To whom does the advice "max out your 401k" not apply?

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tidalwave10
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To whom does the advice "max out your 401k" not apply?

Post by tidalwave10 »

An old saw of personal finance advice is to max out one one's retirement plan contributions each year. Often stated reflexively and without context, this directive seems to presume a "high" salary. Not sure how I'd define that in any absolute terms. But if maxing out means contributing the full allowed amount annually by the IRS, presently $17,500 per person for those under age 50, then:

* At a gross salary of $52,500, a max out represents 1/3 of income.
* At a gross salary of $35,000 a max out represents 1/2 (50%) of income (ouch!)

If one is over age 50, the percentages go up since the max out value allowed goes up (catch-up contributions).

Just for the record, to address the Subject tag of my thread, I realize there may be plenty of situations, some transient, where maxing out one's retirement plans should not be one's present objective, e.g. if someone needs to pay down high interest consumer debt, build-up an Emergency Fund, etc. I'm asking specifically about income thresholds to guide whether or max out.

I'm all for maxing out--trying to do so myself and considering multiple retirement plan max-outs. Wife and I each have access to two retirement plans simultaneously: a 401k and 457b. Maxing out both is impossible for my wife--it would actually exceed her salary; especially since the Pension Plan takes 6% of each paycheck. Musing about mega-maxing out here--when to do it and why--but haven't received much response. Post is too wordy I suspect:

http://www.bogleheads.org/forum/viewtop ... 2&t=133041

... but I do question the wisdom of any universal directive to max out for those at all income levels. Guess I'd like to see suggestions to max out one's retirement plans come with a responsible conditional or qualifier, e.g. "If or When: X, Y, or Z..." Perhaps to say this is a goal one ought generally to aspire to?

Were you to provide a conditional or qualifier to the advice to max out, what would it be?
ajcp
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Re: To whom does the advice "max out your 401k" not apply?

Post by ajcp »

tidalwave10 wrote:An old saw of personal finance advice is to max out one one's retirement plan contributions each year. Often stated reflexively and without context, this directive seems to presume a "high" salary. Not sure how I'd define that in any absolute terms. But if maxing out means contributing the full allowed amount annually by the IRS, presently $17,500 per person for those under age 50, then:

* At a gross salary of $52,500, a max out represents 1/3 of income.
* At a gross salary of $35,000 a max out represents 1/2 (50%) of income (ouch!)
After the "max out your 401k" is an implied, but I guess not always inferred "before taxable involvements". The sentiment isn't to eat crackers for dinner to max out your 401k, it's to max it out before using other investment options.
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swimirvine
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Re: To whom does the advice "max out your 401k" not apply?

Post by swimirvine »

I think the advice means that people should put as much as possible into their 401k since it's a tax-deferred vehicle. Exception

The 401k is full of high fee actively managed funds
a. invest in the 401k up to the max employer match
b. invest in a Roth IRA up to max
c. then go back and put any additional money into the 401k
d. In a rare scenario of a 401k without an employer match and with a menu of terrible funds, one might consider a taxable account over the 401k
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Spirit Rider
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Re: To whom does the advice "max out your 401k" not apply?

Post by Spirit Rider »

You are taking the term "max" literally, when it is not intended that way. It is always subject to the availability of investment dollars.

1. Everybody should be contributing to their 401k up to the company match. Just find a way to do it. Otherwise you are giving up free money

2 Beyond that everyone has a different set of circumstances. They should allocate a given percentage of their compensation to savings and investment. Ideally, that number should be at least 10%, but with families and today's student loans that isn't always possible. A good rule if your savings rate is very low is to increase it by at least 1%/yr or 1/2 of any pay increases whichever is larger until you reach your goal.

3. Since it requires roughly twice the median salary to max out the 401k employee deferral, statistically there are many people who will never be able to do so in their lifetime. If they find that they are able to contribute 15% of their salary the majority of their careers, they will be in the upper tiers of their peers in retirement security.

Bogelheads skew to well above average incomes. Just as life is about living well below your means and not keeping up with the Joneses. Investing is about slow and steady wins the race and not worrying about keeping up with most of the Bogleheads. It is a philosophy not an income level.
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JamesSFO
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Re: To whom does the advice "max out your 401k" not apply?

Post by JamesSFO »

One rule of thumb (Money Ratios by Charles Farrell) suggests saving on the order of 10-15% of annual salary to end up with 80% replacement. I think "max out" is meant in the context of that sort of saving and in contrast to saving taxably. Also, usually it is 401K to match, then (roth) IRA, then max out 401K then taxable.
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Re: To whom does the advice "max out your 401k" not apply?

Post by Spirit Rider »

If you consider your goal to be 80% of pre-retirement salary there is another consideration, Social Security.

Moderate wage earners receive a greater percentage of their income in SS benefits. The Primary Insurance Amount (PIA) used to calculate your benefits is about 40% of the Average Indexed Monthly Earnings (AIME) where the AIME is about 1/2 of the maximum. The PIA is about 30% of the AIME where the AIME is at the maximum. SS max wage base is $117K for 2014. Note: That percentage declines even more as the number of years and the amount you exceed the max.

So if your lifetime income is moderate ($59K in 2014), you need only about 40% of your pre-retirement income to be provided from savings and investments. If your lifetime income is high ($117K in 2014), you need >= 50% of your pre-retirement from savings and investments.

So it is the higher income wage earners who have the greatest need (and luckily the greatest ability) to maximize their retirement savings and investments.
buckstar
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Re: To whom does the advice "max out your 401k" not apply?

Post by buckstar »

I few other considerations:

if there is no match and you anticipate your post-retirement tax rate to be higher than your current rate

if you have high interest rate debt (credit card debt usually)

I'm sure there's others, but the point is that it's not a hard and fast rule.
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ofcmetz
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Re: To whom does the advice "max out your 401k" not apply?

Post by ofcmetz »

If the 457B is a non-governmental plan then I wouldn't put anything into it and would instead use other savings vehicles.

I think the "max the 401K" is generic just like the "age in bonds" advice. You can do a lot worse and sometimes not very much better. I would definitely recommend that tax advantaged accounts are maxed before taxable investing in most cases, but if your income isn't large enough then maxing a his and hers 401K isn't always advisable.

