When Not To Max Out Your 401K

I recently read a post on the small investor’s site about why you should not max out your 401K. The article stated that if you make under 100K you should not max out your 401K because you will not have enough money to fund a decent emergency fund, contribute to an HSA and fund a 529 college savings plan for your children. 

I , on the other hand, am a believer in maxing out all retirement accounts whenever possible as stated on my post on investment strategies. You should max out your retirement accounts when you are able to and without reservations because you can alway set up a Roth Conversion Ladder to get access to your money penalty free before age 59 and a half.

When not to max out your retirement account depends more on defense rather than offense, though offense is a contributing factor. When I refer to defense I am talking about your monthly personal expenses or a budget. Knowing where your money is going is key. I strongly believe that defense wins championships in the game of personal finance and it’s the key to attaining and maintaining financial independence. If you improve your defense your offense automatically becomes better because you will need less offense/income. This does take disciple and the worse your offense the better your defense has to be in the form of extreme frugality. If, on the other hand, you have a great offense and make 3 million dollars a year, but have poor defense and spend 3 million dollars a year then you are living paycheck to paycheck and will never become financially independent. The late Thomas J. Stanley, author of The Millionaire Next Door calls this the high income/low net worth individual. In fact this is what happens to a lot of professional athletes and other high earners these days. Then we wonder how they end up broke after playing 10 years in the NFL making 5 million dollars a year. 

When not to max out your retirement accounts is going to depend on your savings rate and income and your savings rate will depend greatly on your expenses. The less you spend the greater your savings and savings rate. Also the higher your income, while keeping your expenses fixed, the greater your savings and savings rate. The hardest problem of course is avoiding lifestyle creep or keeping your expenses fixed as your income goes up. This is why focusing on defense can keep things in perspective and can make achieving financial independence a reality sooner than later.

Lets say you make 100k a year after taxes and your expenses are 40 to 50k a year. That leaves 50K to 60K to be used to comfortably max out your 401K, 457, HSA, IRA and to put some money in a 529 college savings account and emergency fund. If your expense are 80K a year, maxing out all of your retirement accounts will not be possible with the remaining 20K that is left.

If you make 50K a year after taxes with a 50% savings rate which will be $25K expenses and $25K going to savings, which is getting close to a mustachian level yearly expense, then you will be able to max out at least some of your retirement accounts and your 401K and HSA would be the best ones to fund first with the exception of funding a 3-6 month emergency fund of course. This will even leave a little for your 529 college savings account as well.

Obviously the less you make the harder it is to max out your retirement accounts and the more you need to work on offensive strategies to increase your income. It almost seems like the the better your offense the more you should focus on defensive strategies and the better your defense the more you should focus on offensive strategies to reach financial independence faster, but what you commonly see is offensive heavy people focusing on how to make more money while ignoring defensive strategies and defensive heavy folks focusing on how to slash their budgets beyond the bone. When in fact one is not generally more important than the other, some people just find one more easier than the other. Despite my statement that defense wins championships, you do have to score points sometimes. Finding balance is the key.


If you find yourself in the middle and don’t know where to start, knowing your defensive numbers is a great place to start. Everyone knows their offensive numbers like the back of their hands. Either you make $30K, $70k or $100k a year or $15, $35 or $50 an hour. The defensive numbers are usually less well known. Mint.com or the mint application is a great place to find out how much you are spending every month. You do have to put your bank information into the app or software to find out your numbers though. Some people swear by the YNAB app, but it’s not free. Knowing your defensive numbers needs to be second nature just like knowing your offensive numbers. Once you know how much damage is being done you can then work on limiting the damage. This can be done as easily as cutting out the things in your life that don’t bring you as much value. Like that monthly subscription to stitch or spotify. Do you need both netflix and hulu. Can you find a cheaper internet, cable or cell phone plan. Do you even need cable with netflix? These small things add up and with cutting them out so does your savings rate.

If, on the other hand, you find it easier to focus on offensive strategies first then you may want to focus on side hustles, getting a raise at work or finding a higher paying career. Just remember to keep things in perspective.



I am not a licensed accountant or financial advisor or hold any type of professional financial certifications. This content is general information on investment strategy and does not constitute official or personalized investing advice. It is not a solicitation to buy or sell stocks or any security.  Invest at your own risk. The views of this blog are my opinion alone unless stated otherwise. Any type of historical financial success does not guarantee future returns.


Published by The Fire Investor

Financial Independence hobbyist offering practical wealth building advice for all income levels with a focus on achieving early financial independence.

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