Case against maxing 401k (pre-tax)

[element926]

It was free - they wanted me to invest with them obviously - but I haven't done anything yet. Thanks for the insight!

[Petunia 100]

A lot of good comments here.

These numbers are all hypothetical - I'm 26 so the point of the advisor was that if I continue this path and don't withdraw until 70 I'm going to pay significant taxes at that point vs. using a regular taxed account.

At the same time....what the hell do I care if I'm 70 and making 180k out of my 401k...I won't need anywhere need that much anyway.

My current tax rate is 33% (single). I save 18k + 8k match per year in the 401k, 5.5k in a Roth IRA (backdoor), 3.3k HSA, and I'd guess another 50k in taxable investments as well.

Do you have any interest in retiring early? Keep maxing your 401k, Roth IRA, and throwing some money in taxable to boot and it will be an option far earlier than age 70.

[corn18]

Do you have any interest in retiring early? Keep maxing your 401k, Roth IRA, and throwing some money in taxable to boot and it will be an option far earlier than age 70.

But you will need to have enough in taxable or Roth to retire before 59 1/2. With your savings rate at age 26, I think early retirement becomes a real possibility. If you have to start deciding between maxing the 401k and taxable (vs. both as you are doing now), then I would consider if you plan to retire before 59 1/2. And as TH has pointed out, you have a LOT more options with taxable investments if you decide to do something other than a 9-5 corporate job. He took $400k and turned it into semi-retirement and now doesn't need a 401k. That would be worth looking into at your young age.

[rennigade]

It was free - they wanted me to invest with them obviously - but I haven't done anything yet. Thanks for the insight!

If you use an advisor its not free. How do they stay in business if its free? What would be the point of them investing your money if they werent somehow making money from it? The goodness of their heart?

Hi all,

I'm 26 and currently maxing my employer 401k (18k + 4.5% match of salary so give or take +8k).

What do you mean by "give or take +8k?" A 4.5% match doesnt equate to 8k.


I too have been thinking more and more about how much I contribute to my 401k. Ive been maxing for a while and have a healthy amount in there now. I do have a roth and taxable investments as well. At what point should someone stop maxing...only doing the company match...then investing the rest in a taxable?

Is there a certain dollar amount the 401k would need to be to dial way back and invest a lot elsewhere? Im probably going to dial back in my low 40's and keep maxing roth ira and the rest in taxable. I want to retire early so will need a couple hundred grand. My wife has started funneling $500/month in her taxable so that is going to help.

^edit...I dont think there is a cookie cutter answer to this...just thinking out loud. It would obviously depend on what your expenses are to figure out when to stop investing so much in a 401k and moving the rest to taxable.

[element926]

Petunia 100, absolutely I would love to "retire" early to escape the 9-5 job.

corn18, who took 400k and retired early? definitely would like to read into this.

rennigade, this was my first introduction meeting - I didn't pay anything and based on the feedback here and my instincts I don't plan on using an advisor.

I mean give or take because I'm a sales employee so the match is 4.5% of my salary and therefore can flux 4.5% of 180,000 is $8100 and that's what I got last year (this year will be more due to a good sales year).

Appreciate the insight on your end. It's a good question...I'm not sure I suppose the easy answer is to just max out the 401k while you can, as soon as you can - as long as you can continue to put a lot into taxable accounts as well.

[corn18]

Petunia 100, absolutely I would love to "retire" early to escape the 9-5 job.

corn18, who took 400k and retired early? definitely would like to read into this.

rennigade, this was my first introduction meeting - I didn't pay anything and based on the feedback here and my instincts I don't plan on using an advisor.

I mean give or take because I'm a sales employee so the match is 4.5% of my salary and therefore can flux 4.5% of 180,000 is $8100 and that's what I got last year (this year will be more due to a good sales year).

Appreciate the insight on your end. It's a good question...I'm not sure I suppose the easy answer is to just max out the 401k while you can, as soon as you can - as long as you can continue to put a lot into taxable accounts as well.

TexasHusker and 97guns are both semi-retired and doing very well.

[Jluke]

I mean give or take because I'm a sales employee so the match is 4.5% of my salary and therefore can flux 4.5% of 180,000 is $8100 and that's what I got last year (this year will be more due to a good sales year).

I would not be worried about a measly 18k towards the 401k on that salary, 180k+. Just keep maxing it.

There are ways to get to your 401k money prior to 59.5....

[element926]

Kind of my thoughts as well, since I'm still investing heavily in other taxable accounts.

[TexasHusker]

There is no single right answer on this question. Ask one hundred folks, you'll get one hundred different answers.