The wife and I don't max our tax advantaged vehicles yet still save $38,000 or so a year. I would have to save twice this to max them, and I'm not willing to do that. We are still on a fine pace towards reaching our goals.
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Buffetologist
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Re: To whom does the advice "max out your 401k" not apply?

Post by Buffetologist »

While I'm a fan of Bogle, I'm also a fan of Dave Chilton's Wealthy Barber financial planning book.

He recommends a "10% fund" to build wealth just for the good things in life. Unless you don't plan on doing anything good until you are 55, this would go into a taxable stock fund account. I view this as basically "The Family Business".

I would prioritize the following:

1. 401K up to the company match. (No brainer).

2. 10% fund in taxable stock fund for wealth building.

3. Save for a home

4. Pay off high interest debt (student loans, car loans, credit cards)

5. Max out retirement but not if it causes you to incur more high interest consumer debt.

6. Save for kids college fund. Switch 5 and 6 if you know you won't be getting any aid.
MathWizard
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Re: To whom does the advice "max out your 401k" not apply?

Post by MathWizard »

Buffetologist wrote:While I'm a fan of Bogle, I'm also a fan of Dave Chilton's Wealthy Barber financial planning book.

He recommends a "10% fund" to build wealth just for the good things in life. Unless you don't plan on doing anything good until you are 55, this would go into a taxable stock fund account. I view this as basically "The Family Business".

I would prioritize the following:

1. 401K up to the company match. (No brainer).

2. 10% fund in taxable stock fund for wealth building.

3. Save for a home

4. Pay off high interest debt (student loans, car loans, credit cards)

5. Max out retirement but not if it causes you to incur more high interest consumer debt.

6. Save for kids college fund. Switch 5 and 6 if you know you won't be getting any aid.
I would suggest that 4 goes right after 1

I don't get #2. Why do you want taxable if you have 401K and/or ROTH space available?
Taxable account shoud come last.
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Peter Foley
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Re: To whom does the advice "max out your 401k" not apply?

Post by Peter Foley »

I would agree with a couple suggestions already made.

1. 401k to the company's match
2. Beyond the company match one should consider the availability of 401k options with low expense ratios. (Essentially don't invest more in the 401k if a TIRA option would be more cost effective or provide greater diversification at a lower cost.)


As a third I would add that if one is in the 10% or 15% bracket, putting funds in a Roth rather than contributing beyond the employer's match might make more sense. For a young person starting out it would be very hard to estimate his/her tax bracket in retirement. Roth space is also much more limited than 401k space.
leonard
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Re: To whom does the advice "max out your 401k" not apply?

Post by leonard »

Buffetologist wrote:While I'm a fan of Bogle, I'm also a fan of Dave Chilton's Wealthy Barber financial planning book.

He recommends a "10% fund" to build wealth just for the good things in life. Unless you don't plan on doing anything good until you are 55, this would go into a taxable stock fund account. I view this as basically "The Family Business".

I would prioritize the following:

1. 401K up to the company match. (No brainer).

2. 10% fund in taxable stock fund for wealth building.

3. Save for a home

4. Pay off high interest debt (student loans, car loans, credit cards)

5. Max out retirement but not if it causes you to incur more high interest consumer debt.

6. Save for kids college fund. Switch 5 and 6 if you know you won't be getting any aid.
Why would someone prioritize "the good things in life" if it comes at the expense of retirement funding? That could happen if one strictly follows your prioritization above.

Drive a Ferrari, but plan on Mac and Cheese and a cheap apartment for retirement.

Sorry - that makes no sense at all.

EDIT: one more thing "Switch 5 and 6 if you know you wont' be getting any aid". So you are saying there is a situation where parents should put their retirement at risk (and risk being a burden on their kids) by prioritizing College funding over retirement funding. Kids can get loans for college. No loans available for retirement. Again, this prioritization makes no sense.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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Re: To whom does the advice "max out your 401k" not apply?

Post by jackholloway »

MathWizard wrote:
Buffetologist wrote:While I'm a fan of Bogle, I'm also a fan of Dave Chilton's Wealthy Barber financial planning book.

He recommends a "10% fund" to build wealth just for the good things in life. Unless you don't plan on doing anything good until you are 55, this would go into a taxable stock fund account. I view this as basically "The Family Business".

I would prioritize the following:

1. 401K up to the company match. (No brainer).

2. 10% fund in taxable stock fund for wealth building.

3. Save for a home

4. Pay off high interest debt (student loans, car loans, credit cards)

5. Max out retirement but not if it causes you to incur more high interest consumer debt.

6. Save for kids college fund. Switch 5 and 6 if you know you won't be getting any aid.
I would suggest that 4 goes right after 1

I don't get #2. Why do you want taxable if you have 401K and/or ROTH space available?
Taxable account shoud come last.
Reread the thread again - for a moderate income of 35k, you are advocating saving half of your income, not to be used until retirement. For median families, you are talking a third.

There is a nonzero chance you will die before fifty. My great grandfather died of a heart attack at 45.

Saving some income to do enjoyable things before retirement is not a bad strategy, as long as you have your other financial priorities in order. Truly high rate debt - 15%+ - would come before that for me.
leonard
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Re: To whom does the advice "max out your 401k" not apply?

Post by leonard »

One other thing on threads like this -

I wish people would spend more time devising strategies on Why? and How to? maximize 401k contributions, rather than expend the creativity and thought on how and why NOT to maximize 401k contributions.

Many don't want to save for retirement and just use these theoretical discussions on why it's "not optimal" to rationalize not doing it cause they don't want to or think they can't.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
MathWizard
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Re: To whom does the advice "max out your 401k" not apply?

Post by MathWizard »

jackholloway wrote:
MathWizard wrote:
Buffetologist wrote:While I'm a fan of Bogle, I'm also a fan of Dave Chilton's Wealthy Barber financial planning book.

He recommends a "10% fund" to build wealth just for the good things in life. Unless you don't plan on doing anything good until you are 55, this would go into a taxable stock fund account. I view this as basically "The Family Business".

I would prioritize the following:

1. 401K up to the company match. (No brainer).

