Financial Mistake #8 – Not Maxing out my 401K Early Enough
I’ve seen some posts recently, that are saying it might not be the best practice to max out your 401K. One of them was referencing that they wanted to buy a house and didn’t have enough money in accessible accounts for the down payment and wished they hadn’t saved so much in their 401K.
OK.
I don’t know about you, but I just don’t buy this logic.
And this is not a numbers post. I’m not dissecting all the technical advantages of a 401K as if searching for the cure for COVID, I’m merely metaphorically throwing some shit on the wall and seeing if it sticks.
I just have a lot more fun doing it this way.
Sure, there exist situations when it may be unwise to max out your 401K. I acknowledge that. If you don’t have the means, obviously don’t do it. Or if you’re addicted to saving and it’s negatively affecting your life, or you need that money for a serious lifestyle decision, maybe it shouldn’t be going into that account.
I’ll meet you a little below halfway for these. Aren’t I such a nice guy and charming fellow to be so fucking accommodating?
And let’s just clarify as well, I’m writing from the perspective that I’m assuming you have the means to max out your 401K. Yes, this is a privileged position that is not accessible to everyone. How hard it is to climb the golden ladder and find yourself diddling on this lofty perch while gazing at the stars with phantom simulacrums of vanity and achievement fanning you from either side with palm fronds stitched out of pathos and pomp, is up for you to reconcile with yourself and own worldview.
We neither have the time nor space to debate such a diabolical plot.
Now that being said, and all these fun little shenanigans and inconsistencies pushed out of the way like another insignificant face in the crowd, my gut tells me that I think it is the rare situation in which you will regret the tax benefits, saving and compounding advantages of maxing out your 401K.
Maybe not having access to that money until later is actually a good thing (I’m not talking to you, FIRE aficionados, whispering in the shadows about Roth IRA backdoor conversion ladders, only normies).
Of course again, it’s your decision here. But I have a feeling, and flippant and fleeing as it may be, I doubt your older self will ever be kicking your younger self for saving too much in a 401K for their benefit.
But man, did I fucking digress on this one. This is financial mistakes post and I’ve just lollygagged my way through the first third of it. I’m losing my Midas touch here.
So, let’s get back on track, and here was my own personal situation…
I believe I maxed out my own and wife’s 401K for the first time in my mid-thirties. And yes, by FIRE standards this is insanely late to the party. If I were Cinderella, I would have already lost that glass slipper for good and allowed prince charming to shag the next best looking broad at the gala!
Even more embarrassing, is that it wasn’t due to any lack of means. It really had never crossed my mind prior to getting on the FI bandwagon at around age 35 that this was something I could, or even should, be doing. Looking back, I probably could have started maxing out my 401K in my late twenties with the current lifestyle I had been living.
Now, I’ve always been a good saver and investor, so luckily, I had accumulated a decent amount of assets, but I still never had that kick in the pants to push me toward maximizing what I could really be doing to take back my time.
And up until this point, I had simply contributed about 20% to my 401K ever since my early twenties, thinking this was the right amount that most financial advisors recommended. Well actually, they recommended 10%-15%, so at 20%, I felt like an over achiever. Hahaha.
But I didn’t know any better. There was no motivation to do more. Why put in greater than 20%? What was the actual goal?
I also knew there were tax benefits, but I was content with the amount I was saving. Why max out a 401K when I’m on track to retire sometime probably in my late fifties. Plus, no one around me talked about this stuff or had ever mentioned anything to the contrary.
So, was not maxing out my 401K early enough a terrible mistake?
No, not really. But it was still a mistake, nonetheless.
Has my life path been altered forever? Insurmountable and herculean obstacles thrown in my way like an ant being crushed under a child’s finger?
No, I’m doing just fine.
However, in a hypothetical sense, sure, it can sting a little. But hindsight is 20/20 and I was trying to stare through a crystal ball that had been constructed out of black stone. It’s easy to speculate that I probably would have more money and saved some tax dollars if I had maxed out my 401K earlier, but who knows how life would have played out.
And of course, the real question gets asked, where would I be if I had been maxing out my 401K say since my late twenties?
What the fuck would that crazy compounded number be?
Honestly, I don’t care and don’t want to know. Because it is irrelevant.
And the easy answer, is definitely farther ahead than I am now, and maybe I’d even be hanging up my corporate boots next year at 40. But so goes life. So goes the world, spinning like a basketball on the tip of your finger. Those decisions have come and gone, and we move on to the next just as each day guarantees a new tomorrow.
Whether we’re around to take part in it or not, is a quibble for another day.
-Q-FI
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Aight, mi compadres. We’re getting near the end of the year, so how have you been doing with maxing out your 401K (or insert the equivalent based on sector and country)? At what age did you start maxing it out? Any 401K millionaires out there that will admit it (I am not a part of this club)? I know Steveark will! Ha.
I don’t think I’ll be posting again until after Christmas. So here’s to wishing everyone a safe and festive holiday season! I appreciate everyone who reads and comments. Interacting with all of you has definitely saved my sanity at times as well as made a challenging 2020 so much brighter for me!
Here’s a secret. My total 401K value is less than $20K after working nearly 25 years. Why? I was mostly HCE and every company I ever worked for failed the annual test and had a contribution cap. It was $6K at my last employer and also they had no match either. They all had miserable investment options as well. So I just invested on my own in my taxable accounts knowing that I’d want access to the $ in my 40s when I retired. Also, most had great exec. deferred comp plans to offset this which I did participate in.
