When it comes to retirement plans, there are some very common vehicles to fund your post-career goals. IRAs, savings accounts, and 401(k) plans are things most everyone knows about. As with most accounts, barring savings, there are limits and caps to how much you can contribute to a 401(k).
To be in the best position for retirement, you should max out your 401(k) contributions, right? It might not be that simple. Obviously, there are advantages to maxing your 401(k) contributions that can’t be overlooked, but there may be drawbacks as well.
Higher Contributions = More For Retirement
This one is easy: obviously, the more you put into a 401(k), the more you’ll have to spend later. If you have excess income after paying your bills and taking care of other debts, it makes sense to put that towards retirement.
Many employers who offer 401(k) plans will match employee contributions up to a certain amount. If you’re able to contribute at least to the match amount, that’s almost always a good idea. If you contribute less, you’re effectively leaving money on the table.
Prepare for Emergencies
The idea for retirement accounts is always that they’ll get us to the actual retirement, but what happens if you’re no longer able to make contributions? What if you’re laid off, disabled or otherwise out of a job? Especially during times of economic uncertainty, you’ll be happy you contributed a little extra to your retirement account in the event you find yourself unable to continue doing so.
Peace of Mind
Don’t underestimate the positive effects of peace of mind. Knowing that you’re building up your retirement can be beneficial to your stress level and can help you stop worrying about your financial future.
Though there are very good reasons to max out your 401(k) contributions, you might not want to do it all the time.
Your Employer’s 401(k) is Underwhelming
Your employer’s match program may not be very impressive. When it comes to having to contribute a large majority of the funds in your 401(k) yourself, it can be a hassle to max your contributions.
Given the Circumstances…
You may have external circumstances that prevent you from contributing the full amount. You may have just bought a new house or car, or you may have high-interest debt of another kind. Those expenses can eat into the excess income that could normally go toward 401(k) contributions.
As always, each situation is different and unique. You may be more suited to one 401(k) strategy than another of your peers—and if you can’t max your contributions at all times, that’s okay. There’s no rule stating you have to. Do what you’re comfortable with. The best way to figure it all out is to talk to a financial professional and get them involved with your goals.