2. 10% fund in taxable stock fund for wealth building.

3. Save for a home

4. Pay off high interest debt (student loans, car loans, credit cards)

5. Max out retirement but not if it causes you to incur more high interest consumer debt.

6. Save for kids college fund. Switch 5 and 6 if you know you won't be getting any aid.
I would suggest that 4 goes right after 1

I don't get #2. Why do you want taxable if you have 401K and/or ROTH space available?
Taxable account shoud come last.
Reread the thread again - for a moderate income of 35k, you are advocating saving half of your income, not to be used until retirement. For median families, you are talking a third.

There is a nonzero chance you will die before fifty. My great grandfather died of a heart attack at 45.

Saving some income to do enjoyable things before retirement is not a bad strategy, as long as you have your other financial priorities in order. Truly high rate debt - 15%+ - would come before that for me.
Yes, I missed the 10% for good things in life. My mistake was that I read wealth building and stocks. Those seem to be
two different things.

I do the "wealth building" and saving for college in my ROTH. Since they raised the limits beyond $2-3K
I typically have space in these. I can always withdraw contributions. I haven't had to actually withdraw the ROTH contributions,
just suspend contributing, since the discipline of contributing to the ROTH every year meant that that stream of income could
just be directed at college, and we could pay out of pocket.

I save for short-term in plain old savings acct. and CDs, not stock accounts, since I may tap these when an opprotunity
comes along, and I don't put money in stocks that I expect to need sooner than a decade out.

My wife and I do enjoy life. We had vacations to national parks nearly every year from when the kids were 6 until
they graduated from HS. Now they are in college, but my wife and I have still managed a few domestic trips plus
two trips to Europe in that time.

Note that #1 was not a roof over your heads or food to eat . I assumed that this list covered discretionary funds.
I can see the point of the 10% for a better life, but I still put high interest debt payment ahead of the "fun".
We got married in the realy 80's when even the prime rate was double digits. My subsidized student loans were 9%.
That is probably why I hate paying interest.
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Re: To whom does the advice "max out your 401k" not apply?

Post by Buffetologist »

MathWizard wrote:
I don't get #2. Why do you want taxable if you have 401K and/or ROTH space available?
Taxable account shoud come last.
The whole point of the "10% fund" is to build accessible wealth. It's the cornerstone of the book's advice. He says it should be a higher priority than retirement savings. I'm all for retirement savings, but that doesn't need to be maxed out in your 20's if you have other obligations that you need to take care of.

This is not totally crazy. Capital gains receive preferential tax treatment, and not everybody will be in the 15% tax bracket at retirement. Also, taxable accounts get stepped up basis when you die. Leave money in your traditional IRA or 401K and your heirs will either have to liquidate it over 5 years or take required distributions over their lifetime. If your beneficiary is a kid, they are subject to the kiddie tax and they may end up paying the highest tax rates if their parents are.

Certainly, tax advantaged accounts should be used for retirement savings, and one should definitely save for retirement, but that's not the only goal in life. Chilton reasons that by creating an accessible endowment of wealth, life can be lived with much less financial stress. Quality of life is often measured by experiences. I happen to agree. Build up a $500K endowment and take a 20K vacation without worry. Build up $1 million, and that sailboat you've always wanted is not a huge deal.
leonard
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Re: To whom does the advice "max out your 401k" not apply?

Post by leonard »

Buffetologist wrote:
MathWizard wrote:
I don't get #2. Why do you want taxable if you have 401K and/or ROTH space available?
Taxable account shoud come last.
The whole point of the "10% fund" is to build accessible wealth. It's the cornerstone of the book's advice. He says it should be a higher priority than retirement savings. I'm all for retirement savings, but that doesn't need to be maxed out in your 20's if you have other obligations that you need to take care of.

This is not totally crazy. Capital gains receive preferential tax treatment, and not everybody will be in the 15% tax bracket at retirement. Also, taxable accounts get stepped up basis when you die. Leave money in your traditional IRA or 401K and your heirs will either have to liquidate it over 5 years or take required distributions over their lifetime. If your beneficiary is a kid, they are subject to the kiddie tax and they may end up paying the highest tax rates if their parents are.

Certainly, tax advantaged accounts should be used for retirement savings, and one should definitely save for retirement, but that's not the only goal in life. Chilton reasons that by creating an accessible endowment of wealth, life can be lived with much less financial stress. Quality of life is often measured by experiences. I happen to agree. Build up a $500K endowment and take a 20K vacation without worry. Build up $1 million, and that sailboat you've always wanted is not a huge deal.
You've missed a few vital points.

1. Contributions to Roths are always accessible without penalty. So, not 100% tied up.
2. You can take "substantially equal payments" from retirement accounts before retirement age. so, again not 100% tied up.
3. Finally, you can do a "stretch IRA" and let heirs enjoy the money at lower tax rates. Again, using a retirement account.

I think more critical analysis of Chilton would be time well spent versus simply repeating Chilton on a website. Or maybe these are the auto repair manuals?

Finally, you have not addressed the poor prioritization I pointed out above. It simply makes not sense to prioritize either discretionary spending or children's college over retirement saving - in any case.
Last edited by leonard on Mon Feb 17, 2014 2:36 pm, edited 1 time in total.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
an_asker
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Re: To whom does the advice "max out your 401k" not apply?

Post by an_asker »

jackholloway wrote:
MathWizard wrote:
Buffetologist wrote:While I'm a fan of Bogle, I'm also a fan of Dave Chilton's Wealthy Barber financial planning book.

He recommends a "10% fund" to build wealth just for the good things in life. Unless you don't plan on doing anything good until you are 55, this would go into a taxable stock fund account. I view this as basically "The Family Business".

I would prioritize the following:

1. 401K up to the company match. (No brainer).

2. 10% fund in taxable stock fund for wealth building.

