I hate putting any significant amount of money into an account which generates next to nothing in interest. I have just a little more than required in my local bank’s checking account (zero interest) to avoid monthly fees and to provide me with free day-to-day banking services such as online banking and ATM usage.

For Roth IRAs, at least, there is also a rule where you can take substantially equal periodic payments (or some such language) that can include both the deposits and the gains. And other things can be rolled over into IRAs.

A standalone saver puts money in a liquid account.

Although with 401K/Roth IRA, you are earning money but aren’t withdrawing it.

However, I also needed to build up a lot of savings in my taxable accounts to generate dividend income for my ER at 45 I started 2 years ago. To do that, I was able to change the ratio from 65%/35% in favor of the 401(k) to 35%/65% the other way, the ratio Steve Austin happened to mention. [This was made possible by cashing out the company stock I held in my employer's 401(k)/savings account when I retired.] But this was only because the percent in the taxable accounts would be able to generate enough dividends to cover my expenses with a surplus.

This did not make the 401(k) which I rolled into an IRA useless. I consider it one of several “reinforcements” (SS and pension are the others) which will prop up my income starting when I turn 60 in 13 years. I don’t need those funds now so I can let them grow tax-free until I need them, giving me the best of both worlds. Finding the optimal balance between what you know you will need prior to age 60 versus what you can put away and grow tax-free until you hit age 60 is not easy to determine and will vary from person to person.

One more point, Jacob. You should have listed another choice besides spending and investing – paying down debt. In the 1980s, I saved to buy my first car, then to pay off my student loans, then to buy my apartment. In the 1990s, I saved to pay off my mortgage although I was investing more of my income first. Only when the interest rate on my ARM rose and my ability to deduct the mortgage interest fell did I reach that tipping point which told me to pay off the loan.

I do agree (roughly) with your saving, spending, and investment definitions.

What you seem to be after is the difference between passive and active asset accumulation. If you are a saver you build up assets (deposit account, brokerage, 401(k), etc) and if you are an investor you seek income generating capital allocations (bonds, rental real estate, business ventures, etc).

It’s great if you have $10k per year in passive income and I have $250,000 in my savings account. But it doesn’t matter which because they are identical. The stock market has been proven to safely support long term withdraws of 4% (don’t be cocky)! Active pursuits may be able to create a reliable income of more than 4% per year but they also require work.

PS. In the end, whichever way you create your wealth it is ALWAYS for the purpose of SPENDING it. If you don’t spend it someone else (children, long lost relative, charity, Uncle Sam, etc) will spend it when you are dead.

@ mattg

You can take the principle amount out of a Roth IRA with no penalty. You also can use non-deductible IRAs as well. Finally if you retire before 59 1/2 you can use a rule 72(t) to set up a series of equally sized, periodic withdraws from your 401(k) penalty free. You must take the same amount every year until you turn 59 1/2 and you must not be working for a W-2 wage, BUT in this situation there are no penalties (just regular income tax) on the withdrawals. There are methods to get your money so absolutely take full advantage of the 401(k) and IRAs during your working years.

Also, once retired you can meter out a partial Rollover IRA (from the 401(k)) to Roth IRA conversion each year, keeping your income low so that you don’t pay a big tax rate on your conversion. (The 10% bracket is a good low place to be.)

Finally, if you really need to dip into your tax-advantaged accounts after early retirement, you can tap your Roth IRA *contributions* w/o penalty (or tax, of course) as long as you wait 5 years to withdraw any given contribution. This includes conversion contributions, I believe. (I’ve never done this and don’t plan on needing to, so please vet me in the IRS Pubs before you take it as gospel.)

Details: I’m not sure that savings and investment are mutually exclusive. I think investment is a subset of savings. Savings is a balance sheet operation where income net of expenses is moved out of the checking account and into the savings virtual account (which could consist of one or more numbered bank/brokerage accounts). Investment, in Grahamian terms, is nothing more than a set of thoroughly-analyzed financial operations that “promises safety of principal and a satisfactory return”. Savings can also be speculated, which is the set of financial operations that is not investment per Graham. Savings can also be shifted back to the checking (current) account for funding expenditures. This is realized income.

Having the tedious definitions out the way, isn’t all savings for realizing income *eventually*, by someone (you, your heirs, or other beneficiaries)? Being in (early) retirement, it’s palpable every time I touch my financial registers: I save for my income, mostly via investment, but I do speculate, too. (And even a money marking or regular savings account is an investment.)

Although the IRS recognizes it in my taxable accounts immediately (regardless of how I categorize or where I register it), I like to think of savings as deferred income. After the money is contributed, i.e. was in checking, now in my savings account, I think of it as 1) principal (or basis) and 2) return, interest (or gain). When the money is distributed, i.e. was in savings, now in my checking account, it is realized, it is income. I try only to take income that I need to cover expenses. I also try to make sure that I never distribute more than I have gained (over some arbitrary period) via returns/interest/dividends/etc.

Investing always is better, however things do come up that intercept your goals.

I think when you are young, single with no kids you can easily follow the path of an investor.

The only reason I can enjoy my interest now is because I started investing early before marriage and kids came into play. And of course, avoiding debt is always a plus.

The problem is that so many people are tangled in debt that they cannot picture themselves investing.

Everyone should have short term savings and also long term saving

I’ve never really seen these two ideas as being in conflict before, and it may take me a little while to fully understand it, but now that I’m thinking about it, but I could be tying up my money in places I can’t get. I could be in a situation were I would have enough assets to be financially independent between taxable and tax-sheltered accounts, but won’t be able to harness it because of my age. If I wanted to quit working at that point, I’d have to sell some of the assets rather than use the income…

I’m rambling a bit, but I was really just wondering if you or anyone had any opinions as to whether useing 401ks and roth iras is a good strategy for those of us hoping to retire early.