My 401k is lagging behind. AND I don’t contribute the max to it each year — even though I’m over 50 and could make catch-up contributions. What’s more, I could probably afford to max it out. But I don’t. By choice. And I’m even behind in my 401k savings.
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Huh? Am I just stupid?
Welllll, possible stupidity aside, there are valid reasons why I, and perhaps you, might lag behind in your 401k savings.
You hear a lot today about the 401k Millionaire. Those who have dutifully maxed out their 401k’s over the years (if they could afford it) and invested them wisely can hope to reach 401k Millionaire status before too long (stock market corrections notwithstanding). But that’s difficult for many. Some can only afford to put a small percentage of their income into their retirement accounts, if any at all.
For me, it took some time before I could manage to put higher percentages into my retirement as my income grew. Not only that, but I regulate spending better than I did in days past. And, I didn’t have a rational plan for investing until several years ago, when I, like many others, ran across the Bogleheads website. So I was basically MIA, so to speak, for longer than I should have been.
That’s when I began to realize I need to get my spending and savings priorities in order. Fortunately, I’ve made fairly decent progress in that arena, but it didn’t happen overnight.
Shortly thereafter, I inherited a small amount of money — but sizable enough that I could apply my new-found wisdom and put it to responsible use. Certainly better than spending it all or letting it idly sit in a checking account. It was the first time I maxed out my retirement accounts, which I did for 2 years. To make that happen, I increased my (then) 403b withholding and used the inheritance money as replacement income.
So I maxed out my 403b, as well as our Roth IRAs, for those 2 years. I also inherited a small Traditional IRA sitting in a fee-sucking national bank which I immediately transferred to Vanguard. It has steadily grown in a low-cost balanced fund while paying out the yearly RMD’s (Required Minimum Distributions). [Update: It has taken an obvious hit in the current market turmoil.]
Fast forward to today, and changes in my job situation have placed me in a different financial environment. When I first started with my current employer, I had 2 retirement options:
- Open a 401k with a generous match
- Contribute to a pension plan along with a supplemental non-matching 401k
I selected the pension option with the supplemental 401k. My reasoning was that the pension might offer a broader range of income in future years, provided I make it through the vesting period and the pension itself remains viable. And, if not, the money would be returned with respectable interest (better than a 5-year CD).
Regardless of whether I had gone with the 401k matching or the pension, there was a required percentage contribution. So, that means the first x% of my retirement contribution goes directly toward the pension, and whatever is left over is available for the supplemental 401k.
So if you are contributing to a pension, you, like me, might not max out your 401k, IRA (or similar) supplemental plan.
Thankfully, I could still max out the 401k on top of the pension. And still I do not. By choice. It would be tight, but I could likely do it. Why do I not?
Roth IRA Contributions
One of the reasons is that I’m still maxing out my personal Roth IRA, which I’ve continued to do ever since I did so with the inheritance. I’m more comfortable at this time continuing to contribute a portion of my income after-tax to my Roth. And I am making the extra $1,000 catch-up contributions as well. But it’s tight. I can no longer max out both of our Roths (we live on one income). But I’ve so far kept up with mine. (Before you feel too sorry for my spouse, she has her own accounts from a previous life which are still ahead of mine even without additional contributions. Compounding!!)
So if you are making contributions to a Roth IRA, especially if you’re maxing it out, you might not be able to put as much into your 401k.
FSA / HSA Contributions
Since we tend to have healthcare-related needs throughout the year (surgeries, braces, glasses/contacts, dental work, etc.), we contribute some of our pre-tax income to an FSA (Flexible Spending Account). In the past, we have contributed to a HSA (Health Savings Account), but we no longer have that option. So we are making use of the FSA now. But with an HSA, you essentially have a health care-centric retirement account with some superior benefits over a 401k or IRA. If you have one (or in some cases, both) options and are taking advantage of them, it may hinder your ability to contribute as much to your 401k.
Taxable Investment Contributions For Specific Purposes
In the meantime, we also maintain a benevolence fund that I contribute to. But this fund is not tax-sheltered. Some consider this to be less than efficient, and, ultimately, it is less efficient. But that money is available for specific purposes without the restrictions of a retirement account. So if you have funds which are earmarked for a particular cause or some other objective, it might limit how much you contribute to your 401k.
Because of these other 4 accounts — the pension, the Roth IRA, the FSA and the benevolence fund, I am “unable” to max out my 401k. As such, we skew the statistics that focus on 401k balances to determine the financial readiness of Americans for retirement. But it’s by choice. Of course, if I had oodles of income more, then I would be “able” to max that out, too. So this puts me outside the camp of those who max out all of their retirement accounts before they start working on their taxable investments or other accounts.
So, we / you never become a 401k millionaire. But what really matters is that you save your money as responsibly as possible if you are able. Meaning, if you’re not saddled with critical expenses such as medical or unexpected home repair bills. But don’t be overly obsessed with maxing out your 401k if you have other reasonable options that you’re taking advantage of. Just make sure you don’t neglect the options you have. Obviously, if you’re struggling to make ends meet or paying off debt, that’s a valid reason you aren’t contributing to a 401k or an IRA as well. But that’s different from shirking on your own retirement or load-balancing amongst other alternatives.
What about you? What are your (valid!) reasons for falling behind the curve on your 401k?
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