I’ve been playing around with the idea of maxing my 401k for the last few months. I can’t talk to anyone in my real life about this because they don’t care about this kind of stuff. So I am asking for your input. Should I max my 401k in 2016?
This was the year of the debt slayer. I was auto-enrolled in the 401k at 2%. I lowered the percentage to 1% to minimize my contribution without unenrolling from the program. I wasn’t eligible for a 401k match the first year.
2015: 11% + 4% match (a round 15%)
I got antsy this year and bumped up my percentage before my debt was paid off. It has been at 11% for most of the year.
2016 and beyond:
The plan was to increase my 401k contribution by 6% every year until I’m maxed out. I’m wavering on this plan.
It comes with positives and negatives
- Tax Savings
The tax savings of maxing a 401k are a no brainer. Defer taxes now, pay taxes later when I’m hopefully in a lower tax bracket. The more taxes I can defer the better.
- Use the Space!
401k contribution space is use it or lose it. Every year that I don’t max my 401k, I’m losing out on the ability to funnel money into it. I can’t get this space back!
- Early Saving, Big Compound Interest, All the Money in the world!
I’ll be 29 for most of 2016. I’m running out of time to be considered an early saver. (Thanks law school for dumping me in the job market so late). The earlier I can get my 401k rolling, the easier all of this will be when I’m older. There is also something pretty about being able to say “I maxed out my 401k before I was 30.”
- Lower Paychecks
I’m no where near the max in my 401k today. If I max it, my paychecks are going to drop significantly. Due to the tax savings, my check won’t drop the entire amount of increased contribution, but its still going to be dropping a lot.
This matters most because Hubs and I recently switched to living off my paychecks. Yes, it’s all one pool of money, but it divides nicely right now. Lowering my paychecks significantly would mess up the plan.
- Neglect Other Savings Goals
Lower paychecks means I’ll have less money to divert to other savings goals. The savings goals on deck for 2016 are significant: 1) Continue saving for a house and 2) Save roughly $7500 for my Japan trip. Maxing my 401k would mean that one of these would have to give.
- Finding Balance
Knowing me, I’ll probably try my darndest to do it all and make it work. Between house savings, Japan and a maxed 401k, I may end up living under a rock eating only rice (no money for beans)
Wait 1 more year
Riding my 6% increase for 1 more year would give me ample time to fluff up my house fund and pay for Japan, all while contributing a decent chunk to retirement. In 2017, I expect us to decide whether or not we are buying a house. If yes, then proceed as planned. If no, funnel all the money we can into tax deferred accounts.
More than 6%
Going from 11% to max in one year is no small feat. However, there is nothing stopping me from increasing it more than 6%, but less than max.
Play Games with Bonuses and 3-check Months
In 2016, I expect to receive a bonus of some magnitude. I’ll also have 2 months with 3 paychecks. If I decide my regular budget can’t handle the full max during normal months, I could significantly increase it in time for these 3 checks (1 bonus check and 2 ‘extra’ paychecks). I won’t miss the money if I never have it.
Alternative- December 2015 is a 3 paycheck month. I could count one of these as my first January paycheck and bank an entire January paycheck.
Pray for a Raise
If I get a sweet raise, this will all be a moot point. Fingers crossed for a sweet raise!
Do you max your 401k? Do you have any suggestions for me? Which options would you choose ?
Don’t let this sway you, but I’m leaning toward sticking with the 6% increase and playing around with the percentage in time for the 3 fat paychecks.