3. Save for a home

4. Pay off high interest debt (student loans, car loans, credit cards)

5. Max out retirement but not if it causes you to incur more high interest consumer debt.

6. Save for kids college fund. Switch 5 and 6 if you know you won't be getting any aid.
I would suggest that 4 goes right after 1

I don't get #2. Why do you want taxable if you have 401K and/or ROTH space available?
Taxable account shoud come last.
Reread the thread again - for a moderate income of 35k, you are advocating saving half of your income, not to be used until retirement. For median families, you are talking a third.
But Roth IRA contributions can be withdrawn anytime with no penalty. I agree with MathWizard - there is no reason to put money in taxable if Roth IRA space is available (especially for the low income category we are talking about here).
There is a nonzero chance you will die before fifty. My great grandfather died of a heart attack at 45.
Agree with the statement, though your great grandfather dying at 45 is probably not the best example - back then, the average life expectancy was likely in that range as well.
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Garco
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Re: To whom does the advice "max out your 401k" not apply?

Post by Garco »

Lots of good advice, even ordered lists.

In my case, employer mandates plus reality meant.

1. Mandated 401k contribution (5%), overmatched by employer.

2. Save for house downpayment, purchased about 5 years into career with 30-yr mortgage.

3. Save for college educations (2 kids, no financial aid).

4. Use supplemental options (SRA, 457b) beginning after last college graduation, increasing until maxed out at $23K the last couple of yrs.

5. Make last mortgage payment.

6. (coming soon) Retire on tax deferred investments and SS.
leonard
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Re: To whom does the advice "max out your 401k" not apply?

Post by leonard »

Garco wrote:Lots of good advice, even ordered lists.

In my case, employer mandates plus reality meant.

1. Mandated 401k contribution (5%), overmatched by employer.

2. Save for house downpayment, purchased about 5 years into career with 30-yr mortgage.

3. Save for college educations (2 kids, no financial aid).

4. Use supplemental options (SRA, 457b) beginning after last college graduation, increasing until maxed out at $23K the last couple of yrs.

5. Make last mortgage payment.

6. (coming soon) Retire on tax deferred investments and SS.
Why exactly would you do the minimum on retirement savings and then prioritize kids college over the rest of it? Is that the catch all "reality" part?
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
MathWizard
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Re: To whom does the advice "max out your 401k" not apply?

Post by MathWizard »

jackholloway wrote:There is a nonzero chance you will die before fifty. My great grandfather died of a heart attack at 45.
You don't have to tell that to me.
2 grandparents and a brother did not make it to 50. My father barely made it past 50.

That does not mean that I should live like there is no tomorrow. To me getting rid of high interest debt is better than
saving. You get a much higher rate of return.

The saving 10% for fun is probably after all the bills have been paid, and retiremnet is in place. What would the 10% have
been spent on instead? Higher lifestyle, more dinners out? Then the message about 10% wealth building is just deferred
gratification. Don't spend on cheap entertainment now, save on entertainment now and have lots of fun later. That is what
I have done. Everything was paid off except the mortgage before we ever considered traveling to Europe. That money came
from plain old savings.

I did have some money in taxable stocks after student loans were zeroed out and we bought a house, back when ROTH limits
were $2K/year. I dribbled that into ROTHs once the limit rose to $5K.
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Garco
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Re: To whom does the advice "max out your 401k" not apply?

Post by Garco »

leonard wrote:
Garco wrote:Lots of good advice, even ordered lists.

In my case, employer mandates plus reality meant.

1. Mandated 401k contribution (5%), overmatched by employer.
2. Save for house downpayment, purchased about 5 years into career with 30-yr mortgage.
3. Save for college educations (2 kids, no financial aid).
4. Use supplemental options (SRA, 457b) beginning after last college graduation, increasing until maxed out at $23K the last couple of yrs.
5. Make last mortgage payment.
6. (coming soon) Retire on tax deferred investments and SS.
Why exactly would you do the minimum on retirement savings and then prioritize kids college over the rest of it? Is that the catch all "reality" part?
a. My basic goal was to arrive at point 6 with zero debt for me and everyone in my family (kids). b. My point #1 involved a 15% retirement savings rate already (employer put in 10% while I put in 5%). This was both the minimum and the maximum that I could contribute to my 401k. Do that for 38 years, and believe me, it really adds up. We succeeded, and when we had the basic goals covered we've used our last working years to pad the nest and max out supplemental tax deferred savings.
Last edited by Garco on Mon Feb 17, 2014 8:25 pm, edited 2 times in total.
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Re: To whom does the advice "max out your 401k" not apply?

Post by bungalow10 »

I've always done the max - but my employer has the max set at 15%, so when I was right out of college, there were years when my max was $8,750, $10,000, $12,000. I did a Roth to make up the rest.
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leonard
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Re: To whom does the advice "max out your 401k" not apply?

Post by leonard »

Garco wrote:
leonard wrote:
Garco wrote:Lots of good advice, even ordered lists.

In my case, employer mandates plus reality meant.

1. Mandated 401k contribution (5%), overmatched by employer.
2. Save for house downpayment, purchased about 5 years into career with 30-yr mortgage.
3. Save for college educations (2 kids, no financial aid).
4. Use supplemental options (SRA, 457b) beginning after last college graduation, increasing until maxed out at $23K the last couple of yrs.
5. Make last mortgage payment.
6. (coming soon) Retire on tax deferred investments and SS.
Why exactly would you do the minimum on retirement savings and then prioritize kids college over the rest of it? Is that the catch all "reality" part?
a. My basic goal was to arrive at point 6 with zero debt for me and everyone in my family (kids). b. My point #1 involved a 15% retirement savings rate already (employer put in 10% while I put in 5%). This was both the minimum and the maximum that I could contribute to my 401k. Do that for 38 years, and believe me, it really adds up. We succeeded, and when we had the basic goals covered we've used our last working years to pad the nest and max out supplemental tax deferred savings.
So, you simply made a goal that may or may not have optimized the finances.

Each year someone forgoes maximizing 401k's and IRA's - they simply loose that space.

Also, kids can get loans for college. You generally can't get a retirement loan.

Not an approach I would recommend - as I think the opportunity cost on the tax advantaged space is too expensive. Also, the risk of not having enough for retirement is a bigger risk than not funding kids college.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
mnvalue
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Re: To whom does the advice "max out your 401k" not apply?

