An Argument For 401(k) Minimizing

Just about every financial adviser demands you max out your 401(k) contributions, at least to the percentage your employer matches, which is why it’s refreshing to see a rare counter-argument.

Personal finance blogger Debt Ninja makes a coherent case for reducing his retirement contributions, reasoning that it makes sense to rob from his 60-something-year-old self and giving up stock market advances and decades of compounded interest to give himself a raise when he’s young and needs the money more.

He writes:

3) The third, and probably most important, reason I decided to reduce my retirement contribution by 3% is this: I had no plans for the short term. Sure saving 18% for retirement is great, but guess what? That doesn’t make me rich until I’m 60 years old. What if I want to have a good chunk of change accessible in my 40’s? What if I want to retire early, but don’t want to be penalized for withdrawing from my retirement accounts? Well my friends, this is where the ’short-term’ investing game comes in to play. I have to start exploring other means to grow my money. I have been so focused on retirement, I completely forgot to establish a game plan for my 30’s, 40’s, and 50’s.

Is Debt Ninja rationalizing here or is there validity to his methods? What tweaks have you managed your 401(k) since the economy committed seppuku?

My 401K is gonna be pissed! [Punch Debt in the Face]


Edit Your Comment

  1. The Federalist says:

    I save the bare minimum required to get the matching contributions. This works out to be an automatic 50% gain not counting market performance. The rest of my retirement contributions go to a Roth IRA where I have full control of where my money goes (ie. if the market is really lousy I can hold it all as cash).

  2. Erwos says:

    Where did he make a counter-argument to contributing to get the full employer match? That’s exactly what he did. He was simply saying that he had other places he could invest the money. Given that he was maxing out his Roth IRAs, too, dumping it into the 401k didn’t make sense to him. That’s a pretty reasonable argument. You can’t plan ONLY for the future.

    So, basically, another overly sensational Consumerist lead-in. Where’s the Consumerist expose on how blogs are now overly sensationalizing their news because the bloggers live and die on page views? Massive conflict of interest.

    • morgasco says:

      Yeah, the title is misleading, along with the lead in. He’s still taking advantage of the employer match in full, along with socking away money in his ROTH IRA, so I fail to see how he’s reducing the percentage that the employer is matching. All it seems he’s realized his the fact he needs to balance out his investment plan with short term liquid funds, which should be part of any investment plan, you know, the whole short term/long term goals thing.

      My favorite line is “Oh, and the government only matches 5% anyways.” I think a lot of people wish they had an employer match that nice, especially now.

  3. friday3 says:

    It is a little misleading to say he wants to minimize his 401K. He took $100 a month away from it, for possible other investments. If that $100 allowed him a higher standard of living in his younger days, I do not see the problem. I have never understood the need for people to want to live this magical retirement life, while being broke or not enjoying life while you have the ability to do more things.

    • RandomHookup says:

      There’s a balance — you don’t want to be 87 and living on only your Social Security and the generosity of your children. Some people overestimate what they need in retirement, but way too many don’t make any retirement savings at all (or lost it all over the last couple of years). The interesting pattern I’ve heard about is needing more in your early retirement because you want to travel and enjoy life, but then not spending as much as your health declines (or you’re tired of the cruises and just want the early bird special at Denny’s, then Matlock).

      • floraposte says:

        Is that true, though, given the limits of what Medicare covers and the high costs of residential care?

        • Eyebrows McGee (now with double the baby!) says:

          It’s kind-of a crapshoot in terms of your health and your lifestyle. One of my grandfathers, who worked three jobs to build himself up from dirt-poor (after growing up in the depression, serving in the Navy, etc.) so he could send all four of his kids to college, saved a ton for retirement, retired super-healthy, and spend nearly 30 years travelling all over the world with his only meds a daily aspirin and occasional advil for a tricky knee when he played too much tennis. (I got an e-mail from him when he was 81 and in Africa saying, “I’m so glad I visited Kenya while I’m still young! It’s much more fun hiking!”) His health is declining now but he and his wife are able to care for him at home without much help and they don’t spend a lot of money these days, unlike their globe-trotting days. Their arrangements ensure a fairly inexpensive last few years. (Man I feel morbid saying that.)

