Retirement: Here's Why I'd Never Max Out My 401k First
When Covid hit in 2020, the financial markets took a tumble. Corning Inc. decided to pause the 401k match for a period of time. I chose to reduce my 401k contributions and contribute to a Roth IRA instead. I made the maximum allowed Roth IRA contribution that year. The rest went into my employer 401k. When the 401k match was resumed, I made sure I put enough into the 401k to get the maximum match, but I continued to do full Roth IRA contributions every year.
I have a friend named Phil who's retired and works his retirement finances pretty hard. I consider him to be a savvy financial person. One day while visiting Phil in Charlotte, I shared my retirement savings regret. I wished I had contributed to the company 401k enough to get the full match, then did the full yearly Roth IRA contribution, and if I had money left, I'd go back to the company 401k. My argument for this strategy was building a tax-free nest egg that I'd feel better about in retirement. There are a lot of retirement videos that explain how taxes will become important to you in retirement, even though you pay them without a thought during your working years.
A few days later Phil called me. He'd done some analysis of my strategy versus sticking to the employer 401k totally. He argued that the end result wouldn't matter. Why? His math included the assumption that one would put more into a pre-tax 401k than in a post-tax Roth IRA. If you saved $100 a month in a pre-tax 401k, you might only be able to save $80 a month in a Roth IRA, because you need to pay the taxes now versus later. So Phil's argument was that one would end up with about the same nest egg, or more, with a pre-tax 401k contribution strategy.
Today I watched this video. This is a video every still-working person, young or old, should watch. There's another strategy to consider, and it surprised me.