Should you max out retirement accounts?

Retirement! Why did I start saving in my 20s for something that won’t happen for so long? While its frustrating for me it does give me the peace of mind that I am actually saving. However, I don’t do it quite as conventionally as some. In this post I’ll dive deep into the question: “should you max out your retirement accounts?”

Conventional 401k & Retirement Wisdom

Conventional retirement wisdom from the likes of Dave Ramsey is fairly straightforward. It goes something like “invest 10-15% of your income and you’ll be set”. While I don’t think its that straight forward I do think that saving for retirement is not overly complicated.

The biggest issue people has right now is that they don’t save enough. With the savings rates where they are at, people are relying on social security, which has its own issues.

Within the personal finance community everyone says you must max out your retirement accounts. It usually goes something like:

  • Hit your employer match
  • Max out a roth ira (if you’re young)
  • Max out your 401k
  • Max out your HSA (if you have access to one)

Of course I agree with savings, but I think just blindly saving all your money may not be the best idea. After digging into it a bit more I started asking (and answering) myself “should you max out my retirement accounts?”

should you max out retirement accounts

When can I access my retirement savings?

If you put money away for retirement and get all the tax advantages, when will the government let you have access to that money? 

The most straightforward answer is not before you hit approximately 60.

Everyone within the personal finance community will point to a number of ways you can get access to the money before then. I like to keep things simple. I don’t like to assume those loopholes will be around forever.

If you’re interested you can read about some of these ways to access retirement funds here and here.

What if I have too much retirement savings?

I realize not everyone is able to ask themselves this question but its something I have asked myself. I first asked it after I ran across this article

I’d recommend clicking on that because it shows how someone that is 30 years old could already have too much in their retirement account. Of course I think a 5% withdrawal rate is a bit much I do believe the idea has merit.

I hadn’t considered it before but it does make sense that you can save too much for retirement. If I can’t easily get the money out then wouldn’t that be a bad thing?

Example of saving too much for retirement

Lets say you are 40 years old and have been maxing out your retirement accounts for 14 years. This would have allowed you a little time to get your feet under you and then pour everything into retirement.

Lets assume you have maxed out your 401k each year in addition to a roth for you and your wife. That makes it ~ 32,000 (assuming a little employer match).

Assuming that money didn’t grow at all (which is a bad assumption) you’d have 448,000 in your retirement accounts. You’ve got 20 years (at a minimum) till you retire. Lets also assume you get 5% return after taxes.

After a little math I calculate you’d have just short of 1.2 million. Lets say you can live off of 50,000 per year. Throw in the 4% rule and you can pull out just shy of what you need.

This means that this person, after maxing out their retirement accounts for 14 years of their life, should probably consider slowing down sometime soon.

Given that they will likely always get an employer match I’d think they should run the numbers on only investing enough to get the employer match.

Thoughts on retirement example

Don’t get me wrong this is a great situation to be in. However, during my 20s and 30s is when my expenses may be my highest. I also may want to invest in education or my family.

While I am certainly a proponent of saving for retirement, I can’t say I’m a proponent of blindly maxing out your retirement accounts every year.

The other thing that is unconventional that I do is save in taxable investing accounts.

What about taxes?

I already know what you are thinking, saving in taxable accounts means you are paying excess in taxes. You are correct. In fact, I’ll readily admit this situation is not optimizing my tax situation.

However, never let taxes along decide your path. You should decide your path first and then try and optimize the taxes.

I think about it this way, what if I did have 100,000 sitting in taxable accounts? Assuming thats invested in VTSAX and didn’t withdrawal anything it would spit off around 2.2% in dividends.

That 2,200 each year would be taxed as a long term capital gain meaning 15%. This would mean having the peace of mind, flexibility, freedom of 100,000 is going to cost me $330 a year.

I’ll take that any day.

Should you max out retirement accounts?

Even if you don’t agree with me I hope you see where I’m coming from. I never blindly take someone’s advice and try and run it through my own mind to see if it seems logical.

It turns out I won’t be maxing out my retirement accounts. I don’t think it makes sense for my personal situation.

While I’m fortunate to be in a position to even consider saving too much for retirement I’ll elect to save a good chunk in retirement but then put the rest in taxable savings.

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