Why Maxing Out Your 401K Might Be Foolish
Retirement planning should meet future needs and allow joyful, generous living today
A few weeks after I started my first professional job at age 22, my uncle took me out to lunch. I knew nothing about retirement planning at the time, so he offered me this tip: Put at least 10 percent of your income into a 401K. Start now and you’ll never miss the money. Don’t ever stop.
More than 15 years later, I’m glad I took his advice. Although I cut back a few times during tight financial seasons to the minimum amount required to get employer matches, my wife and I have mostly maintained that 10 percent mark. We contributed regularly to our retirement accounts through a job loss, the birth of two kids and the Great Recession. We haven’t missed a single contribution.
By staying disciplined, we have accumulated $350,000 in retirement savings. That little piece of family advice paid off big time. And my uncle was right: We never noticed the missing money from our paychecks.
Despite our success in this area (apparently we have saved 5x the national average and 83x the median for our age group), we never maxed out our 401Ks. I increased our contributions briefly last year with the intention of maxing out after my wife got a promotion, but then I did the math.
We were on track to save too much for retirement.
Given the warning in the parable of the rich fool against accumulating too much wealth, I decided against maxing out our 401Ks. Instead, I calculated what we will really need in retirement and set a financial finish line that guides our contributions.
Unconventional Retirement Planning Advice
Common financial wisdom recommends saving as much as possible for retirement, which often includes maxing out 401Ks. But we turn into rich fools when we aimlessly accumulate more wealth without a plan or purpose. We should approach retirement with a specific goal in mind, rather than blindly save with no ceiling.
Using the Personal Capital Retirement Planner, I realized that maxing out 401Ks would likely give us more money than we could spend. If we max out between now and age 65, we’ll retire with more than $3 million in today’s dollars, adjusted for inflation. There’s only a small chance we would run out of money. In fact, we would probably die with 25 percent more than our starting point.
Even if we stopped making contributions today, our retirement funds would grow to just short of $1 million over the next 25 years in an average market. If we only make the minimum contribution to get the employer matches, the number doubles to more than $2 million.
I ran four different retirement scenarios using the Personal Capital Retirement Planner to come up with our retirement financial finish line. Looking at these scenarios, I’m not scared of having too little in retirement. I’m more worried about having more money than we need. So how do I determine a reasonable financial finish line?
| No Additional Contributions |
Minimum Contributions (to get employer matches) |
Current 10% Contributions |
Maximum Contributions |
|
|---|---|---|---|---|
| Current Savings (Age 39) | $350,000 | $350,000 | $350,000 | $350,000 |
| Annual Contribution* | $0 | $23,500 | $35,000 | $46,000 |
| Age 65 Portfolio Value (Median) | $942,456 | $2,003,667 | $2,557,670 | $3,037,201 |
| Retirement Annual Spending** | $75,000 | $75,000 | $75,000 | $75,000 |
| Age 93 Portfolio Value (Median) | $0 | $915,744 | $2,453,322 | $3,837,415 |
| Simulation Success Rate*** | 24% | 60% | 74% | 82% |
* Includes employer match
** In today’s dollars, adjusted for inflation, plus taxes on withdrawals
*** Based on a Monte Carlo analysis of 5,000 simulations
Setting A Retirement Financial Finish Line
In Personal Capital’s Monte Carlo analysis of 5,000 simulations, there’s a 60 percent or greater chance that our retirement portfolio alone will sustain our planned spending of $75,000 a year if we make at least the minimum contributions. And I based these projections only on 401Ks and rollover IRAs. They exclude taxable brokerage accounts, real estate, inheritances, Social Security and other retirement income.
The Personal Capital Retirement Planner shows what will happen if my wife and I save 10 percent of income into our 401Ks until age 50, let the accounts grow until age 65, and then start spending $75,000 a year.
So what’s my retirement plan? I’m sticking with our 10 percent contribution rate and setting a retirement finish line of $1.8 million in today’s dollars.
I chose this number in part to give us flexibility to stop working corporate jobs over the next decade while still saving enough to sustain us in old age. If we keep contributing 10 percent, we will have $1 million by age 50. If we then retire early and stop making contributions, our retirement accounts will grow to $1.8 million by age 65, when we will start making withdrawals. There’s a 54 percent chance that dollar amount will sustain our planned spending through retirement, with our savings dwindling to around $400,000 by age 93.
