Should I Max Out My 401k? a 42-Year Old Retired CFA answers!

If should max out 401k is on your radar, this short guide cuts through the noise. Here is what is worth knowing, and how to put it to work today.

Key Takeaways

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• It’s an intimidating question.
• As a Chartered Financial Analyst who retired from Financial Services at age 42, I have seen “experts” give a lot of bad advice or avoid givi...

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Should you max out your 401k? It’s an intimidating question.

As a Chartered Financial Analyst who retired from Financial Services at age 42, I have seen “experts” give a lot of bad advice or avoid giving good advice. There are so numerous unqualified people on the internet and on YouTube that claim to be experts. There are also so numerous Financial Advisors who are dissuaded from giving advice on a client’s assets held away from the Financial Advisor.

My career was in the home office of two very large Financial Services firms. My roles were generally around designing or approving which investment products and tools Financial Advisors had access to. I was secretary of the Investment Policy Committee.

I even managed an Investment Risk team for several years. I also spent several years helping build Managed Account Programs.

Bottom line: I understand how Financial Advisors are dissuaded from giving advice on 401ks.

This post is my chance to provide unbiased advice as someone who knows the shortcomings of much of the biased, unqualified, and/or inexperienced advice on 401ks and personal finance.

I am giving general advice and opinions here. I’m also sharing my personal experience. Your situation is unique to you. Make decisions accordingly.

Table of Contents

• What Does It Mean To Max Out A 401k?
• Why Max Out your 401k Retirement Plan?
• Why Shouldn’t I Max Out My 401k?
• Max Out Your 401k As Early As You Possibly Can
• Should You Max Out Your 401k, Or Just Up To The Employer’s Match
• Should I Max Out 401k Or Pay Off High-Interest Debt?
• If I Am Married, Should Both Of Us Max Out Your 401ks?
• Should I Max Out My 401k Or Pay Off the Mortgage?
• But Not Everyone Has 401ks
• I Have Maxed Out My 401k. Now What?
• Maxing Out A 410k And Retiring Early
• My Approach To Retiring Early: 2 Phases
• Wait, I Don’t Have Enough To Max Out My 401k And Also Save For Early Retirement
• Bottom Line On Whether You Should Max Out Your 401k

What Does It Mean To Max Out A 401k?

Before jumping into why you should max out your 401k, let’s step back. If you are under 50, you can contribute up to $20,500 to your 401k. This does not include employer contributions. It is also the 2022 IRS contribution limit.

Why Max Out your 401k Retirement Plan?

401k plans lower your taxable income by contribution amount and defer taxes on capital gains. Both are wonderful tax advantages to help you save for retirement.

401ks are explained in excellent detail elsewhere. Since there is nearly $7 Trillion(!) in 401ks, it is no wonder that there is no shortage of information and opinions on 401ks. The days of pension plans have all but passed us by.

The primary reason to contribute the maximum is that the more you invest, the more you will likely have later. To retire, you need more later. 401k’s are tax-deferred vehicles. They are not tax-free. Instead, they are tax-deferred retirement savings accounts.

So you can invest an additional amount each paycheck that would otherwise go to taxes and then pay taxes later.

If you max out and contribute $20,500 a year and your tax bracket is 22%, then you are investing $4,510 more that year than you otherwise would have paid in taxes.

Would you say no if your boss offered you a $4k raise? Of course not, so don’t say no to saving that amount in taxes. Compound that over the years, and you have a large nest egg.

We’ve turned our best tips into quick-read books, and we’re publishing new ones every week. See the full collection here: amazon.com/author/chachingqueen.

Why Shouldn’t I Max Out My 401k?

There is no shortage of debates on whether or not to max out your employee contributions. Instead, I will lay out what allowed me to retire at 42, and you can decide what will work for you.

Unfortunately, numerous Financial advisors will not actively recommend maxing out your 401k. They will try to steer you to contribute to IRAs. IRAs get them paid. 401ks don’t.

It is my opinion, from being in the meetings deciding these things, that financial advisors are generally dissuaded from giving investment advice on 401k plans. In several different roles, I was a part of the work streams making decisions about whether or not firms should allow Financial Advisors to offer 401k advice.

This is something that really bothered me in my career. The large firms were reluctant to advise on accounts they were not custodians over.

In other words, Financial Advisors tend to only give advice on your brokerage account. This is a flaw in the system. Instead, they recommend a Roth IRA or traditional IRA instead of coaching you to max out your 401k. So why shouldn’t you max out your 401k? Because you are listening to advice that is in your best interest.

It’s not entirely the Brokerage Firms’ fault. It’s also a function of regulators making it challenging for firms to give advice on assets held elsewhere, but that’s a different story.

Numerous people will tell you a different number in your emergency savings account. But there are instances where it makes sense not to max out your 401k. More specifically: If you do not have an emergency fund, don’t max out your 401k.

You know your number, people that do not know your situation don’t. It isn’t based on time. e.g., “6 months” is arbitrary. It is based on how sure your income and expenses are.

No one on YouTube can tell you the likelihood that you will have a job loss or an unexpected expense. The amount of my emergency fund has always varied with my spending

Final Thoughts

Before you check out, double-check should max out 401k against current offers and any coupons you can stack. Small habits like this add up to real savings over a year.

Originally published at chachingqueen.com.