          My other grandparents, my grandma’s health was never robust after she turned about 70, so they had a quieter retirement, but then my granddad’s final illness was long and extremely expensive for the necessary palliative care, so they spent a lot of money at the end of his life, particularly so he could have most of his care at home instead of in the hospital. (My grandma died 52 days after he did, literally as soon as she finished settling his estate.)

          But they probably couldn’t have predicted, in their working years, how their health, and in particular their final illnesses, would work out.

    • Firethorn says:

      By the sounds of it, he’s still saving that money, he’s just keeping it in accounts with more liquidity than 401ks. So if he gets cancer when he’s 40* he’s better off.

      Right now, if his income is low enough there’s also the reduced capital gain tax rates right now. I’m low enough that my standard mutual fund isn’t taxed either. So I’m not penalized for keeping some assets liquid in case of emergency/unemployment/etc…

      *This MAY be something that you can pull from a 401k without penalty, but it’s still less liquid than a traditional mutual fund or many other investments.

  4. wrjohnston91283 says:

    He makes the arguement that you might need the money in your 40s/50s, or before you can get it out of your 401k. If so, still save they money, but put it in a regular brokerage account (always available), or a Roth IRA (you can get money out prior to 60’s, but still some limitations). Even put it in a regular savings account or a CD is better than nothing (which is what you’ll be earning)

  5. NeverLetMeDown says:

    It’s a matter of what he wants his consumption profile to look like over time. Personally, I save with the orientation to ensure that I have adequate resources for when working is unlikely to be an option, but to each his own.

    While there’s lots of debate over this, the one clear, fundamental, “if you get nothing else, get this” fact of 401(k)s is: if there’s an employer match, contribute to get it. There’s no other place you can get a guaranteed 100% instant return. It’s the best deal around.

    • rpm773 says:

      It’s the best deal around.

      It think it’s even more than that – it’s part of your compensation package. If you don’t max out you employer’s contribution, it’s like leaving a part of your salary on the table.

    • FatLynn says:

      Plus, with most employers, you only need to put in about 6% to max your match. That is really not a lot.

    • bjcolby15 says:

      I agree that 6% is not a lot of money for a match, but I certainly have a problem when people proclaim that the employer’s contribution is “free” money. The employer’s 401(k) contribution is actually one of two things – it’s money to offset the taxes you’ll pay when you turn of age, and it’s money to ensure your loyalty to the company – a “mini bribe,” if you will – meaning you’re bound under their rules and regulations. Thus, a contribution is NOT as free as in absolutely free, but with a few strings attached.

      If you don’t want to contribute to their 401(k) plan now but want to in the future (or conversely, you’ve contributed a lot and you want to take a breather), the company is not going to care. It will care about your performance and your daily contributions to their operations. If you’re not contributing, then those employer matches (and all other benefits) end instantaneously after HR hands you a box and tells you to clean out your desk, because your services are no longer required.

  6. Tim says:

    18% is a bit much to save for retirement anyway, I think.

    My employer stopped 401(k) matches about three weeks before I became eligible (turned 21). So I haven’t even established a 401(k).

    • Firethorn says:

      Right now, I plot on saving 20% of my income.

      10% towards retirement*, 10% to a liquid fund that I term ’emergency fund’. If it gets large enough, it might eventually become an early retirement fund, but it’s there.

      *My job still comes with a pension, this is in addition

      • RandomHookup says:

        What’s this “pension” of which you speak? Is that some kind of way of stocking up on deer meat for emergencies?

        • Firethorn says:

          It can otherwise be called a ‘defined benefit package’. Serve XX years, get YY% of my salary for retirement.

          It’s not enough to actually retire on, thus the saving 10% towards retirement.