If the projections ever get too far ahead of that $1.8 million finish line, we will cut back on contributions to maintain the same target.
Five Reasons Not to Max Out 401Ks
Many people don’t feel secure unless the simulation success rate hits 100 percent, leaving zero chance of failure. But that approach to retirement planning stems from a scarcity mindset rooted in fear about the future. I want to operate from an abundance mindset that assumes there will always be more resources available, not fewer. I have to leave some room for faith and dependency on God’s provision.
Here are five reasons I think it’s foolish to max out our 401Ks:
It leaves less room for generosity
Jesus condemned the rich fool for accumulating retirement wealth at the expense of generosity. As a Christian, I believe God has entrusted me with excess riches so I can meet the needs around me, not stockpile possessions for a future that isn’t guaranteed. Giving should increase as income rises, and unlimited saving creates a hoarding mentality that stifles generosity. Every budget should make expanding room for charitable giving. And because the world’s needs are so pressing, I feel obligated to give more now than become generous later during retirement.
It delays joyful living and fulfillment
In addition to living generously now, I want to live joyfully in the moment. That means enjoying God’s blessings and spending money on things that bring fulfillment. I don’t want to gamble an abundant life today for extra (and unnecessary) security tomorrow. If less money gets me through retirement just fine, I’d rather enjoy it now than max out 401Ks.
It limits my lifestyle and career choices
This reason is purely financial. The savings that would have gone to maxing out 401Ks instead goes into taxable brokerage accounts with no distribution rules. Those more accessible non-retirement funds open up more short-term options, including faster debt reduction, early retirement and career flexibility.
It assumes the worst-case scenarios
I understand why people save as much as possible for retirement. They want to mitigate the risk of medical and long-term care costs in old age. While it’s wise to save enough that we don’t become a burden to others — including our families, churches and government — making fear-based retirement decisions leads to hoarding. We must find a reasonable balance.
It cedes control of my own financial future
I can earn additional income in retirement if necessary, so I don’t need every penny in the bank ahead of time. An abundance mindset promises me future opportunities to make money, even after age 65. In addition, I have the power to cut back on expenses. We’re planning for $75,000 in annual spending, but without a mortgage or child-care expenses, we could live on less than $50,000 today. We have more power over our retirement fates than we realize.
Many people don’t feel secure in retirement planning if there's any chance of running out of money. But that approach stems from a scarcity mindset rather than the belief that there will always be more resources available, not fewer.Click To TweetThe Two Extremes: Poor Planning vs. Wealth Hoarding
I’m confident in a nest egg that puts the odds of a sustainable retirement in my favor, especially considering it won’t be my only source of income. When I factor other investments into the projections, I’ll probably have too much money, even without maxing out our 401Ks. That’s why I’ll be tackling an overall net worth finish line next.
Of course, I realize that the decision to max out 401Ks could be the right move for some people. If you’re playing catch-up or have a shorter timeline to retirement, it might make perfect sense. If only one spouse is working, you might have to max out to reach your retirement goal. But saving as much money as possible without calculating your actual needs in retirement puts you at risk of becoming the rich fool.
A retirement financial finish line finds the middle ground between the two extremes: poor planning and wealth hoarding. It offers a healthy approach to retirement that guarantees future needs will be met while still allowing us to live joyfully and generously today.
A retirement financial finish line finds the middle ground between the two extremes: poor planning and wealth hoarding. It guarantees future needs will be met while still allowing us to live joyfully and generously today.Click To Tweet
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My husband and I are just starting out and are trying to figure out how much to put into a 401k. I haven’t seen good long term models for retirement success, and so I know I’m privy to the “save with no purpose” model. And I really thought this piece put things into perspective.
A couple of thoughts, hitting your target early means that you can retire early and have much more time to pursue something more meaningful. Maybe like me you’ll decide to work a long career and only slightly early retire. So I have too much money, that’s not hoarding. Wealth is not inherently evil, it is the value you assign to it that matters. Two, you do not know if you’ll be able to work to 65, life is uncertain and disability is more likely than death. Disability insurance is a poor substitute for a salary so being well above the glide path toward a 65 year retirement date is a smart move that will supplement the insurance you should have to protect your family. I maxed my 401k, my ROTH a post tax conventional IRA and also had a lot of non-retirement investments and still gave 10-15% of my gross income away during my career. And we lived well, frugally sure, but we lacked nothing and had fun as a family and as individuals during that whole time most of it on a single income. I think working to maximize your income make it not a choice between options but the freedom to give generously, live well and save aggressively. Great post, obvious you spent a lot of time thinking this through. I think it hits many of the toughest problems this community deals with!
