7 Reasons Why You Should and Should Not Max Out Your 401K

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3 min read

Only 3.5% of employees max out their retirement account

When you start your professional career, most employers give you the ability to opt-in to their employer-sponsored retirement plan, usually a 401K.

For most people, it’s a no-brainer. However, as you progress through your career, you are thinking about retirement goals and whether or not you should max out your 401k.

In this article, I’ll discuss reasons why you should and should not max out your 401k and other financial considerations to take into account.

A Brief History Of The 401K

The 401k was created in 1979 by benefits consultant Ted Benna. Benna designed the plan for a client who declined to use it because he feared it would be appealed once the government found out about the potential tax loss.

The first 401k was started in 1981. Fast forward 30 years, and there is approximately $6.9 trillion invested in 401(k)s and is the primary retirement vehicle for most Americans.

Ok. History lesson over. Let’s get to the good stuff.

Why You Should Max Out Your 401K

1. To Take Advantage Of Tax-Deferred Investment Growth

You can contribute up to $19,500 tax-deferred, or $26,000 if you are 50 or older. Many people view this as an advantage as they expect to be in a lower tax bracket when they retire and can enjoy years of tax-free growth.

2. To Recieve An Employer Match

You don’t necessarily need to max out your 401k to get your employer match. Still, you’ll likely need to contribute significantly depending on your employer.

Many employers match between 4% – 6% up to a certain amount, say $10,000. For example, if you made $125,000 and your employer matches up to 6% contribution, up to $10,000. In that case, you would need to contribute $10,000 to receive the full employer match. Otherwise, you’re leaving money on the table.

3. It’s Easy to Employ A Set It & Forget It Strategy

Employer-sponsored retirement plans make it incredibly easy to contribute to a 401K. The contributions are automatic, and your fund sponsor often helps you pick an asset allocation that is right for you. Automatic contributions eliminate the temptation to use the extra funds to go on vacation or clothes shopping.

Out of Sight, Out Mind works for many people.

I’m sure some personal finance snobs disagree, but this strategy works for most Americans.

Moving On…

Why You Should Not Max Out Your 401k

1. You Have High-Interest Consumer Debt

Suppose you have high-interest consumer debt such as credit cards or an expensive auto loan (5%+). In that case, you should dedicate any additional income towards reducing your debt burden.

With the average credit card interest rate around 16%, that’s a risk-free return that’s hard to beat in any investment account.

2. You Don’t Have Emergency Savings

I’m not a huge proponent of holding significant emergency savings, but if you don’t have between 1-2 months of cash on hand, it’s wise to start saving before you max out your 401k.

It’s not a question of IF there will be unexpected expenses; it’s more of a matter of WHEN—car repairs, medical bills, etc
. You should have at least 3-6 months of cash on hand as mandatory home repairs can happen quickly and be quite expensive if you are a homeowner.

3. You Don’t Earn Enough Money

The reality is you need to be a high-earner to max out at your 401k. Controlling for major cities such as NYC and San Francisco, if you make around $130,000 or more, you should comfortably be able to max out your 401k.

On the other hand, if you earn $50,000, it would be nearly impossible to max out your 401k. It’s all relative to salary, my friends.

We hear about way too many people who achieved financial independence seemingly too easily. Unfortunately, most of those people already had very high-wage jobs to start with. So, maxing out any tax-advantaged accounts isn’t much of a challenge for them.

4. Existing Financial Obligations

Perhaps you have a mortgage, a family to care for, college tuition, or other childcare expenses. Sometimes you may need to sacrifice for today and reduce your 401k contributions.

It’s important to note, If you are consistently sacrificing retirement goals for living today, you may need to revisit your spending habits. Saving and investing for retirement should be a priority for all Americans.

Retirement Stats

The number of 401k millionaires soared 84% year over year, with the number of 401ks over $1million topping 412,000. Sure, it’s comparatively tiny to the millions of retirement accounts out there, impressive stat nonetheless.

Meanwhile, non-millionaires are also doing well. The same study also shows the average 401(k) held $129,300 at the end of the second quarter of 2021, up 24% from a year ago.

The most recent publicly available IRS data from 2018 shows that only 3.5% of wage-earning taxpayers contributed the maximum elective contribution amount.

And while nearly 40% of wage-earners made elective retirement contributions in 2018, which sounds good until you realize there are even more people who are not contributing.

Frequently Asked Questions

Other Important Financial Goals To Consider

If you’re maxing out your 401k, you’re in an excellent position financially. As noted above, only 40% of Americans contribute to an elective contribution.

That said, it’s essential not to leave any blind spots in your financial planning. Additional financial considerations Include:

Life Insurance

Proper coverage is critical, especially if you have a family. Experts recommend 10X your salary in coverage and an additional $100,000 for each dependent. There are plenty of online companies that make life insurance applications seamless.

Disability Insurance

Most people are often underinsured or not insured at all when it comes to disability insurance. Many employers offer disability insurance, but it’s often inadequate, and private coverage is needed. I recommend coverage from a company called Breeze.

Having a Will & Trust

Should something happen, it’s essential to have a will, so your assets are not stuck in probate. Fabric offers life insurance and wills so that you can knock off two birds with one stone. Alternatively, Trust & Will also offers estate services entirely online.

Real World Investor


Adam is the founder of realworldpersonalfinance.com, an investing website dedicated to helping discerning individuals make the best investment decisions.

Before starting Real World Personal Finance, he was a Senior Vice President at one of the country's largest investment banks. He has over 10 years of experience working in financial services. His experience includes working with complex derivatives while spending many years working on a trading floor.

He has a bachelor's degree in Business Administration, majoring in finance.

2 thoughts on “7 Reasons Why You Should and Should Not Max Out Your 401K”

  1. Excellent points, maxing out the 401K worked for us but only because we never had school loans or an expensive mortgage and I was a fairly high earner. It is kind of rare for young adults to start out like that now and the other priorities you listed have to be taken into account. A lot of advisors look at this as a black and white issue, but real life makes it more complex than that.

  2. Thank you! Agreed, it’s always easier to save when you have no debt and are a high earner, although that’s not most Americans!

    In general, I try to write my articles as baseline guidelines with some practical insight/considerations. There are so many nuances that are never quite so simple. There’s also a large psychological aspect of being separated/having direct control of your money, which I noticed is why many people tend to invest in their personal accounts before maxing out the most “logical” tax-advantaged vehicle first.

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