The right answer for you depends upon:

1. Your time horizon
2. Your risk tolerance
3. Whether you prefer to work for yourself or someone else

What has worked for me may not fit you at all, but I'll tell you my personal take.

Government-endorsed savings retirement vehicles ("GESRV") (IRAs, 401Ks, 403Bs, etc.) are intended to give savers a way to save for retirement. The government says that retirement age (in terms of accessing these savings without penalty), is 59.5 years. There are intricate and complicated ways to access some of the funds penalty-free before 59.5, but that is another subject.

The attraction to GESRV plans is tax deferment. Note that does not mean tax free. Income taxes are eventually due. The saver is merely deferring them to a later date. His income tax rate may be higher or lower at that later date - there is no way to predict that.

An added attraction to the 401K plan is the "company match". Many companies will toss in monies to match what you put in, up to a certain amount per year. If your company matches 100% of the first few $ thousand, you are effectively getting a 100% return right then.

But that 100% return is one-time only. It kick starts you in a big way, but for the rest of the investment time horizon, you are on your own.

There are pros and cons with any investment strategy. You don't hear much about the cons of using GESRV plans, because virtually everyone is participating and it just seems like the right thing to do. Conventional wisdom says "max out your 401K" and so on.

I generally go against conventional wisdom. I am a contrarian, and that includes my investment choices. I have found conventional wisdom to be wrong for me more times than not. Additionally, I'm a bit anti-establishment. I tend to naturally resist doing what the government and my employer tell me I need to do. What do they know? Are either really concerned about my personal well-being and financial security? Nope!

So back to the question. I will use one example from my personal experience - your results may be better or worse: From age 25 to age 40, I pretty much maxed out my 401K every year. I believe by age 40 it was worth around $450K. It dropped substantially later but that's another subject. Let's just stick with the $450K. An impressive number.

About $200K of this was my own contributions. The rest was company match and growth. I figured my growth was around 7% per year without regard to the employer one-time match. Not too bad.

However, outside of my retirement, I spent about $200K of my personal funds on a business franchise in 2011. The first year it lost $30K. So my basis was really now $230K. But each year thereafter, it has made from $50K to $70K per year. So it has returned to me $300K so far, and hopefully it will continue to do well (this is a singular location - I have more now).

Additionally, I have built an asset that is worth around $180K, using a conservative three times net earnings valuation.

So my total return from a $230K investment is around $480K, and the income keeps coming in.

I opened a second location for around $100K that does better, and I opened a third location that actually loses money currently. However, on the whole, I've spent roughly $400K on a business that nets around $140-150K per year to me.

I figured out at age 46 that I didn't need my company any more and left. By having more time to spend on my businesses, they of course became more profitable.

Yes, I did walk away from the 401K scene and the "company match", but in my personal case, that was pennies and I'm now dealing in dollars.

Good luck!

[element926]

Nice! What is the business in your case?

[Fishindude77]

I think anyone with the opportunity to participate in a good 401K with company match should participate and contribute at least enough to get the company match. That's pretty much like getting free money. Also, your personal contributions will be pre-tax money, so that gives your investing a little jump start as well.

Putting all of your eggs in one basket is never a good idea, so there is certainly no need to max out he 401K, if you have other investment options you are comfortable with.

Like TH, I'm a big believer in self employment also. I think everyone should have some sort of business of their own, even if it's just one rental property, or lawn mowing side gig.

[TexasHusker]

Nice! What is the business in your case?

Haircut franchise. But there are hundreds other franchises that are capable of the same.

[corn18]

Also, look into the maga backdoor roth. I do that to get more money into my Roth account. If your 401k plan allows it, you can contribute after tax dollars to your 401k (not Roth) and then roll that over ton an outside traditional IRA and then roll that to a Roth IRA. I can get an extra $18k into my Roth account each year this way. The Roth is nice as I can access that money any time I want. Add this to my regular back door roth and I am putting $30k / year into my Roth accounts. For my retirement savings:

18,000 401k
6,000 401k catch up (I'm 51)
18,000 401k match
18,000 401k after tax converted to Roth
12,000 tIRA to backdoor Roth
75,000 taxable

I plan to retire at 55, so this gives me enough in Roth and taxable to spend until I get to 59 1/2.

I wish I had done the alternate income/work for yourself thing when I was younger. The idea of continued income with little work would make my retirement plan a lot easier.

[LivingAlmostLarge]

Depends are you assuming you won't get married or have kids or increase expenses ever? And assuming you'll be contributing $18k until 70? And it'll be $5M? I just think lots of assumptions.

[element926]

My plan does allow for the megaback door IRA, I just have not yet explored it yet. I think that's probably something I'll do soon or next year.

Good point on the assumptions, but I guess that's all we ever have