Post by mnvalue »

If you make less than $87.5 or so (depending on tax situation) and that's going to always be the case, then you're probably not going to max your 401k. That's the point at which you could save 20% for retirement into a 401k and not max it out. Here's my general idea of priorities:

0) Capture any free money: 401k match, HSA match, good ESPP, student loan auto-debit interest rate credit, etc.
1) Dave Ramsey's "$1000 Emergency Fund"
2) Dave Ramsey's Debt Snowball, but only for >= 8% interest rate or so, or variable rate loans. Or everything, if you're cash flow constrained or truly abhor debt.
3) Dave Ramsey's 3-6 months of expenses Emergency Fund, but I like to suggest 6. I also like to suggest using a Roth IRA to hold this, to increase the Roth space (worst case, you don't need it) and increase the psychological barrier to spending the money.
4) Dave Ramsey's 15% to retirement, though I'll call it 15-20%. This would be in the following order: If 15% or less marginal, HSA if allowed, Roth IRA, Roth 401k if decent, taxable. Otherwise: HSA if allowed, 401k if decent, IRA, Roth IRA, non-decent 401k unless truly horrible, taxable. In all cases, 401k also includes TSP, 403b, and governmental 457. Married couples consider all of their accounts.
5) Pay off intermediate-rate loans.
6) Save for replacement car.
7) Save for house downpayment.
8) College savings, if you have kids.
9) I bonds, if desired for anything in savings or for more of the bond allocation.
10) Roth IRA or taxable investing for "wealth building".
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Re: To whom does the advice "max out your 401k" not apply?

Post by tidalwave10 »

leonard wrote:One other thing on threads like this -

I wish people would spend more time devising strategies on Why? and How to? maximize 401k contributions, rather than expend the creativity and thought on how and why NOT to maximize 401k contributions.

Many don't want to save for retirement and just use these theoretical discussions on why it's "not optimal" to rationalize not doing it cause they don't want to or think they can't.
Sorry if you misread my intent--or if I've misread yours. While I disagree with your first sentence I don't deny your second. However, I do not fall in the category of folks who don't want to save for retirement. Quite the contrary. Let me explain.

I often phrase questions in negated form as a type of Reductio Ad Absurdum or Devil's Advocate Checkpoint. These types of questions often tease out great insights and nuances. Dullard that I am, I'm benefiting immensely from the replies here. In ways that will help maximize retirement savings, etc. To do or not do re: saving for retirement--that does not compute, to me, at all. Were this an argument--it is not--I believe it would be of the Straw Man variety.

Catching up on reading the replies to this thread but wanted to sound in sooner than later.
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Re: To whom does the advice "max out your 401k" not apply?

Post by bottlecap »

I think the application of common sense to general rules avoids any concerns like this. If you don't make enough to put a decent roof over your head, eat, live a little and max out retirement accounts, then this general rule does not apply to you. Realistically, in such a situation you don't need to max it out, because it's not like someone living on $40k will need to save $17,500 per year for 40 years to maintain a $40k lifestyle in retirement.

JT
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Re: To whom does the advice "max out your 401k" not apply?

Post by Garco »

bottlecap wrote:I think the application of common sense to general rules avoids any concerns like this. If you don't make enough to put a decent roof over your head, eat, live a little and max out retirement accounts, then this general rule does not apply to you. Realistically, in such a situation you don't need to max it out, because it's not like someone living on $40k will need to save $17,500 per year for 40 years to maintain a $40k lifestyle in retirement.

JT
Indeed. When my employer mandated that I would be putting 15% (my 5%, their 10%) into my 401k, with immediate vesting, I focused on my career and my family. That is a goodly lifetime retirement savings rate; almost anybody who keeps that up for 40 years is going to have an accumulation at retirement that can support them. Add SS and Medicare and you're very likely to be in good shape.

But taking care of home and family requires spending and investing more of your take-home pay, after the mandatory 401k. Specifically, if you have kids who are heading to college and you want them to graduate without debt, you save and invest for that. When that's done, if you have extra cash then up your retirement savings. You don't have to "max out" your retirement savings from the start, but you do have to make sure that it's a goodly rate for the long term.

This all depends on the baseline retirement savings rate that you may have. Mine was 15% starting in 1975 and continuing to this day. Initially I was only earning about $16K per year, so the contribution to the 401k was only about $2,500 per year (in 2014 dollars this would be about $11,000). But I got raises, lots of them. I now have a lot of money in that 401k (>$2 million), all from that 15% initial and continuing savings rate. I have a fair bit more than that b/c of other investments and savings, especially after the kids' college was paid for.
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Re: To whom does the advice "max out your 401k" not apply?

Post by BigHead »

tidalwave10 wrote:I'm all for maxing out--trying to do so myself and considering multiple retirement plan max-outs. Wife and I each have access to two retirement plans simultaneously: a 401k and 457b. Maxing out both is impossible for my wife--it would actually exceed her salary; especially since the Pension Plan takes 6% of each paycheck. Musing about mega-maxing out here--when to do it and why--but haven't received much response. Post is too wordy I suspect:

http://www.bogleheads.org/forum/viewtop ... 2&t=133041

... but I do question the wisdom of any universal directive to max out for those at all income levels. Guess I'd like to see suggestions to max out one's retirement plans come with a responsible conditional or qualifier, e.g. "If or When: X, Y, or Z..." Perhaps to say this is a goal one ought generally to aspire to?

Were you to provide a conditional or qualifier to the advice to max out, what would it be?
For a 401k, I'll match the employers contribution up to the limit.

Max the Roth IRA, as I feel it's more important than a 401k. Still in my mid twenties, taxes are the lowest they've been in decades, given the way the world is turning I have no doubt taxes will be higher than today when I retire. Access to the amount deposited is important in the event an opportunity comes a long that is irresistible and I'm cash short is important to me.

I haven't yet reached a bracket that puts me in the top income bracket which would spur me to add to a 401k, but at the same time I might continue to prefer avoiding the 401k for the immediate future, at least until tax rates increase. I much prefer the freedom of moving funds around. I'm currently heavy rental real estate, which gives me lots of tax writeoffs, and will remain my focus till interest rates go up/mortgages start being paid off.

Plus, I intend on having a high retirement income.

"max out your 401k" is a simplistic line meant for those who don't delve into the subject much to encourage them to save.
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Re: To whom does the advice "max out your 401k" not apply?

