Should I max my 401k?

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?

Historic Contributions:

2014: 1% 

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

Positives

  • 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.”

Negatives

  • 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)

Other Options

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.

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22 comments

  1. Do I max out my 401k? Hell yeah I do and I think you should too!

    Can you travel hack your way to Japan? I don’t know the details, but people like Brad from Richmond Savers can usually tell you how to get anywhere for free.

    Saving for a home is a fine and worthy goal. I’m not sure how much you’re trying to save, but loan requirements are easing up thanks to companies like SoFi who are changing the game.

    If I had more detail, I may be able to help you more. I do love saving though, especially when it reduces your tax burden. Saving comes before everything for us. Personal finance is personal though, so my solution isn’t for everyone.

    1. You make an excellent point about travel hacking. I’m in the middle of Brad’s TravelMiles Course. Right now I’m preparing to pay for all of it and hoping to pay for none of it. I’ll land someone in the middle.

      My goal for the House Fund is to save as much as I can before my next lease is up (Roughly Dec 2016). My crazy goal was $100k, but more realistically I’m looking for $40-60k.

  2. Could you fund a Roth IRA? That could be a great happy medium. You can pull from a Roth IRA for a first time home purchase/any contributions (not earnings) without penalty. Doesn’t let you say you’ve maxed your 401k, but it does give you flexibility and the crucial early savings.

    1. Hi Sarah, I forgot to mention where this goal fits into the big picture. I already max my Roth IRA. Right now, I double max (Roth and HSA). I’m looking for the triple max!
      I’m also planning to make it through the house buying process without tapping any of my retirement accounts. I don’t want to lose any of that space!

  3. Can you bump it up 6% for November/December see how it feels and then re-evaluate? Each time that I’ve changed contributions, I gave my self a “cooling off” period before I reversed course. I only brought my contributions down one time, and that was after I got a raise after Kenny was born, we initially banked the whole raise (in the 401k), but later determined that $100 extra a month felt like a lot of breathing room which we needed, and backed off just a bit.

    1. Excellent point Hannah! The plan was to increase my contribution when the annual raises/ COL adjustments hit, but what am I waiting for?? I bumped it up 3% today. I’ll see how that feels and then maybe give it another bump.
      Here I was so focused on 401k space going forward that I didn’t stop to think about the 401k space I’d already resigned to lose. Doh!

  4. Oh, what I would give for a 401K. I’m a PhD student living off of a stipend (but hopefully only for two more months because I am about to defend!). I am very sorry to report that PhD stipends have no type of retirement savings mechanism attached to them whatsoever. It’s only recently that I’ve started becoming aware of money and finances, and the realization that I’ve basically missed out on 5 years of retirement savings is hitting me rather hard these days. So for what it’s worth, I personally would choose to max out any type of retirement account, no questions asked.
    PS: No one I know in real life wants to talk about this either. So thank you for posting about it!! 🙂

    1. 1st of all: Good luck defending!! Then you can be done with school and get a 401k or a 403b and rejoice!
      2nd: Don’t worry too much about the lost space if you couldnt do anything with it. My question is more of a balancing between saving for a house and saving for retirement. I’m saving, but where makes the most sense?
      3rd: I love talking about this stuff 🙂 I hope I can max it this year. I’ll try my best! 🙂

  5. My vote is max it. You’ll never get that year back, as you said, and depending what tax bracket you’re in, that gives you an automatic savings of some large percentage. As others have said, I bet you can travel hack your way to Japan, and with you guys continually optimizing your budget (even your entertainment costs are low!), I bet you’ll find other ways to save for the house. It seems worth messing up the live-off-one-paycheck scheme to be able to max out. Definitely bank those bonus/extra paychecks, too. And of course with your sweet raise you’re gonna get, you’ll be able to max it AND save faster for your house. 🙂

    1. I am working on travel hacking Japan. If I can get that covered, it will make a big difference in the cash we need to save.

      If we didn’t have the house to save for, this would be such an easy choice. Maybe I need to just use the band-aid approach: Max it and suffer the consequences. Old me will thank me.

  6. I’m in the same boat. I currently contribute 22% to my 401K and in order to max out, I’d have to up it about 28%. I’m gonna do that in Jan. It is gonna be tougher, but I made a budget/financial forecast (shout out to Gen Y Fin Guy for the idea) for 2016 and determined my biggest expense is gonna be our house remodel. My wife and I have some taxable savings we automatically do every month, we are just gonna have reduce those a bit to compensate for the lower paycheck. Once the remodel is finished (or if we get a big raise) we can re-up those.

    I currently have my 401K contributions split 50% roth and 50% normal (something I just did recently). I don’t know if this is the best course though. When I up my contribution in Jan, the additional is all gonna be pre-tax contributions. I don’t know if this is a good idea or not. Any advise?

    1. Sounds like you are in a good boat. I like the idea of increasing your 401k and lowering your taxable contributions. That should make a difference.

      No advice on the 401k split. I’m still on the fence between Roth and regular. I like the certainty of a Roth- the taxes are paid. But I also like lowering taxes today and pulling the plug early and converting the 401k to a Roth IRA in bits to effectively pay no taxes. All stuff to think about.

      Thanks for stopping by!

  7. I haven’t figured out how to balance (the idea of) maxing my 401k vs cash savings that goes to annual /semi annual payments (car insurance, a family trip every other year). I know I will get there eventually! I need to find the right side hustle to fun the fun. 🙂

    1. The only thing that will help me create a saving balance is more money! Enough to max out everything to overflow into the other funds. Until then, balance is a constant evaluation. I’ve found it best to pick a strategy, set it and forget it. Otherwise, it might just drive you crazy!

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