Balancing IRAs and Non Registered Savings

Whenever we are trying to figure out how much we can or should set aside for our retirement, this will require an examination of what we will have to give up in order to achieve our goal, and therefore starts with a close examination of our personal finances and spending habits.

We can view the disposition of our income in several categories, starting with the minimum amount that we will need for what we could call non-discretionary spending, our costs of living together with our current financial obligations.

Balancing IRAs and Non Registered SavingsThis is not a set amount though, and we can for instance cut back on things, buy cheaper food for instance. Although buying food is necessarily for life, the amount that we spend on it can vary quite a bit.

We could rightfully say then that this non-discretionary spending should involve what would be reasonable minimums to pay for essentials, which can mean getting a cheaper place to live but would not involve living in a cardboard box on the street because that wouldn’t be a reasonable decision.

Our current situation may not allow for all desired changes to be made, as some situations may take some real time to unwind, such as paying too much for our housing. We may decide to downsize but that is something that will take some time to achieve.

We shouldn’t just be looking at our current spending though and limit ourselves to what we may be able to achieve at any given moment, and should indeed look ahead for several years to make plans to make any adjustments in our spending that may be needed to ensure that we allot enough money to our retirement fund.

There may be plenty to do now though, and a lot of people spend more than they actually have to, and a lot more in many cases. We have been taught well how to be consumers and even see some things that would clearly be discretionary spending seen as required, and could be eliminated if needed.

Discretionary Spending Versus Saving

There are too many things that we can spend our money on to even list, but if we’re looking to save for anything, including retirement, we need to closely examine and deliberate on all spending that we make to ensure that we’re not better off overall seeking out less expensive options and eliminating certain types of spending.

People will very often push themselves to the brink and beyond when it comes to spending their money, and it’s not uncommon at all for people to spend more than they take in, not only leaving nothing for savings but paying interest on the negative amount and ultimately needing to either correct things or end up bankrupt.

Others may balance money coming in and out more, although they may be too eager to buy certain things and will use credit to acquire them sooner. This is not always a bad idea but should only be used when there is a very good reason to do so, and being anxious to get something now rather than waiting until we save up for doesn’t necessarily qualify.

If we do not have a good way to get around, we may need to borrow to buy a car, but within this decision, we can overdo this and spend more than we really have to. What happens is that we not only spend too much but the cost goes up as well due to the interest cost of the loan we take for this.

Spending on transportation is a good example of how the three categories of income allotment fit together, the base requirement, the discretionary component, and the savings part of things. We certainly may enjoy a new car or a more expensive one, but we need to realize that this falls well within the discretionary category, in spite of so many people choosing to spend extra on this.

When we do so, we need to calculate the true cost of this, which is what we are giving up down the road for this, and this includes not only the principal amount but what we could earn in interest on the money by saving it.

If we spend an extra $1000 a year on transportation, where we could otherwise have set this aside for the future, and we find ourselves short later for something and having to pay interest on it, or if we are short when we retire, this transportation spending has resulted in our being in a worse position.

This is not to suggest that everyone should become very frugal with their spending, but we do need to realize that when we overspend, we impact our lives down the road, and may impact them pretty severely.

It is wise to plan well for all of life’s events, including and perhaps especially our retirement, and what we always want to avoid is the deception that a certain lifestyle represents the minimum merely because other people in a similar situation are enjoying it. This is what a lot of people tend to do, they will have a certain number of kids because that’s what others do, they will drive certain cars, buy certain houses, take their family on an expensive vacation every year because that’s what others do, and so on.

We want to make sure that all these things are within our budget though, and if they are, they are perfectly fine, but this budget doesn’t just mean what we could spend now, it means accounting for our overall financial welfare throughout our lives. This means deciding often times between spending the money on something or not depending on what will help us the most, meaning getting the most out of this money overall.

Saving for Non-Retirement Goals

Among the things that we end up buying, we may consider saving for things instead of just buying them on credit, and in today’s instant gratification culture, the easier choice, to buy now and pay later, isn’t always the best one.

We need to therefore factor in the interest costs of buying on credit and make sure that these additional costs are justifiable. This should address more than just our impatience, although getting something now is a true benefit. It needs to be greater than the cost of borrowing though, but if it is, that’s fine.

The trick here is to at least think of such things, and we often do not. We just let our desire to have something now blind us to other considerations, even to the point where we may acquire something that we cannot afford at all, and end up defaulting on the loan.

We also need to keep money aside to deal with contingencies, including the loss of one’s job, and this is why we’re told to have a certain amount of our income set aside for this, six months’ worth for instance. If you earn 50,000 a year, this would have us maintaining $25,000 of liquid assets to use in case of need, and this is apart from saving to buy things or saving for other purposes such as retirement or our children’s education.

There are a lot of things to save up for in fact and we should be making sure that we’re giving enough weight to our saving needs rather than not paying that much attention to them or just giving them lip service such as I need to save but really not making any real changes in our spending habits.

This non-retirement savings will therefore be pretty substantial, with the contingency fund as well as saving for other non-retirement things, and then there’s our retirement savings on top of that. In order for this to work properly, if our income is modest as most people’s is, we are going to have to devote a large percentage of our income toward saving, which will involve spending quite a bit less than we usually do.

Devoting Enough to Our Retirement Accounts

While saving for retirement by making contributions to accounts like IRAs will involve giving up something now, the idea here is to gain more later and especially be in a more comfortable position so that our lifestyle does not take a dramatic downturn at retirement.

In addition to the benefit of our retirement savings generating returns and adding further to the reasons to save, with IRAs, there are also tax advantages present. With a traditional IRA, we get to defer taxable income and invest it over time, and with a Roth IRA, we get to save up for our retirement tax free.

This makes saving for retirement even more beneficial than just looking at a certain amount being more beneficial later rather than now, as the calculation for the future benefits needs to take into account that the amount in retirement will be a lot greater than the amount now.

We do need to seek out a sense of balance here, as we may not want to live on a shoestring during our working years and then live lavishly in retirement, and the goal should be one of smoothing so that retirement doesn’t impact our lifestyle very much if at all.

We may be faced with a downturn in our finances anyway, due to our simply not being able to accumulate enough wealth to see us through our retirement years, or we may simply outlive our money, where it seemed like we had enough but we’ve lived longer than we thought or incurred additional expenses in retirement.

We therefore should be shooting for not just keeping our lifestyle at a comfortable level but also plan for contingencies in retirement, just like we need to do when we’re working. Should we not be devoting enough to our retirement, as is generally the case with people, we then need to look at ways in which we can cut down on our spending to better accommodate our retirement needs, even if we’re still going to end up with a shortfall.

This will then come down to making smaller sacrifices in retirement instead of bigger ones, and it’s always preferable to come as close to your retirement goals as you can even if you can’t achieve them.

Retirement planning is an area that a great many people need to devote more thought to, and there’s more involved than just having a pension plan or a 401(k) at work and perhaps investing a little in an IRA as well and thinking you’re doing well just because of this. That may not be enough and if it isn’t, we’re going to have to do some real work to bring this level up to a more acceptable one.

We may or may not be able to devote more money to our retirement, but we never will if we don’t ask ourselves the right questions, and if we don’t examine our capacity well enough. It is only when we give all of this very careful thought and examine all of our spending without bias that we can ever say that we’ve thought about our retirement enough.



Robert really stands out in the way that he is able to clarify things through the application of simple economic principles which he also makes easy to understand.

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