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By Dan Kadlec
May 24, 2016

Few dispute the wisdom of starting to save at an early age. But where you save is another matter. It may be best not to lean so heavily on a tax-advantaged retirement account, new research from Allianz Life Insurance Co. suggests.

With Social Security benefits eroding and traditional pensions disappearing, tax-advantaged employer-based plans have become many peoples’ primary source of retirement security. That’s not likely to change. But these plans have the obvious drawback of triggering penalties for early withdrawal. You can borrow from them. But that is not a great option.

Employer-sponsored plans are not a piggy bank, and when people use them as one the costs can be substantial. Billions of dollars leak out of retirement savings this way every year. The Center for Retirement Research at Boston College estimates that the typical 401(k) saver has 25% less wealth in retirement due to using their account as an ATM.

An emergency fund is part of the answer. But young people, especially, should also have a liquid account for near- and medium-term goals, says Katie Libbe, vice president of consumer insights at Allianz. “The industry is so fixated on retirement saving,” she says. “But you should also be ‘freedom saving’ so you can be more gutsy when it comes to life decisions.”

Following Your Dreams

Allianz found that one-third of adults polled regretted major life decisions such as not following their dreams, not taking more risks in their career, and not taking the time to explore new lifestyles and pursue passions. Many wish they had the guts to take more sabbaticals, go back to school, and reinvent themselves. They regret falling into the trap of taking the first job they were offered, even if they didn’t like it, and then sticking with that career for 40 years.

Life spans have expanded by 30 years the past century. Almost everyone in the poll (93%) sees those bonus years as a positive development. But longevity also sparks regrets and the recognition that with so much time there may be other ways to live your life. About half believe longevity enables a totally different view of how and when life choices should be made—from the timing of children and marriage to cycling in and out of careers. One in six believe it is now possible to retire at a later age but work fewer years overall.

About half of those surveyed would like to avoid the traditional route of school-work-retire. Yet few actually take a non-traditional path. What prevents more people from giving it a try? Surprisingly, says Libbe, fear of failure ranks far down the list. They are willing to take a shot at their dreams—but they do not have the savings to make the leap. (This mindset may change as millennials come of age with an evolved set of priorities.)

Funding a New Career

That is why the emphasis on retirement saving right out school misses the mark, in her view. “Save by all means,” she says. “But don’t think of it all as money you can’t touch until you are 65.” If you have savings you can tap without penalty you will be more likely to relocate to your dream city or country, or take time off to travel, or go back to school to learn a new skill, or start a small business while still in your 30s or 40s, she says.

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Of course, it’s still crucial to save for the long-term, as Libbe acknowledges. A lot of research points to Herculean savings needs for millennials to retire in style at 65 or 70—they will need to amass about $2 million, according to some reports. But once you are saving enough in your 401(k) plan to get the full company match, consider putting some additional savings in a Roth IRA (you can withdraw the principle tax-free) or a taxable account. These savings can help provide financial security while you make a mid-life career change, explore an encore career, or simply take a much-needed sabbatical to reassess your goals.

If you work longer—say, part-time until age 70 or 75 instead of 65—your savings will have more time to grow. Those additional returns may compensate for the money you spent while taking time off along the way. And you may end up working the same number of years in total.

No question, this is a more challenging path than the traditional road to retirement. But if you want the flexibility to pursue your dream job, it’s a smart strategy to follow. So start contributing to a retirement plan right out of school, but keep some of your savings accessible for a career move in five or 10 years. Otherwise you may end up using your 401(k) as a costly ATM—or living a life you don’t love.

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