Why maximize 401K?

**SlurpeeLove** · 09-27-2014, 09:08 AM

I suppose it is up to your personal preference. I probably won't contribute to my company's 401k beyond the match, but it really depends on if my IRA (once I open one) will have a limit. The government limits the amount you can put in a 401k and an IRA account from my understanding. So I think many people want to be able to retire early and enjoy their life (not just scrape by).

I will be contributing as much as I can to retirement so that I can enjoy my life and perhaps even retire early.

JMO

**rennigade** · 09-27-2014, 09:19 AM

A lot of people do it for a tax break.

Also...for people who suck with money..you cant touch it until you're almost 60...and if you do theres some harsh penalties. So for those who spend spend spend it almost forces them to wait until they're older to touch it.

My wife and myself...we would like to have a couple million when we retire. Im only 31 and she's 30...but if we would stop contributing to our 401k and roth right now (both of which we maxed for years)..at 60 years old assuming a 6% return over those 30 years...we'd have over 2 million combined. The power of growth over that time makes my mouth water...thats why we contribute. That and we are trying to retire between 50 to 55 years old. So in that 10 years or 5 years without working...when we hit 59 1/2...we wont have to worry about money anymore.

I would say if we were just scraping by that we couldnt travel or buy things/do hobbies we enjoy...we wouldnt be maxing our 401k.

You just need to find a happy balance. Like you said at the very least contribute what your employer matches.

**MonkeyMama** · 09-27-2014, 09:34 AM

For the tax break. Of course, this makes more sense if your income is higher.

Also, aiming high or preparing for the worst.

My personal motto is "Hope for the best and prepare for the worst". But... Am I going to tie up 35% of my income in retirement so I can max out a 401k and our IRAs? Heck no. I have other financial things on my plate. Of course, interestingly, we don't save a whole lot less than that, BUT, we also don't need the tax break. There is an element of wanting to keep more of that money accessible for shorter term financial goals.

But if our income was higher, the 401k tax shelter would be a no brainer.

**UDRogue** · 09-29-2014, 11:28 PM

Originally posted by loss4words View Post

Doing a calculation using online 401K calculators it tells me that if I can contribute 5% and my company matches 5%, my annual retirement income is more than my current annual income.

Does the calculator account for inflation? Inflation used to mean prices went up, now it sometimes means value goes down, but either way your dollar does not buy what it used to buy. Your retirement income might be more than you make now but the value of that amount when you retire might actually end up being only half what it is now.

**Petunia 100** · 09-30-2014, 06:29 AM

Originally posted by loss4words View Post

I guess this is a silly question and you guys will laugh but I'm trying to understand why one would want to contribute above companies match to 401K.

Doing a calculation using online 401K calculators it tells me that if I can contribute 5% and my company matches 5%, my annual retirement income is more than my current annual income. Granted, I will not be able to afford a nice retirement home and my quality of life won't increase when I retire but I'll manage to get by. Meanwhile in regular life since I'm not contributing as much and have some money left I can use that money to buy myself nice things or not worry about my budget as much.

What is the reasoning on putting as much as you can to a 401k limit?

Which calculators did you use? Online calculators vary greatly, using different assumptions, and give different results. What assumptions were used about inflation, rate of return, and withdrawal rate?

I don't know anything about your situation of course, but I am skeptical that only 10% per year sets one up for increasing their income in retirement. Generally, you can expect a 15 - 20% savings rate, along with SS benefits, to replace about 80% of your pre-retirement income.

Some prefer to save much more aggressively, because you cannot know for certain that you will experience no income interruptions along the way. Being downsized, or health problems, or a few years of unemployment, can greatly impact the size of your nest egg.

**autoxer** · 09-30-2014, 07:13 AM

Originally posted by loss4words View Post

What is the reasoning on putting as much as you can to a 401k limit?

Sure you can save 10% and work for 45 years, but there are other options. You don't have to conform to what society dictates to be a traditional retirement age of 65. I would rather drastically increase my savings rate and get out of the rat race much earlier. The way I see it, saving money is like buying my freedom. Once I have reached financial independence, I can choose how to spend my time.

**corn18** · 09-30-2014, 09:19 AM

I max out my 401k for the tax break. I get an immediate return of over 45%.