If I was to do the math on how I came out, doing it myself easily eclipsed the 401K Route. However, my situation was very anomalous and would definitely recommend most everyone to contribute to their 401K. If it’s a good plan, with a good match and decent investment options, it a mistake not to go that route if you’re looking at a regular retirement timeline.
Hahaha. Well, you’re just like me Mr. Fate! We’re both not 401K millionaires!
But, I find your HCE comment fascinating. I didn’t know about this HCE test and had to look it up – love it when I learn something new from a comment. If you ever wanted to write a post about it, I would be highly interested in learning more about your story. That cap is brutal at $6K.
You make a good point, that I’m not sure how I glossed over – I guess I’m just getting lazy in my assumptions. Maxing out a 401K makes more sense if you have good options in the plan and a decent match. Tax benefits alone might not be enough. I got pretty lax there.
And it makes perfect sense what you did based on your situation. It always amazes me the broad assumptions I make and then hearing how unique and different every person’s situation is. I always know this in the back of my mind, but it’s good to get the constant reminders.
Yea I’m guilty of making the same mistake. I cringe to imagine what I could have had if I’d had the sense to max out…but as you say, no point in looking back. I’ve only contributed 10%-20% to my 401k till just this year where I’ve decided to max it out.
I got lucky in a way though, that part of my union hourly package saves for me on top of my 40k contributions–whether I want to or not. $10 an hour goes to my pension and $2.25 an hour goes to a tax haven IRA-like account called an “annuity”–not an annuity in the traditional sense, that’s just what they call it. I can roll the annuity over to an IRA when I’m out of the union and control where it’s invested in the interim, I use fidelity’s S&P fund.
My union 401K doesn’t match and the fees are high through shitty John Hancock, so the best benefit for me is reduced taxable income. This is why I’ve been reluctant to max it out. Like Mr. Fate, my taxable account has been my weapon of choice over the years.
This is another really interesting take Noel. It just goes to show how little I know except for the big corporate company 401K plans that have good options. I’ve never been on the union side so it’s cool to see how it works. Thanks for sharing bud!
It’s funny, I thought this would just be kind of a plain vanilla post on 401Ks, but I’ve already learned a lot from both you and Mr. Fate’s comments.
I didn’t max my 401k contributions until I discovered this community, but I’ve always prioritized maxing my Roth contributions because they’re tax-free withdrawals. It wasn’t until I cut my spending that I could afford to max my 401k, otherwise I could have maxed it a few years earlier, but I definitely could not have afforded to max it before 36. I just didn’t earn enough. As for choosing to prioritize my home purchase over my 401k, yeah, I did that too and don’t regret it. Fortunately most of my down payment came from investments I started as a teenager with my babysitting and waitressing money. If it weren’t for that money, I couldn’t have afforded my home and retirement savings.
Anyway, no use crying over a past we can’t control, right? We’re still ahead of the game! Happy holidays, merry Christmas to you and Mrs QFI!
I think you were right in prioritizing the home purchase, and should. Figuring that out is way more important than maxing out a 401K.
The posts I was seeing, were a little bizarre and more about people who maxed out their 401K and then seemed to decide without any planning that they needed a down payment to buy a home. So their advice was to not max out a 401K. I’m not sure if they didn’t know there were penalties for early withdrawal, or they just suck at planning. I was operating under the assumption that if you know you want to buy a home, you would plan for it, and like you Katie, not max out a 401K because you knew you’d need that cash for another and better investment. But maybe that’s me being naïve and making too many assumptions again.
Merry Christmas as well and thank you for all of the great comments and feedback this year! I’m glad we found each others blogs. I don’t think there’s enough strong female opinions in FIRE, so I always appreciate your take on things.
hell, man, i made every money mistake under the sun until i met mrs. smidlap and had a good reason to straighten it all out. i even cashed out 2-3 small 401k accounts with the 10% penalties. i just chose not to know anything and bury my head in the sand until around age 35.
then opportunity struck with this large company i’ve worked for since ’05. we had 2 incomes and a very inexpensive house and made hay really fast with emphasis on making sure our roths were fully funded. neither of us ever maxed our 401k’s even once. i used overtime money to pay off large lingering student loans and our mortgage and have been 100% free of all debt for years now. mrs. me is semi-retired at a part time job and i’m only putting in 13% i think but i love having all that roth money for when we need it. our incomes were solidly middle class but never huge. one thing about being behind schedule is that it prompted me to become a better investor and i really multiplied her old 401 once we rolled it to a traditional IRA. you’re absolutely right about having a huge money pile now if we took those steps sooner but it sure has been a fun ride in life. i wouldn’t swap it.
i hope you’re enjoying your holidays with lots of sports on your down time.
Hahaha… I love it. You prove the point Freddy that it’s never too late to learn and get back on track. Plus, pretty remarkable how quickly you righted that ship and I agree that there is no need to max out your 401K, if it doesn’t fit your plan. Plenty of other options and strategies to utilize.
This should be a much needed slow week for me at work, so I am looking forward to being lazy and soaking up some sports. Lots of leagues starting back up and plenty of college and NFL games to indulge in.
Happy Holidays Freddy to you and Mrs. Smidlap!