Thanks for the thoughtful response. You make some really good points here. I agree wealth is not inherently evil, and I didn’t mean to imply that. I also agree that it’s possible to save aggressively, live joyfully AND give generously; they are not mutually exclusive. But I do think that saving crosses the line into hoarding when we save more than we need to cover every possible worst-case scenario, especially when it comes at the expense of increased generosity. I’m feeling challenged to give more now, even if it means taking on more future risk, rather than build a fool-proof security net. The line between saving and hoarding is blurry, and I’m wrestling with it as I write.
Very interesting perspective. Great analysis! I do think this is very situation specific. I think if you have high enough incomes and have access to a Roth 401k, it changes the calculus. We have high incomes, max out our 401k’s, give 10% of gross income (not net), and live joyfully. We can always pull out our Roth contributions whenever. There’s also ways to distribute money stuck in a traditional 401k vehicle if you decide to retire early. You can take out an SEPP at any age. You can also develop a Roth IRA conversion ladder.
I think if you’re able to give generously now and live joyfully now while still maxing out a 401k, you can also leave money for your children or children’s children.
For me, we’re in a very high tax bracket, so if we can save money on taxes now and pay less taxes in the future, that feels like a win. Again, probably unique to our situation. I think you make a strong argument for not maxing out the 401k.
Good point about the options for early withdrawal of retirement funds. I’ve researched Roth IRA conversion ladders, and they seem like a good option. I’m not as familiar with a SEPP and will have to look into that more. I guess I’m thinking about retirement in two phases: early retirement and “real” retirement. I’m treating 401Ks like money that can’t be touched until traditional retirement age, while simultaneously saving in separate investment vehicles for possible early retirement. When I look at it that way, I think I’m saving enough for traditional retirement and don’t need to increase 401K contributions.
There are certainly benefits to maxing out. And if your income is high enough, you can definitely max out while still giving generously and living joyfully. I’ve just decided that if I don’t need to max out to retire comfortably, then I would rather have that money more easily available now for living or giving.
Very cool post, will be interesting to understand the rationale for the target finish line when you get into that. I try to strive for the right balance, but it is more difficult than it sounds. Quantifying it might just make it far easier.
Yes, it can be very difficult to quantify. I was introduced to the concept of finish lines about a year ago, but I’m still figuring out how to calculate them. I’m leaning toward a retirement finish line (the $1.8M) and a pre-retirement finish line (TBD) rather than one overall net worth finish line. I think there’s a maximum amount of money I will need before retirement, and then a maximum amount in retirement. And then I hope to give away everything else. But I’m finding that it’s easier said than done to put it all down on paper. I think the key is breaking it down into more manageable chunks (retirement, pre-retirement, college, etc.).
I’m loving your blog. Not a lot PF blogs out there with a giving mindset. Alas my blog went by the wayside after the birth of our son but I’ve subscribed to yours. We’ve always tithed 10% but I’m challenged to think about increasing that as times go on.
Thanks! I think I’ve found a niche here that seems to be resonating. This topic is still relatively new for me, as I’ve only been actively thinking about it for about a year. It only took one person to turn me onto the concept, so I’m excited to do the same for others. Regarding your blog, it’s tough to find the time to write and promote with young kids (mine are 6 and 4). I intended to post at least once a week, but I’ve fallen into a cadence of about every other week. But I’m comfortable with that, considering this blog helps me think through these ideas as much as it helps others.
Thank you for this thought-provoking perspective. I am one who likes to see the Monte Carlo chance of success to be 100%, but you have listed some good reasons to change my way of thinking. Your blog has inspired me to focus on how I can give more generously now. I needed to read this!
There’s a big part of me that also wants the chance of success to be 100%. But as I have increased my giving, I have become more comfortable with leaving some room for failure. I think it’s because I’ve seen God’s blessing and provision increase as we have pushed the limits on generosity. So it’s strengthening my faith that He will continue to provide in the future. Keep me posted on your progress!