Post by Bacchus01 »

HSA should go right after pay down high interest debt and should come before a Roth.
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Re: To whom does the advice "max out your 401k" not apply?

Post by tidalwave10 »

bottlecap wrote:I think the application of common sense to general rules avoids any concerns like this. If you don't make enough to put a decent roof over your head, eat, live a little and max out retirement accounts, then this general rule does not apply to you. Realistically, in such a situation you don't need to max it out, because it's not like someone living on $40k will need to save $17,500 per year for 40 years to maintain a $40k lifestyle in retirement.

JT
Well said. Similarly, for another generic rule of thumb--suggesting one needs to plan to generate ~80% of current income annually (while employed) to live on in retirement, I call B.S. on that one. Perhaps it does apply to a specific segment of future retirees. But if one presently lives comfortably on 30K/yr, for example, and currently earns double or triple that amount, saving the remainder. Well, the 80% figure becomes almost meaningless, does it not? Unless one expects to live some personal version of The High Life in retirement that greatly exceeds one's current annual expenditures and ambitions.
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Re: To whom does the advice "max out your 401k" not apply?

Post by englishgirl »

I think it's a reasonably good rule of thumb. As already mentioned, for those that don't want to delve too deeply, it's a great goal. I think it's quite useful to say "do this, this, then this, in that order." Typically we say to contribute to the 401k enough to get any match, THEN fill up your Roth IRA space, THEN go back and max the 401k if you can. Now the HSA should be probably thrown in the mix before going back to max the 401k, but the advice starts looking complicated. Also, if one had a lot of debt, I think it would be a bad move to max retirement accounts but to just pay the minimums on debt. There has to be some sort of tradeoff of paying down debt while not foregoing all 401k/IRA space, for example. If we tried to write a rule for every circumstance, it'd be pages long.

I've never maxed out my 401k, for various reasons. I don't feel that I earn enough to be able to max out all retirement accounts and still enjoy life. Or maybe I just want to spend too much money now! I don't get a company match, but do get profit sharing if I qualify (working more than 1000 hours a year). I have been cutting down my hours as I transition to another career/business, but deliberately didn't go lower than 20 hours a week so I could qualify for profit sharing. I view it as a form of making sure I get the "match". I am not in a high tax enough tax bracket such that the immediate tax savings are a real draw to prevent me from using a "tax diversification" strategy of splitting my retirement accounts between Roth and regular - although I assume though if I WAS in a high enough tax bracket, I could max both, so perhaps it's a moot point. I do put at least 10% in to the 401k. In good years it's been as much as 15%. And I max out my Roth IRA and my HSA, which I intend to keep doing even when I give up the day job.

I have been looking at small biz retirement plans, for the day when I am ready to give up the W2 job. Most folks around here seem to recommend using a 401k because of the higher contribution limits, but I keep looking at the SIMPLE IRA and can't help but feel that it's going to be a better next step for us, as the administration is simpler. Given that I've never maxed a 401k, why not take advantage of the benefits of a SIMPLE even though the contribution limit is slightly lower. I'm assuming we could always switch to a 401k in 10 years if the biz is booming and we want to put more money away.
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Re: To whom does the advice "max out your 401k" not apply?

Post by sans souliers »

It's a lofty ideal to which one should aspire, but daily living has a tendency to restrict our reach for the stars. Especially young daily living.

That being said, there are life events that provide us with golden opportunities to shrink the gap between ideals and reality.

-- We just need to be reminded to take advantage of these events. --

Friend gets divorced, moves in with you temporarily, won't take charity, and insists on kicking in for the utilities? Adjust your withholdings at work.

Windfall events -- Inheritance, ..gift, ..bonus, ..profit sharing? Opportunity's knocking - put away most of it in the Roth.

Lifestyle changes -- got a raise? ..or got a promotion? You've earned a celebration, yes, but remember to increase your 401k investment.

Splitting the rent? You get the picture.
Sometimes pessimism leaves me pretty well prepared for when things don't go my way, and pleasantly surprised when they do.
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Re: To whom does the advice "max out your 401k" not apply?

Post by leonard »

tidalwave10 wrote:
leonard wrote:One other thing on threads like this -

I wish people would spend more time devising strategies on Why? and How to? maximize 401k contributions, rather than expend the creativity and thought on how and why NOT to maximize 401k contributions.

Many don't want to save for retirement and just use these theoretical discussions on why it's "not optimal" to rationalize not doing it cause they don't want to or think they can't.
Sorry if you misread my intent--or if I've misread yours. While I disagree with your first sentence I don't deny your second. However, I do not fall in the category of folks who don't want to save for retirement. Quite the contrary. Let me explain.

I often phrase questions in negated form as a type of Reductio Ad Absurdum or Devil's Advocate Checkpoint. These types of questions often tease out great insights and nuances. Dullard that I am, I'm benefiting immensely from the replies here. In ways that will help maximize retirement savings, etc. To do or not do re: saving for retirement--that does not compute, to me, at all. Were this an argument--it is not--I believe it would be of the Straw Man variety.

Catching up on reading the replies to this thread but wanted to sound in sooner than later.
In that case - you are making it way to complicated. Just max it out. If it's a close call - create a real budget, cut the unnecessary items (there always there), and then max it out to your ability.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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Re: To whom does the advice "max out your 401k" not apply?

Post by tidalwave10 »

leonard wrote:
tidalwave10 wrote:
leonard wrote:One other thing on threads like this -

I wish people would spend more time devising strategies on Why? and How to? maximize 401k contributions, rather than expend the creativity and thought on how and why NOT to maximize 401k contributions.

Many don't want to save for retirement and just use these theoretical discussions on why it's "not optimal" to rationalize not doing it cause they don't want to or think they can't.
Sorry if you misread my intent--or if I've misread yours. While I disagree with your first sentence I don't deny your second. However, I do not fall in the category of folks who don't want to save for retirement. Quite the contrary. Let me explain.

I often phrase questions in negated form as a type of Reductio Ad Absurdum or Devil's Advocate Checkpoint. These types of questions often tease out great insights and nuances. Dullard that I am, I'm benefiting immensely from the replies here. In ways that will help maximize retirement savings, etc. To do or not do re: saving for retirement--that does not compute, to me, at all. Were this an argument--it is not--I believe it would be of the Straw Man variety.

