I read a Bloomberg article about high earners who have stopped trying to put the maximum into their 401(k)s. After 36 years in financial services, their reasons sounded familiar. What stayed with me was how easily the headline could be read as advice to save less.
One woman in the article had already saved about $500,000 in her workplace plan. She planned to cut her contribution from 20% of pay to 5%, enough to get her full employer match, and put the difference into other accounts. She wants to retire early and have money she can use before age 59½.
That raises a question for the employees at the smaller companies I advise. If you can set aside another $50 per paycheck, what do you need that money to do?
Maybe you’re saving for the next car repair, putting a little more away for retirement, or deciding how much you can afford to give to your alma mater. As a Cal alum, I get plenty of reminders about that last one.
Would it earn you more of your employer’s match? Ask how much you need to contribute to get the full amount. If you already get the full match, look at what else that $50 could do. If a car repair would go on a credit card, some money in a savings account could give you room to handle it. If the money is for retirement, putting more into the 401(k) may still make sense.
Do you want different investments? One investor Bloomberg interviewed wanted to own individual stocks and crypto. Another saver wanted money available for an earlier retirement. Those are different goals. If you expect to spend the money in the next few years, ask what would happen if your investments fell just when you needed to sell. If your concern is the 401(k)’s investments, look at the full list and what each option costs. The fund you were automatically put into may be one of several choices.
When will you need the money? If you leave a job in the calendar year you turn 55 or later, withdrawals from that employer’s 401(k) can qualify for an exception to the additional 10% federal tax on early withdrawals. You can qualify even if you leave before your birthday that year. You’ll still owe income tax on pre-tax withdrawals, and the exception doesn’t follow the money into an IRA. Before moving the account, ask whether the plan lets you take part of the balance and leave the rest invested.
If you run a small company, try this at your next 401(k) review. Ask someone to explain the match using a real paycheck example, show an employee where to find the investment fees, and explain what the plan lets them do with their balance when they leave. Put those answers where employees can find them before they have to make a decision.
When someone asks me whether to put more into their 401(k), I’d start with two questions. What are you saving for, and when will you need it? The annual limit tells you how much you’re allowed to put in. Your answers tell you what you need the money to do.
#401k #RetirementPlanning #SmallBusiness