**dczech09** · 10-01-2014, 03:38 PM

Contributing up to the match has an obvious benefit with the fact that there is a built in return. If you invest 5% of your income and your employer matches that 5% dollar-for-dollar, that is like getting a 100% return on investment... up front!

Why would someone want to contribute up to the maximum, beyond the company match? That is the similar to asking why someone would contribute to a 401k that did not have a company match at all.

The tax break is the first thing. Especially for higher-income people, the tax deduction is pretty sweet!

Probably the key benefit the to 401k is the fact that you are investing with the government's money. Think about it. With standard investments, any returns would be taxable as you earn them. If you investments are under a 401k, taxes will not be applied until a day down the road. So instead of paying the money in, you keep it, grow money with it, and pay taxes later... POSSIBLY at a lower rate (although I would not bet on that). Keeping that extra money for a bit longer and using it to make more money is an awesome benefit! And this itself is the main reason why someone would want to max out their 401k. Even if the employer does not match, the government is matching in a real way.

**krantcents** · 10-01-2014, 04:36 PM

I contribute the max to a 403b without any match! The whole point is deferred taxes on my retirement savings. I still contribute to an IRA for my wife,Roth IRA for myself and a brokerage account. I will have taxable, capital gains and no tax savings for retirement. It is just one of the ways to diversify my income for retirement.

**ua_guy** · 10-02-2014, 08:14 AM

Everyone's vision of retirement is different. The vision is what starts it all- what does retirement look like, how long could it last, what do you want to do? Crafting a vision is the most important piece if you're just starting to get your feet wet while investing.

You're right--there's a balance of enjoying your income while youth and beauty are still on your side, versus sacrificing every last penny during your youth in hopes of enjoying a grand, "golden age" retirement. It comes down to your risk tolerance and your goals. Chances are good, but not guaranteed, that any of us younger folks will live until retirement.

My two precautionary statements are to be wary of retirement calculators, and anyone who comes to you to sell you advice about retirement. Banks want your money, and financial planners want a cut of that money. Retirement calculators can't answer questions about your vision, and some of the assumptions therein are...ridiculous.

That was long, but the short answer to your question is people contribute more to their 401k based on their vision of retirement. A 401k is a powerful investment vehicle...it's just one way to support the income that you might eventually need or want.

**~bs** · 10-20-2014, 07:04 AM

10%/year savings is likely not going to be enough. And even if there is a decent chance of it being enough, you're better off with saving more because of uncertainties. Regarding the online calculators, do they factor in inflation? Are you assuming a high rate of return from now until you retire? Are they taking into consideration any large market drops nearing your retirement? Escalating medical costs? Are you accounting for tax on 401k?

I'd work towards living more comfortably, but also trying to save more at the same time. Go for a more moderate approach, it doesn't have to be extreme.

**YLTL_Dan** · 10-24-2014, 02:36 PM

I'm fortunate enough to be able to max out my 401k, and I've contributed above the match since I had my first job. Here's my reasoning - the earlier you can start investing, the more you enjoy the benefits of time on your investment growth. You can always lower your contributions once you feel like you'll easily hit your goals, but you can't always increase your contributions if you're ten years from retirement (and can't afford to). Also, you're assuming you'll always be able to contribute, but what happens if you have an unforeseen event and you can't contribute as much anymore?

**Zedon** · 10-25-2014, 05:22 AM

This is something I wonder. Do I max my employer retirement accounts or leave it out. I'm leaning towards maxing it out just due to the current tax benefit, but most likely when I retire and it's taxed it will be taxed the same or higher since I expect my income to be higher in retirement.

**autoxer** · 10-25-2014, 06:05 AM

Originally posted by Zedon View Post

This is something I wonder. Do I max my employer retirement accounts or leave it out. I'm leaning towards maxing it out just due to the current tax benefit, but most likely when I retire and it's taxed it will be taxed the same or higher since I expect my income to be higher in retirement.

What do you mean by leave it out? If the alternative is a taxable brokerage account, then the 401k is probably a better bet. Even if you go up one tax bracket, the years of compounding before being taxed could give you a larger nest egg. You can run some projections in excel to figure it out. What is your current tax bracket?

Why do you think your retirement income will be greater than your current income?

Why maximize 401K?