My first major financial decision…I maximized my 401K contributions from the beginning. 25 years ago I first started working full-time after college and it was an exciting time joining the workforce. On my first day on the job I was handed a bunch of paperwork to fill out. One of the pieces of paper I had to fill out was 401K contribution. What did I know about 401K? Nothing! Fortunately, I knew someone who did and he gave some advice. Max out your 401K. At that time, there was news that social security may not be around by the time I reach retirement age and we needed to prepare for that.

I was new to the workforce. I wasn’t thinking about retirement…I was just happy I had a job! So, what did I do? I took the advice of maximizing out my 401K contribution not knowing what that really meant. I didn’t truly grasp the 401K concept, purpose, and expectation. What I did know was that my employer was going to match a certain percentage of my contribution which means they’re going to give me money! Who doesn’t want extra money? 

Yes, I know. This is a retirement fund and typically you cannot access this money without a penalty. Some say money now is better than money later. I didn’t see it that way. I saw an opportunity to get additional money even though I wouldn’t see it right away. So that was my first experience. Since then I’ve had many jobs and at each job I did the same thing, maxed out my 401K. I’ve been fortunate enough that every employer made contributions so my thought process was the same. I’m getting extra money from my employer.

Was there a downside for doing this? When I was dating my wife before we were married, I made a comment that I was broke all the time. She made less than I did. She had a house, a car, and a dog all on her salary. I also had a condo, a car, but no dog. She couldn’t believe I told her I was broke and asked to see my pay stub. She flipped when she saw that I maxed out my 401K. She was an accountant and she believed that money now is better than money later. I kept my contributions the same.

Fast forward, I rolled over all my 401K’s into an IRA. That’s another topic I’ll write about in the future. So where do I stand today. 25 years of maximizing 401K contributions. Here’s a site that shows you historically what the maximum contribution amount are each year. You do the math. Plus don’t forget that these are investment portfolios so hopefully they grew, which they did. But there’s not much I can do with this because it’s in my retirement account and if you withdraw too early, you could incur a penalty. I don’t know what my plans are. I would like to live off the growth and dividends, but I have to keep in mind the penalty fee and taxes.

There are pros and cons to maximizing your 401K. I’ve been fortunate that I’ve been able to do so and still be able to maintain a decent lifestyle. Here are the pros and cons from my perspective.

Pros:

Contributing towards your retirement because of the potential social security may not be available

Employer contribution matching (extra money)

Reduces your taxable income (could be key if you are on the border of the next tax bracket)

Investing for your future (I don’t want to be forced to work because I have no retirement savings. Read this article)

Cons:

Reduces the amount of cash now (I feel you live within your means and you adjust)

If you withdraw too early, you can incur a penalty fee

In conclusion, I have no regrets with the decision I made 25 years go. Yes, I had less cash but I lived within my means. It’s contributing towards my early retirement portfolio. How will I use this? Will I end up penalizing myself if I withdraw too early? Are there easy ways to avoid penalty? Lots of unanswered questions. If you are interested in following my journey, email subscribe to get alerts of latest posts.