservatively (and miss out on potentially higher returns), especially when they have many years before they even consider retirement. Consider the following example.

John and Mary (both 35) recently hired Barbara as a financial planner. Specifically, they asked Barbara about the suitability of investments in their retirement plan accounts.

During their overall review of the financial plan, Barbara conducted an investment risk tolerance assessment for the married couple by asking questions about length of time before retirement, comfort level with the market


and access to other


outside of their retirement plan accounts. Due to an expected retirement date over 30 years from now and the fact that the couple are extremely comfortable with market volatility, their assessment showed that they have a tolerance for very high investment risk and that an aggressive portfolio is appropriate for their retirement plan accounts.

Barbara reviewed the investments in John’s 401(k) account with her employer and Mary’s 403(b) account with her employer. His analysis showed the couple that they both currently maintain portfolios with a moderate level of investment risk. Subsequently, Barbara recommended that John and Mary reallocate their investment portfolios to make them more aggressive and explained to them that this action would provide them with more opportunities for stronger growth on their long-term horizon before retirement.

What you shouldn’t do: Treat your retirement savings like a piggy bank

I encourage people to treat their retirement savings as if they’re “not even there”. By this I mean that retirement savings should not be viewed as a source of cash for emergencies or short-term goals.

Establishing an appropriate amount of cash reserves is how a person should deal with financial emergencies (loss of job, unexpected medical expenses, etc.) and short-term goals (eg.

advance payment

on a house, vacation, starting a business, etc.). Retirement savings should only be viewed as a long-term investment vehicle and accessible when the funds are needed for retirement income.

Early access to retirement accounts can negatively impact a person’s financial plan in two ways: potential penalties; and the loss of certain long-term cumulative benefits. Paying a penalty to the IRS is obviously a negative implication in a financial plan, but losing long-term compound benefits may take a little more explaining to understand. Consider the following example.

To pursue their dream home, Mark and Jane needed $20,000 in extra cash to have the right down payment for the home they wanted to buy. Unfortunately, they didn’t have a financial planner and received bad advice from a family member who told them to access funds from Mark’s 401(k) account, which is worth about $300,000. $.

retirement calculator
Use Insider’s calculator to see if you’re on track for a comfortable retirement by answering a few questions about yourself, your savings, and how long you plan to keep working.

You will be have on


You will be need on


*Need is based on coverage of 70% of your annual pre-retirement income and a life expectancy of 100 years.

Instead of trying to find another cheaper house, the couple were determined to buy this house. They made a withdrawal from Mark’s 401(k) account without realizing the financial consequences. Mark won’t have that $20,000 to use in retirement, but even more, Mark lost the opportunity to grow that $20,000 within his portfolio.

Yes, there is still a significant amount in his 401(k) account after the withdrawal, but using the following assumptions shows the extent of the lost opportunity: $20,000 invested with a 7% annual rate of return for 20 years could have reached around $77,000! This is a significant sum of money that could have been used as retirement income.

Mark and Jane would have had to either find another house to buy or build up a higher amount of cash reserves, which would have provided them with greater financial flexibility. Using retirement savings should never have been an option.