      • Harry Manback says:

        My plan for this year is roughly 24% of my salary into my 401k, because my employer will match 50% of that. I figure even if I end up borrowing from it to help pay for a house (which I might not even have to do) that I will be ahead because of the automatic match (which requires no time to be vested fully). It’s going to be a struggle, but I figure it’s worth it. I figure with $50k at age 25 already in my 401k (along with almost $35k in liquid (or at least semi-liquid, like my brokerage account) funds) I am doing alright for now. I would like more savings so that I can buy a house and have 6 months of savings, but since I’m living on my own and contributing so much to my 401k it’s difficult.

  7. tbax929 says:

    I stopped contributing when my (now former) employer stopped matching. If your employer does match up to a certain percentage, then it’s a great deal. When I start my new job, I’ll start contributing again, as long as they’re matching.

  8. CumaeanSibyl says:

    Well, if his employer only matches up to 5%, he’s not gaining that much by contributing the extra 3%, and he may well be able to get more out of it through short-term investing. Or he might lose his shirt in the market, but hey, that’s a risk you take.

    My husband’s employer matches 2-to-1 up to the first 5%, so that’s our 15% right there. This is fortunate, because he makes $35K before taxes and trying to save 15% of that ourselves would be a little difficult. This is also why we don’t have a Roth IRA.

    I don’t know how $50K for one person in San Diego compares to $35K for two people in Michigan (we have a super-low cost of living), but I definitely sympathize with the wish for a little breathing room. If we saved 8% of gross income and maxed out a Roth IRA, we’d wind up down about $800 a month. Doable, but not desirable.

  9. TailsToo says:

    My company stopped matching last year, so I didn’t increase my contribution percent this year. My thought is that I would be better maxing out my ROTH (better investment choices, and perhaps tax free after I retire) and putting more money towards my mortgage payments and any other debt… just adding another $150 a month to the mortgage payment takes several years off of the term of the loan!

  10. MaytagRepairman says:

    At 18% I think he was oversaving for retirement at the detriment of other financial goals but on the other hand I’ve never met a senior citizen that complained they saved too much.

    • myrna_minkoff says:

      An excellent, and often overlooked, point.

      No one says, “I have too much money now. I should’ve bought more gadgets in my 20s.”

  11. diasdiem says:

    Right now I only put in enough to maximize my employer match (6%). At the moment I’ve only been putting about 10% of my takehome into my Roth IRA, which only makes up about half the maximum. After two years in a row where my savings account is at almost the exact same spot after paying taxes and maxing out the IRA (which is depressing), I’m diverting more to savings, as well as building up money to invest outside of retirement, hopefully to build up money I can use right when I need it without having to wait until I’m 65.

    Saving for retirement can feel very hard. You’re essentially chucking money in a hole that you can’t take it out of for decades. It’s money you have in the future. I personally want to see the money I have RIGHT NOW grow.

  12. godospoons says:

    I don’t understand the premise of his decision. He’s taking money out of long-term savings to deal with mid-term goals? How about sacrificing short-term desires for mid-term goals? Also, he didn’t give himself a 3% raise, as 401(k) money is pre-tax. At best, he gave himself a 2.something% raise at his income level.

    He’s already suffering the pain of deferring the money to savings, so I would suggest something else. At his age, I started another tradition–a systematic investment plan into a traditional brokerage account. I funded three mutual funds with $500 each and contributed $150 a month in total split across the bunch. I raised the amount contributed as my income rose. That account, a bit over a decade later, is nearly $100K.

    I have had it at my disposal when buying my house or a car but, on the other hand, have never used it for either case, preferring to save separately for those goals.

    On another note–why would anyone pay cash for a car? New car loans are extremely cheap with good credit, as they are secured by the asset, and it impacts your financial flexibility by locking money up in an non-liquid asset.

    • Firethorn says:

      He’s not taking money out of long-term savings, he’s contributing LESS to long-term savings to build a mid-term reserve/meet short-mid term goals.

      He might not have the money available to drop his living expenses much further.

