Should I Max Out My 401(k)? How to Plan for Retirement Funding

Written by
Rebecca Smith

Published
Oct 25, 2018

Oct 25, 2018 • by Rebecca Smith

Are you wondering, "Should I max out my 401(k)?"

You want your savings to work as hard as it can for you before you retire. There are some options that will increase the value of your savings more than others, but it can be difficult to know how to approach the idea of saving for retirement.

This is because we have so many options to choose from. Where we should put our money depends on several financial questions that we need to ask about the accounts we're dealing with.

Things like limits, taxes, and interest rates all hold real value because the amount of money in your retirement account will become quite large. At your point of retirement, .05 percent could mean a few thousand dollars.

That's why it's essential to plan well early on and avoid huge complications later. Here are some more tips to help you with your 401(k).

"Should I Max Out My 401(k)?"

In essence, you're asking if you should give the maximum possible contribution to your 401(k) account. This means that you're putting money toward your company-matched account and reaping the benefits of the investment decisions that the company offers.

At first glance, it seems like the obvious choice. Your company matches your contribution, the money is growing, and you're moving toward a comfortable retirement.

You should definitely contribute at least enough each month to warrant a match from your company. The company match is free money. Not only that, but it will compound over time.

The only thing is, you may be subjected to investment fees and limited investment options for your money. Because the interest will compound over time, a slightly higher interest rate in a personal investment could grow higher than your 401(k), even with the company match.

So, there are three things to look out for when you're examining your 401(k): the rate of the company match, the investment fees, and the quality of investment options.

Another Thing to Consider

One great aspect of the 401(k) is that it has higher contribution limits than its counterparts. The maximum yearly contribution you can make to your 401(k) account is $18,500.

While it's unfortunate that there's a limit, that number is higher than the limits for IRAs and other retirement accounts.

What About the Other Options?

The natural counterpart to the 401(k) is the IRA. An IRA is an independent retirement arrangement that requires you to manage your own funds.

This means that you have limitless investment options. Where the 401(k) comes with a package of investment options, the IRA allows you to find opportunities that could be far more lucrative. That said, you also have more responsibility.

If you're not a savvy investor, you can certainly hire a financial adviser to assist you in your retirement decisions.

The unfortunate thing about IRAs is that you can only contribute $5,500 per year to all of your combined accounts. This means that if you have, three IRAs, the sum of all yearly contributions to those accounts cannot exceed $5,500.

So, Should You Max Out?

You should definitely contribute enough to get a company match. Beyond that point, you should only contribute more if your money is better spent on that account.

If the investments from your IRA are more profitable overall than your 401(k) investments, put the remaining money in your IRA. If that's not the case and your contribution is high with great investments, put all your money toward your 401(k) and forget the IRA.

That said, if you have the ability to save $24,000 or more per year, you should be maxing out an IRA and your 401(k). The rest of your funds should be placed in private investments or saved for a rainy day.

If debts are plaguing your ability to save for retirement, read more about how you can take those obstacles out and start planning for your future.

"Where Should I Be, at This Point?"

You should always make the decision that maximizes your retirement savings. It will depend on your company's 401(k) plan, and your ability to make good investments with your IRA funds.

But, sometimes, it's hard to even get that far. Many people don't have savings accounts and have no plan for their retirement. It's estimated that roughly 70 percent of Americans have less than a few hundred dollars in their savings accounts.

We clearly need a wake-up call. You don't want to be one of those people, and it's never too early to start putting that money away.

The end goal is to have 80 percent of your income for every year of your retirement. So, if you made $100,000 per year when you were working, you would want to have $80,000 saved for each year of your retirement.

Don't freak out because of those figures. That would mean $2,400,000 saved for 30 years of retirement. It is possible!

The only way that you can achieve a financially stable retirement, though, is to start saving early. You need to allow your investment to work for you. That's the most surefire way to accrue capital over long periods of time.

It's estimated that if you have a nest-egg that grows 7 percent annually, that money will double every decade. That means if you have $50,000 invested by the time you're 30, that money will grow to around $3.4 million when you're 90.

There are a lot of things in life that can prevent us from getting started, but think how much more comfortable you'll be knowing that you're set for retirement. You'll also find peace knowing that you have a large amount of savings should you ever need it.

Do Your Best to Start Now

Still asking, "Should I max out my 401(k)?" Before you can answer that question you need to find an employer who pays you well and offers 401(k) plans.

Finding a good career can be one of the most difficult decisions in a person's life. If you're on the hunt for a job and need assistance finding your calling, we've got the information you need.