Catching up on reading the replies to this thread but wanted to sound in sooner than later.
In that case - you are making it way to complicated. Just max it out. If it's a close call - create a real budget, cut the unnecessary items (there always there), and then max it out to your ability.
Thanks Leonard. I'm now happily and consistently maxing out my 457b plan for this year. Adjusting to the drop in salary--no problem. Now considering if I ought to contribute to my 401k plan to get the additional tax advantaged space working for me--a more difficult call to make.

In the next Open Enrollment period, I'm going to sign me and my wife up for our Flexible Spending Accounts, for medical expenses like co-pays and prescriptions. Another way to lower my taxes and something I've never taken advantage of before.
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Re: To whom does the advice "max out your 401k" not apply?

Post by YDNAL »

tidalwave10 wrote:To whom does the advice "max out your 401k" not apply?
To "whomever" is not financially able, while putting a roof over their heads and meals on the table.
tidalwave10 wrote:... but I do question the wisdom of any universal directive to max out for those at all income levels. Guess I'd like to see suggestions to max out one's retirement plans come with a responsible conditional or qualifier, e.g. "If or When: X, Y, or Z..." Perhaps to say this is a goal one ought generally to aspire to?
Have you ever seen it suggested to save 20% of salary/income?.... use that.
http://www.bogleheads.org/wiki/Boglehea ... philosophy
Bogleheads Wiki wrote:Once you establish a regular savings pattern, you can begin the process of accumulating financial wealth. How much saving is enough? Twenty percent of income is a good baseline number.
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Re: To whom does the advice "max out your 401k" not apply?

Post by Garco »

leonard wrote:
Garco wrote:
leonard wrote:
Garco wrote:Lots of good advice, even ordered lists.
Why exactly would you do the minimum on retirement savings and then prioritize kids college over the rest of it? Is that the catch all "reality" part?
a. My basic goal was to arrive at point 6 with zero debt for me and everyone in my family (kids). b. My point #1 involved a 15% retirement savings rate already (employer put in 10% while I put in 5%). This was both the minimum and the maximum that I could contribute to my 401k. Do that for 38 years, and believe me, it really adds up. We succeeded, and when we had the basic goals covered we've used our last working years to pad the nest and max out supplemental tax deferred savings.
So, you simply made a goal that may or may not have optimized the finances.

Each year someone forgoes maximizing 401k's and IRA's - they simply loose that space.

Also, kids can get loans for college. You generally can't get a retirement loan.

Not an approach I would recommend - as I think the opportunity cost on the tax advantaged space is too expensive. Also, the risk of not having enough for retirement is a bigger risk than not funding kids college.
I'm not a dogmatist. I was not into maximizing my final wealth. You appear to have no idea how much it costs to go to a very good college these days; and sticking the kids with $300K+ in loans is not what we had in mind. My approach worked for us. We can retire with >$3 million in cash and investments, and no debt for anybody in our family. That's plenty enough.
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Re: To whom does the advice "max out your 401k" not apply?

Post by leonard »

Garco wrote:
leonard wrote:
Garco wrote:
leonard wrote:
Garco wrote:Lots of good advice, even ordered lists.
Why exactly would you do the minimum on retirement savings and then prioritize kids college over the rest of it? Is that the catch all "reality" part?
a. My basic goal was to arrive at point 6 with zero debt for me and everyone in my family (kids). b. My point #1 involved a 15% retirement savings rate already (employer put in 10% while I put in 5%). This was both the minimum and the maximum that I could contribute to my 401k. Do that for 38 years, and believe me, it really adds up. We succeeded, and when we had the basic goals covered we've used our last working years to pad the nest and max out supplemental tax deferred savings.
So, you simply made a goal that may or may not have optimized the finances.

Each year someone forgoes maximizing 401k's and IRA's - they simply loose that space.

Also, kids can get loans for college. You generally can't get a retirement loan.

Not an approach I would recommend - as I think the opportunity cost on the tax advantaged space is too expensive. Also, the risk of not having enough for retirement is a bigger risk than not funding kids college.
I'm not a dogmatist. I was not into maximizing my final wealth. You appear to have no idea how much it costs to go to a very good college these days; and sticking the kids with $300K+ in loans is not what we had in mind. My approach worked for us. We can retire with >$3 million in cash and investments, and no debt for anybody in our family. That's plenty enough.
Said another way - you were able to do all of it anyway, so the prioritization didn't matter.

Yes. College is expensive. People complain about it constantly on the forum. I get it. No need to imply ignorance on my part to bolster your choices.

it's a weird proposition not to maximize wealth. Anything else is far less measurable and intentionally non-optimal.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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Re: To whom does the advice "max out your 401k" not apply?

Post by Garco »

Said another way - you were able to do all of it anyway, so the prioritization didn't matter.

Yes. College is expensive. People complain about it constantly on the forum. I get it. No need to imply ignorance on my part to bolster your choices.

it's a weird proposition not to maximize wealth. Anything else is far less measurable and intentionally non-optimal.
You seem so stuck on the idea that I did not maximize my wealth because I only contributed the minimum to my 401k. I also wrote that I contributed the maximum to my 401k. They were the same number. I was not allowed to contribute any more.

But I also saved and invested for the kids' college education, which did cost about $300,000 (it would be more these days). And I was able to do that by liquidating the investment for that education, with the kids not ending up with debt. You also seem to think that I shouldn't have saved/invested money to pay for my kids' college, but perhaps invested it for something else. In actuality, when the bills come in and need to be paid, it's a good thing to have the money on hand unless you want to borrow money for that purpose. If I had invested the money in some other way rather than in a fund dedicated for the kids' college I'd have needed to borrow or to cash out the other investment to pay the $300K in college costs.

You seem to think that because I'd be wealthier today if I hadn't saved and paid for my kids' college, I failed to minimize my wealth. My parents paid for my college, and I pledged to pay it forward. It's a family thing. The investment in my kid's "human capital" was not only humane but contributed to their human capital. A very good investment.

