All you personal finance geeks, get your gasps ready….
I’m not maxing out my 401k.
Am I nervous about it?
Do I think I’ll change my mindset in the near future?
Would I tell you to max out your 401k?
3 Reasons Why I’m Not Maxing Out My 401k
It seems like an absolute sin in the personal finance world, but I’m just not a big fan of maxing out my 401k. Why not? There are actually quite a few reasons. Three to be exact…
Most people love investing in their 401k because it’s tax deferred – meaning, if they invest the money today, they can avoid paying taxes until they take their money out later.
This is great and all….but here’s my take on it:
The United States’ national debt has more than tripled since 2001. In just a few more weeks, we’ll top the $20 trillion dollar mark. Chances are that as the debt continues to rise, the tax rates on the citizens will increase as well.
It only makes sense, right? The government earns their money from the country’s people. If the government doesn’t have enough money to pay their bills, then they need to earn more money…which means the people will have to pay more (ie. a higher income tax rate).
So if you can afford to pay cheaper taxes now vs. more expensive ones later, why wouldn’t you?
Secondly, I don’t make that much money today. My wife and I earn less than $100k a year and the majority of our earnings are taxed at the 15% federal tax bracket.
Because we save and invest two-thirds of our income, we’ll likely be multi-millionaires when we retire and will earn far more in the future than we do today. Therefore…heck yes I’d like to pay the taxes today!
So…would I like to start maxing out my 401k?
Ummm, no thank you.
2) We Might Want to Retire Early
Liz and I are on track to become millionaires long before we turn 65. Heck, we might even crack the 7-digit mark before we turn 40!
I understand that things don’t always go as planned (and I’m okay with that – after all, money isn’t everything), but even if we only earn half as much as I’m projecting, we’ll still have a fantastic chance at retiring early.
Soooo, if we’d like to retire early, why would I want to put a bunch of money into a fund where I’ll be penalized for an early withdrawal? (before 59 1/2 years old)
That doesn’t make a whole lot of sense does it…?
Umm, nope, it doesn’t.
3) I Like to Have Control Over My Money
Here’s the plan of 95% of the population:
- Set up an automatic withdraw to put money into a corporate 401k
- Ignore it for 40 years
- Hope that all the funds increase enough so you don’t have to eat SPAM in retirement
It’s a pretty crappy plan and I’m just not willing to sign up for it.
Instead of putting my money into the stock market and crossing my fingers, I’d rather have a little bit more control. For this simple reason, I’m just not too excited about maxing out my 401k.
So How Do We Invest Our Money?
Okay, so it’s pretty obvious at this point. I don’t simply max out my 401k and assume that the stock market will take care of my future. Our investing method is a little more involved than that. But, it’s really not all that complicated.
Here’s the basics of how we invest our money:
- I invest 7% of my corporate income into a Roth 401k, my employer contributes 10%.
- We invest 66% of our take-home pay into our next rental property purchase (Want to know how we’re able to invest so much of our income? Follow This Plan).
That’s it. It’s not fancy. It’s not sophisticated. It just makes sense, and it works for us.
How about you? Are you maxing out your 401k? How do you invest your money?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.