3 People Who Shouldn’t Invest in a Retirement Account

Saving for retirement is a big job, which is why most people work on it as soon as they're able to. Even in the best-case scenario, it may take three to four decades of investing part of your paychecks to get the money you need.

Setting up a monthly savings goal and stashing your funds in a retirement account is a smart move for most people, but there are exceptions to every rule. Here are three types of people who are much better off skipping the retirement account for now.

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1. Those who don't have an emergency fund

An emergency fund should be everyone's top financial goal, even above retirement savings. This is the money you'll rely upon to help you cover unplanned costs like an emergency-room visit, a home-appliance breakdown, or your everyday expenses following a job loss.

Without an emergency fund to fall back on, you could wind up in debt, which would make it impossible for you to save for retirement and lead to more immediate problems as well.

You should save at least three to six months of living expenses in your emergency fund before you tackle any other financial goals. Some people prefer to save even more than this, particularly if they believe they'd have trouble finding new employment should they lose their jobs.

Keep your emergency fund in a high-yield savings account rather than investing it. Investing is risky, because the stock market is volatile in the short term. When you have an emergency, you often need to withdraw your funds at a moment's notice, and that could mean selling your stocks when they're down. By keeping your money in a high-yield savings account, you eliminate this risk of loss while earning a reasonable rate of interest.

Once you've got your emergency fund, you can begin saving for retirement. But whenever you deplete your emergency savings, it's a good idea to make replenishing it your top priority. You also have to remember to update your emergency fund as your life changes. If your living expenses go up, you should increase your emergency fund too.

2. Those who have high-interest-rate debt

Credit cards and payday loans usually charge you more in interest than you'll earn in the stock market annually. If you're just making the minimum payment on your debts and throwing the rest of your money into retirement savings, you're probably setting yourself back.

Instead, focus on getting rid of your high-interest-rate debt first. There are a few ways to approach this. You could take out a personal loan or use a balance transfer credit card. Or you could just put all your extra money toward your debt every month.

Make sure you pay at least the minimum balance on all your credit cards to avoid late fees. Then, throw any extra cash at the card with the highest interest rate first. When that's paid off, move onto the card with the next-highest interest rate — and so on — until it's all paid off.

It's worth noting that you don't have to be completely debt-free before you start saving for retirement. Mortgages, for example, typically have low interest rates, and they're usually not something you can pay off in a hurry. So it makes sense to save for retirement while you're trying to pay off this debt rather than waiting until you own your home outright.

3. Those who plan to retire early

Retirement accounts provide valuable tax savings, but they have strings attached. One of the most significant is that you'll pay a 10% early-withdrawal penalty if you take out funds from most of your retirement accounts before you're 59 1/2. This is problematic for those who plan to retire early.

One way around this is to keep some savings in a taxable brokerage account instead. These accounts don't offer the same tax breaks, but they have no limitations on what you can invest in or when you can withdraw your funds.

If you choose to add a taxable brokerage account to your retirement plan, you should aim to grow it to the point where it'll cover what you estimate you'll need in retirement until age 59 1/2. A retirement account is probably a better choice for money you expect to use after that age.

Saving for retirement should be pretty high on your financial priority list, but it's important to step back and make sure you're not missing any other goals that should be tackled first. Once you've knocked out these other tasks, saving for retirement should be a little easier.

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