Should I Max Out My 401k? A CFA Who Retired Young Answers

Should you max out your 401k? It’s an intimidating idea.

Before jumping into why you should max out your 401k, let’s step back. If you are under 50, you are allowed to contribute up to $22,500 to your 401k.

This does not include employer contributions. It is also the 2023 limit. There are other nuances and disclaimers to this, but for a majority of the people reading this blog, focus on you’re about to contribute $22,500 a year (if married you each can for a total of $45,000)

Why Max out your 401k?

401ks are explained in great detail elsewhere. Since there is nearly $7 Trillion(!) in 401ks, it is no wonder that there is no shortage of information and opinions on 401ks.

The basic reason is that the more you invest, the more you will likely have later. To retire, you need more later. I my post on the Time Value of Money. 401k’s are a tax-deferred vehicle. So you are essentially able to invest an additional amount each paycheck that would otherwise go to taxes. This is very material.

If you max out and contribute $22,500 a year and your tax bracket is 22% then you are investing $4,950 more that year that you otherwise would have paid in taxes. Add this up over the years and you have a large nest egg.

Why shouldn’t I max out my 401k?

There is also no shortage of debates on whether or not to max out your contribution or not. If I was solely interested in google traffic and you sharing this post with your friends (please do) I would write out a debate.

I’m not doing that, others can. Instead I will lay out what worked for me, and you can decide what will work for you.

Fake gurus tell you they know everything, and they get their web traffic. Instead I’m telling you I don’t know everything, but I do know what worked for me.

As an aside, Socrates said something to the effect of the wisest people know they do not know everything. Be careful listening to financial experts. Many are only experts because they say they are. Learn from many sources, and then make up your own plan. This stuff isn’t hard. Just be smart, be realistic, and don’t be greedy.

My approach to retiring early: 2 Phases

My approach to Financial Independence Retire Early was breaking my retirements into two phases. One is Early Retire. This phase I’ve discussed elsewhere. Phase 1 for me was age 40-something through 60ish.

So my plan to retire early was to break things down. You need to save and invest enough to carry you from age 60 something through death.

To retire early you also need to have income and assets to carry you to that age. Everyone focuses on age 60 on. I focused on both age 60 on AND age 40s to 60.

Since most of this blog has focused on budgets, spending, and mindset to do phase 1, let’s use this post to focus on phase 2.

My approach to retire early: Phase 2 = Max out 401k

My phase 2 of retire early starts around age 60. But planning and investing for it starts today. It starts immediately.

There are so many resources for planning for traditional retirement age. The point of this post is simply to make it very clear not to overlook it.

If you are trying to get an asset base large enough to carry you from age 40 through 100ish that is extremely difficult. But thanks to the time value of money, you really only need to have a medium asset base by the time you retire early.

Max out your 401k as early as you possibly can

If you can contribute as much as possible as early as possible, then the snowball grows quickly. Then you can stop contributing when you retire early and let the investment grow.

an example: An asset base of 500k at age 45 invested for 15 years achieving a 5% return will become $1M+.

But $500k by age 40 may seem intimidating. It doesn’t need to be. Put as much as you possibly can into your 401k. Do not put as much as you can to feel like you are putting a lot in, I mean put the most you can in.

You are paying future you. That is how I looked at retirement and my 401k. To me, that $20k a year was not mine. It was future me’s money.

If I didn’t max out my 401k then I was stealing from future me. I don’t steal, especially from future me.

Should you max out your 401k, or just up to the Company Match

I said I was going to avoid this debate, but I will take a stance on it. Yes. Max out your 401k.

If you are married, should both you both max out your 401ks?

If you are married, then you have an additional opportunity. I was maxing out my 401k. My wife was making $50k a year.

We decided we would max out hers too. That was a big mindset shift in our house. It meant she was putting ~$20k of her $50k into a retirement account.

That meant her paychecks after tax were very small. It psychologically hurt.

But what it did, was allowed us to save $40k a year into our 401ks plus get the company matches. It also had us avoid ~$12k in taxes.

Would we rather have used that money on trips, buying and RV, or buying a Tesla? Of course. We focused on saving now so we could have financial independence later. We also focus on satisfice.

This is the idea that you buy what makes you happy, but no more than that.

We only did this for a few years. Maybe two. I didn’t think about it earlier in our relationship. She walked away from her job a couple years ago once our twins were born.

But Dad is Fire, not everyone has 401ks

Not everyone has access to a 401k. Many employers do not offer them. Many of my readers are self employed.

Keep in mind, that a 401k is just one type of tax-deferred vehicle. There are many. There are actually many different flavors of IRAs (Roth, Traditional, SEP, SIMPLE, and on and on). This post is focused on 401k’s because that’s what I had access to.

The point is the same regardless of the vehicle. One way to retire early is to invest as much as you can in a tax-deferred account.

Make it hurt because that is future you’s money. You’ll be glad you have those assets later.

Wait, I don’t have enough to max out my 401k and also save for early retirement

Then I haven’t explained my story well. I started with $800 making $25,000 a year as a 21 years ago as a 21 year old.

I have not been married long (so I haven’t had two incomes). You have this blog. I didn’t have an endless number of youtubes and blogs that I could research.

I had Carleton Sheets books on No Down Payment and The Millionaire Next Door: The Surprising Secrets of America’s Wealthy and reading newspaper listings at the library.

For me phase 1 was leverage buying real estate that other people paid off, and phase 2 was maxing out my 401k. All along I have made decisions off spending just enough money to make me happy, no less and no more (aka satisfice).

Related: “Do Something That Makes You Go To The Library”

The bottom line on whether you should max out your 401k

My approach is to Accumulate and invest for phase 1 of retirement (age 40-60, or whatever for you) and also invest for phase 2 of retirement (age 60 until death).

Staggering it this way gives you liquidity for phase 1, and the benefits of tax deferred investing for phase 2. But you know you, I don’t.

Make decisions that make sense for you. There are many approaches that work.

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