      On another note–why would anyone pay cash for a car? New car loans are extremely cheap with good credit, as they are secured by the asset, and it impacts your financial flexibility by locking money up in an non-liquid asset.

      It all depends on the terms. Last time I got a vehicle I wasn’t able to get one of those 0% loans, got stuck with 5%. The loss of my old vehicle was unexpected, thus I didn’t have the cash to buy the new vehicle up front.

  13. Richard H. says:

    So he went from over-investing in his 401k to doing a full match of his 401k. That is not the argument that you should invest up to the company match, that is him bringing his retirement IN LINE with maxing out the company match and nothing more.

  14. myrna_minkoff says:

    I keep wrestling with this issue. My employer’s plan has some pretty sad fund options, so I would prefer to invest on my own. But — they match half of our contributions up to 10%.

    • diasdiem says:

      I have no idea what my employer’s 401(k) invests in. I have no choice in funds. I only put into it for the employer match.

  15. Harry Manback says:

    I wish I could do this, but my employer matches 50% up to the federal limit. That means I have to contribute nearly 24% of my salary to my 401k (which I did last year and will try to do this year) to get my maximum match. It’s nice on one hand, because I already have $50k saved in my 401k and I’m only 25, while also having nearly $35k in liquid (or semi-liquid) savings. It’s hard to build my personal savings when so much goes to my 401k, especially when I’m single and trying to pay off student loans, and my car loan, but I think I’m doing ok for now.

  16. chocolate1234 says:

    When I first graduated college and started working, I didn’t know much about 401K’s. I contributed 15% even though my employer only matched the first 6%, and didn’t contribute to an IRA at all. This year my employer stopped matching, so I dropped it down to 1% until I max out my Roth. Probably should have done that in the first place anyway.

  17. GuidedByLemons says:

    “I have been so focused on retirement, I completely forgot to establish a game plan for my 30’s, 40’s, and 50’s.”

    Um, how about you, like, draw a paycheck during those years? By working?

  18. evilpete says:

    paying off your mortgage early is a better use of you (unmatched) 401K.

  19. trujunglist says:

    just maximize the employer match and you’re done. that’s basically nothing considering they reduce the amount they’re willing to match constantly, at least for me.

  20. bjcolby15 says:

    Don’t forget debt, either. I’m in the process of paying off my credit cards and nothing gives me a far better return than paying myself the 20+% APR on paid off cards…and goes directly into my bank account. I also paid off years of college debt in 2008 the same way, and even though the interest was lower, it felt wonderful to have them gone and away from my mind.

  21. krunk4ever says:

    That’s why you contribute to Roth IRA or Roth 401K which doesn’t have penalties when you withdraw just your principle any time between now and when you retire.

  22. bwcbwc says:

    If he’s saving 18% in his 401(k) he has some room to play around with other investments. Just don’t spend it all in one place.

  23. says:

    Debt Ninja seems like a pretty smart guy. And kind of common in his approach. Studies have shown that the college grad is most likely to make this stupid mistake in their twenties. They see spending and borrowing as the most important aspects of their lives (in fact, some studies have shown that the top reason college grads use a 401k is because of its loan provision). It is like you attend four/eight years of college and then you take a personal hiatus from prepping for the future because you believe the earning curve will favor a lot of big bucks around 35. It may but playing big contribution catch-up does not replace those early years.

    Those studies also show that dropouts and high school grads (those with a more linear earnings future) tend to invest at least as much as the matching contributions.

    It is hard to tell a young person to live low and pay off your debts. And he is right, stealing from his sixty-tear-old self is criminal. The jailhouse will be regret.

  24. cimorene12 says:

    Ninja is saving for a house and will soon propose. He’s freed up about $1200 that he can take home, if you have read the article in entirety. It’s not a huge deal, but it gives him a little more flexibility, which is great at this point in his life. Ninja made the right decision for him.

    As he wrote in his blog today, everybody should contribute to get the maximum employer match.