Don’t Think About Maxing Out Your 401(k) If You Haven’t Achieved These 4 Goals

Making the most of your 401(k) is a noble financial goal. Making sacrifices and investing money now will make your retirement more comfortable. The earlier you start, the more time it will take for your money to compound.

The problem is that you need a lot of money to max out your 401(k). If you are under age 50 in 2024, the 401(k) contribution limit is $23,000. If you are age 50 or older, you can contribute up to $30,500.

If you can afford to part with that level of cash, great. But for someone with relatively average income and expenses, that number is probably out of reach. But it’s okay. Before maxing out your 401(k), here are four better goals to aim for instead.

1. Pay off credit card debt

Paying off credit card debt will give you much more bang for your buck than maxing out your 401(k) in a typical year. The average credit card interest rate is over 21%, while the average annual return on the stock market is around 10%.

That means if you invest $100 in your 401(k), you’ll typically have about $110 at the end of the year. But after a year, your $100 credit card balance will grow to $121 in debt.

The cost of credit card debt is higher than a typical 401(k) return, so aim to pay off any balances before making your 401(k) a priority. Balance transfer credit cards can be a great tool for paying off debt and saving money on interest.

2. Build an emergency fund

Before you can fully utilize your 401(k), you need a solid emergency fund. A high-yield savings account is a great place to keep that money. Typically, you want to have enough to cover your bills for three to six months to ensure you’re protected against unexpected events like large medical bills, home repairs, or job loss.

Contacting your 401(k) in an emergency can be very expensive. When you invest in a 401(k), you are essentially tying up your money for a long time. Withdrawals before age 59 1/2 are generally subject to a 10% early withdrawal penalty in addition to applicable income taxes. Because the value of investments fluctuates, there is a risk that you will need money when the market falls, or you may have to take a loss and cash out your investments.

3. Make the most of your Roth IRA

It almost always makes sense to contribute enough to achieve the company’s entire 401(k) match. After all, who would refuse free money? However, if you’re considering making outstanding contributions to your 401(k), it’s usually a better idea to maximize your Roth IRA first.

The best Roth IRA brokers charge low fees and allow you to invest in just about any stock, bond, mutual fund, or exchange-traded fund (ETF) you want, while 401(k)s have higher fees and a relatively limited menu. provides. of investment. Additionally, unlike a 401(k), an IRA is not tied to your employer. If you change jobs, you don’t have to worry about your 401(k) rollover.

Once you’ve maxed out your Roth IRA, you can decide whether it’s worth making an unrivaled 401(k) contribution.

4. Save for medium-term goals

You probably have a lot of financial goals you want to achieve before you retire. Maybe you want to buy a house, save for college for your children, or take your dream vacation.

Sometimes the best course of action is to balance your goals a few years down the line with saving for long-term needs in retirement. But remember that the time between now and retirement is also important. It’s important to continue investing for retirement, but if your nest egg is on track, you may find that it makes more sense to save for mid-term goals than to max out your 401(k).

How much should you save in your 401(k)?

Typically, you want to replace about 80% of your pre-retirement income. To do this, aim to save at least 15% of your pre-tax income for retirement in a 401(k), IRA, or a combination of the two.

Depending on your situation, you may need to adjust these goals. If you started saving late or are aiming for early retirement, you may need to save more. But if you start investing early and retire debt-free, you can get away with saving less.

Your top priority should be taking advantage of your employer’s 401(k) match. Beyond that, the amount you aim for each year will depend more on your income and budget than the contribution limits set by the IRS.

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