It’s my first day at my first job out of college and I’m staring at my computer screen trying to figure out what to do about my 401k. I know I should invest part of my paycheck but I have no idea what to do beyond that.
I ask my cousin and he tells me to put in 4% so I can get the employer match. That makes sense to me.
I choose 4% contribution. Done.
Well, not done yet. Now I have to figure out what funds I should invest in. Stuck again.
Since I have no idea, I choose a target date retirement fund. I’m 22 now so I choose the fund 40 years out, Freedom 2050. I’ll be 62 in 2050. That looks good.
Boom. Now I’m done.
Fast forward to 4 years later. I’m contributing much more than 4% of my paycheck and I’m no longer invested in expensive, target date funds.
In fact, I’m contributing up to 45% of my paycheck at times and I’m on track to max out my annual contribution at the IRS limit of $18,000.
I also plan to retire much earlier than 62.
What changed?
1. I realized that retirement is not one-size-fits-all
Before I found the personal finance blogs that changed my life, I thought retirement stories went something like this.
Work until your 65, play golf, bake cookies, go on cruises, move to Florida.
When I was putting 4% into my 401k at my first real job, I was preparing for activities that I thought were 40 years down the road. I had tons of time to put more money in and let it grow.
Then, a few years ago, at the end of a random Google search, I found Mr. Money Mustache and Early Retirement Extreme.
The authors of these blogs retired in their 30s and they weren’t making millions. In fact, they weren’t making much more money than I was at the time.
When I started reading more of their posts, I realized that retirement is what you make it. If you want to retire at age 35, you can.
MIND BLOWN
This realization was life changing for me. I immediately upped my 401k contributions.
Since then, I’ve found many more blogs that have provided the inspiration and strategy to get me to my retirement goals.
The idea of slow travel, entrepreneurship, and the freedom and time to try new things appeals to me greatly.
I no longer plan to wait until my sixties to experience that life.
Maxing out my 401k is one of the strategies to get me there.
2. I don’t leave money on the table
Beyond just building a nest egg, I also contribute to my 401k because the money is rightfully mine.
What do I mean by that?
When you sign your offer of employment, you are agreeing to benefits beyond just base salary.
An employer matching program is a key part of the compensation package that an employer offers.
If you don’t contribute to your 401k ATLEAST up to the employer match, 3-6% at most employers, you’re leaving THOUSANDS OF DOLLARS on the table each year.
I have contributed more than the employer match every year and have grown my balance faster because of it.
The one tip I would offer regarding the employer match would be to look at the vesting schedule. I am not fully vested in my employer contributions until I hit 5 years with the company.
That means if I leave right now, I lose a certain percentage of the employer match.
It’s something I never considered when I was signing my offer but something I will look for in every job offer in future.
3. It lowers my tax liability
When I first decided to up my 401k contributions, I was worried about the extra money coming out of each paycheck.
I was happily surprised to find out that putting in an extra grand into my 401k for one paycheck would not reduce my paycheck by exactly one grand.
It reduced the amount of my paycheck by much less than a grand. Yay!
Now, whenever I lower my 401k contributions and don’t see the paycheck go up equally as much, I feel like I am “losing money” to taxes.
Reducing my tax liability is a huge benefit of contributing the max to my 401k.
It has secured me a better tax refund at year-end as well as helped me qualify for some tax deductions and credits that were just out of reach for my income level (student loan interest deduction, etc).
I’m not only saving for retirement but I’m keeping more of my money now.
4. I’m used to it
I remember seeing my first paycheck at my first job out of college and going nuts. I had never received that much money at once in my life.
Slowly over time, the wonder of the paycheck has worn off. Now I see an amount that allows me to buy the things that I need and some of the things that I want.
The more you get used to having a bigger paycheck, the harder it will be to watch it shrink.
You’ll have to limit or cut out your ‘wants’ in order to put more money into your 401k.
Start contributing more and more and you’ll get used to living on that smaller amount.
The first time I put 45% of my paycheck into my 401k was a shock, but now I am used to that smaller paycheck and have adjusted my spending accordingly.
5. It helped me get a house
When I first applied for a mortgage, I didn’t have the 6 months reserves that the lender required.
I had saved up for the down payment and additional expenses but I didn’t have enough money in savings to cover 6 months of the mortgage.
I soon found out that the vested part of your 401k counts as reserves.
Many people use real estate as a means of getting towards retirement faster.
Money in your 401k can help you qualify for mortgages that can help you earn passive income or achieve other goals.
6. I’ll have more money in the future
Maxing out your 401k allows your money to compound and grow more quickly.
In fact, blogger Mad Fientist recommends that you take advantage of compounding and front-load your retirement accounts at the beginning of each year.
My strategy is to put as much money as I can into my 401k at the beginning of the year and then contribute up to the employer match through year-end.
I can’t put the entire $18,000 in at the beginning of the year because first, my employer caps 401k contributions for each paycheck at 45% and second, because my employer’s matching program requires that you contribute up to the match each paycheck to get the full amount.
Meaning if you hit the $18,000 in May, you won’t get the full employer contribution.
I have a spreadsheet that I use to determine how much I can contribute throughout the year to hit the max.
7. It makes me feel good
Lastly, hitting the max for 401k contributions makes me feel good.
The rest of this post has been about numbers and logic but part of why I max out my 401k is emotion.
Setting myself up to achieve my ideal lifestyle sooner than traditionally expected feels awesome.
Nothing I could buy now could feel better than purchasing freedom and flexibility in the not so distant future.
Wrong or right, seeing my 401k account balance on the computer screen lights me up.
Readers, do you contribute the max to your 401k? What is your retirement strategy?
Millennial Boss
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I started out the year with the intention to max my 401k out, but lowered it to just the match when I started earnestly saving up for my house down payment. I was shocked to see how much got diverted into taxes!! Uncle Sam is a greedy bastard.
Awesome that you’re saving for a down payment! Are you thinking of getting a multi-family? I’m interested but not sure how to search for a property that will cash flow.
Good for you maxing out the 401k. It’s too bad more employers don’t have a higher match as so many people just start out with the 3-5% that the employer matches. A few innovative companies are now offering an auto increase which increases your contribution every time you get a raise. They’ve found people who go into these have higher saving rates a few years later than those who originally sat down with financial planners.
But congrats on the maxing out! Early financial Independence is a real thing and the more people on board, the more happy, healthy people we’ll have in the world.
Thanks! I’d like to hope so!