Should you always max out your 401(k)? Not necessarily. It’s often treated as the default advice for anyone serious about their finances, but maxing out contributions isn’t automatically the right move for every situation.

Retirement Savings Have a Cost

Retirement savings are important, but not if they’re coming at the expense of an emergency fund, high-interest debt, or other major financial goals. Money directed into a 401(k) is money that isn’t available for a job loss, a medical bill, or a high-interest credit card balance that’s growing every month it goes unpaid. Pushing contributions to the max without addressing those areas first can leave someone financially stretched in the present while still building for a future that’s decades away.

The Order of Operations Matters

The order of operations matters. Retirement savings, an emergency fund, debt paydown, and other goals aren’t competing priorities so much as steps that work best in a certain sequence.

Start by capturing your employer match, since that’s typically the highest-return, lowest-risk move available in a financial plan. From there, build a solid financial foundation, including an emergency fund and a plan to pay down high-interest debt. Once that foundation is in place, increasing retirement contributions as part of a broader plan makes far more sense, since it’s no longer competing with more immediate financial needs.

Retirement Savings as Part of the Whole

Maxing out a 401(k) can absolutely be the right move for the right person at the right time. But it works best as one piece of a broader financial plan, not as a goal pursued in isolation from everything else going on.

Where does maxing out your 401(k) fit into your current order of operations? Have a question or want help understanding your options? Contact us today to schedule a complimentary Q&A with one of our team members.