You also disregard that as soon as those bills were paid I started putting money into other investments -- a lot of money in fact.

Frankly I have no idea why you think this is suboptimal. But frankly I also don't give a hoot what you have to say any more.
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Re: To whom does the advice "max out your 401k" not apply?

Post by leonard »

Garco wrote:
Said another way - you were able to do all of it anyway, so the prioritization didn't matter.

Yes. College is expensive. People complain about it constantly on the forum. I get it. No need to imply ignorance on my part to bolster your choices.

it's a weird proposition not to maximize wealth. Anything else is far less measurable and intentionally non-optimal.
You seem so stuck on the idea that I did not maximize my wealth because I only contributed the minimum to my 401k. I also wrote that I contributed the maximum to my 401k. They were the same number. I was not allowed to contribute any more.

But I also saved and invested for the kids' college education, which did cost about $300,000 (it would be more these days). And I was able to do that by liquidating the investment for that education, with the kids not ending up with debt. You also seem to think that I shouldn't have saved/invested money to pay for my kids' college, but perhaps invested it for something else. In actuality, when the bills come in and need to be paid, it's a good thing to have the money on hand unless you want to borrow money for that purpose. If I had invested the money in some other way rather than in a fund dedicated for the kids' college I'd have needed to borrow or to cash out the other investment to pay the $300K in college costs.

You seem to think that because I'd be wealthier today if I hadn't saved and paid for my kids' college, I failed to minimize my wealth. My parents paid for my college, and I pledged to pay it forward. It's a family thing. The investment in my kid's "human capital" was not only humane but contributed to their human capital. A very good investment.

You also disregard that as soon as those bills were paid I started putting money into other investments -- a lot of money in fact.

Frankly I have no idea why you think this is suboptimal. But frankly I also don't give a hoot what you have to say any more.
Great - I care less about your specific situation - more about what a boglehead reader might take away from your example. I am simply stating another point of view for the reader to take away.

You did what you wanted. You're happy. and, I don't give a "hoot" either.

btw - I'm some random guy on the internet - why so defensive.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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Re: To whom does the advice "max out your 401k" not apply?

Post by rob »

leonard wrote:I wish people would spend more time devising strategies on Why? and How to? maximize 401k contributions, rather than expend the creativity and thought on how and why NOT to maximize 401k contributions.
Because it's not a black and white world...

For example - I am LIMITED to 10% of my salary to my 401K... It's enforced by my employer. I cannot make the IRS limits to "max" my contributions, short of finding a way to vastly increase my salary.

Others, just cannot afford to save 17,500 each year because they are raising a family, have large health costs or just don't earn enough to fully fund everything.

I think it's important to fund what is possible but the buckets need some sort of priority sequence when you cannot fill them all - like making sure you get any match. I think it's an important discussion point.
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Re: To whom does the advice "max out your 401k" not apply?

Post by ThatGuy »

leonard wrote:Also, kids can get loans for college. You generally can't get a retirement loan.
Isn't a reverse mortgage a retirement loan?
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Re: To whom does the advice "max out your 401k" not apply?

Post by leonard »

rob wrote:
leonard wrote:I wish people would spend more time devising strategies on Why? and How to? maximize 401k contributions, rather than expend the creativity and thought on how and why NOT to maximize 401k contributions.
Because it's not a black and white world...

For example - I am LIMITED to 10% of my salary to my 401K... It's enforced by my employer. I cannot make the IRS limits to "max" my contributions, short of finding a way to vastly increase my salary.

Others, just cannot afford to save 17,500 each year because they are raising a family, have large health costs or just don't earn enough to fully fund everything.

I think it's important to fund what is possible but the buckets need some sort of priority sequence when you cannot fill them all - like making sure you get any match. I think it's an important discussion point.
It's not black and white cause people look to hard for the gray.

The reality is - if you start digging in to the finances of folks that "can't max out their 401k" - you'll find daily starbucks, multiple flat screens, a car that makes no sense, kids they can't afford, house they can't afford, etc. etc. So, not maxing out for some becomes an exercise in rationalizing.

BTW - maxing out assumes "maxing out for your situation" IMO. If your employer only allows 10% - than that's the max in your situation. But, then again, employers don't happen by accident.
Last edited by leonard on Fri Mar 07, 2014 1:10 pm, edited 1 time in total.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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Re: To whom does the advice "max out your 401k" not apply?

Post by leonard »

ThatGuy wrote:
leonard wrote:Also, kids can get loans for college. You generally can't get a retirement loan.
Isn't a reverse mortgage a retirement loan?
No - it's an asset backed loan that can be used for anything.

Also, would you in good conscience recommend one? Have you seen the terms on those?

One could technically get a loan from a loan shark for retirement - but would we recommend it.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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Re: To whom does the advice "max out your 401k" not apply?

Post by ThatGuy »

You have to be at least 62 to get a reverse mortgage. Sounds like it's obviously intended for retirees.

As far as the asset backing, every loan has an asset backing it, or the lender wouldn't do it. In the case of college loans, it's the future income since the loan can't be vacated even in bankruptcy, and they'll even garnish your Social Security for payment.

This is all aside from the point of whether I think a reverse mortgage is a good idea. I'm simply saying that such trite nonsense such as "you can't borrow for retirement" doesn't help.
Work is the curse of the drinking class - Oscar Wilde
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Re: To whom does the advice "max out your 401k" not apply?

Post by leonard »

ThatGuy wrote:You have to be at least 62 to get a reverse mortgage. Sounds like it's obviously intended for retirees.

As far as the asset backing, every loan has an asset backing it, or the lender wouldn't do it. In the case of college loans, it's the future income since the loan can't be vacated even in bankruptcy, and they'll even garnish your Social Security for payment.

This is all aside from the point of whether I think a reverse mortgage is a good idea. I'm simply saying that such trite nonsense such as "you can't borrow for retirement" doesn't help.
Great technically correct - but a moot point anyway since it's a bad option.

Not every load has an asset backing - some loans do not have collateral.

Other loans that technically retirees could use to fund retirement:

1. Pawn Shop
2. Loan Shark
3. Borrowing from children.
4. Pay day (if they have a job).

All of these technically true - any of them a REAL option. No.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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