Maxing 401K frustration

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conservativeinvestor
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Maxing 401K frustration

Post by conservativeinvestor »

Maxing 401K contributions each year seems to be common advice everywhere I look. The articles and forums make it sounds like every one is doing it and it's so easy everyone should be doing it.

I am a goal oriented person and have had a goal to reach the max limit, every promotion or pay raise goes into an increase in 401K contributions and while my contributions started out at 10% and have grown to over 20% I still haven't been able to reach the contribution limit over many promotions and pay increases.

A person making the U.S. mean annual salary of $56,000 per year would have to put in a whopping 36% of their pay to meet the maximum contribution limit this year.

Why is this such common advice? Is there an assumption made that the only people reading this advice are high income and can meet the max contribution limit with little sacrifice?
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JoMoney
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Re: Maxing 401K frustration

Post by JoMoney »

*shrug* I don't assume advice I read from anyone in particular is the advice from "everyone" to "everyone" in every situation.
If you asked someone who said that specifically, you might get different replies from different people.
I'm a fan of maxing 401k contributions, and my maxing I mean to the extent the individual is able to contribute, whatever the max they can afford, and if they have a high enough savings rate and income they'll hit the maximum allowed by tax law.... and even then there are different maximums depending on whether or not the plan allows for contributing non-roth after-tax contributions... and some plans have there own maximum % , my former employer allowed for non-roth after-tax contributions but I was limited to contribution 50% of my pre-tax income each paycheck, which at the time was just barely enough to allow me to max out both the pre-tax and post-tax contributions each year.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
sailaway
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Re: Maxing 401K frustration

Post by sailaway »

The most common advice is to get the match, which tends to be a much lower bar.

Here at bogleheads, the order of operations does not even suggest that the next dollar would go to 401k.

Are you goal oriented or just keeping up with the Joneses? If you are goal oriented, you should be setting goals appropriate for your situation. Otherwise you are just trying to fit in because it is something you heard about.
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oldcomputerguy
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Re: Maxing 401K frustration

Post by oldcomputerguy »

Don't let the stuff you're reading discourage you. Yes, a lot of the literature does suggest maxing out a 401k as a target, but it's not an absolute requirement. Nor is it "easy". Savings requires discipline in order to live below your means and put the rest into something that won't benefit you for years down the road. From what you describe, I'd say you're doing great.

If it makes you feel any better, Professor William Bernstein in his book "If You Can" suggests that one save 15% of one's salary into a retirement fund, so you're already exceeding that target. :beer Keep saving as you can, and stay the course.
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Da5id
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Re: Maxing 401K frustration

Post by Da5id »

conservativeinvestor wrote: Sun Jan 23, 2022 8:56 am Maxing 401K contributions each year seems to be common advice everywhere I look. The articles and forums make it sounds like every one is doing it and it's so easy everyone should be doing it.

I am a goal oriented person and have had a goal to reach the max limit, every promotion or pay raise goes into an increase in 401K contributions and while my contributions started out at 10% and have grown to over 20% I still haven't been able to reach the contribution limit over many promotions and pay increases.

A person making the U.S. mean annual salary of $56,000 per year would have to put in a whopping 36% of their pay to meet the maximum contribution limit this year.

Why is this such common advice? Is there an assumption made that the only people reading this advice are high income and can meet the max contribution limit with little sacrifice?
Obviously not all advice is for everyone. If you don't have the cash flow to maximize your 401k, or if that will cause a poor quality of living, don't do that. You don't need to work 3 jobs, live in a cardboard box and eat rice and beans in order to max your 401k. It is a goal, not a requirement, and it may conflict with other goals. A more reasonable approach is to put what you can afford into your 401k. Make huge efforts to at least put in enough to get the company match. Dedicate part of raises towards increasing your contribution. etc.
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mrpotatoheadsays
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Re: Maxing 401K frustration

Post by mrpotatoheadsays »

Common advice once was to keep your ship close to shore. Because the world was flat, and if you drifted out too far, you would fall off the edge of the Earth.

Moral of the story: Educate yourself.
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JoMoney
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Re: Maxing 401K frustration

Post by JoMoney »

... deleted bad off topic reference ...
Last edited by JoMoney on Sun Jan 23, 2022 9:25 am, edited 2 times in total.
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pasadena
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Re: Maxing 401K frustration

Post by pasadena »

It's often said that way, but really, the common advice is "get the full match and strive to max out your 401(k)". As in, get as close as you can and increase contributions as your income grows, if you can. Which is exactly what you've been doing. And it's a lot harder to save 20% of $56k than it is to save 40% of $100k.

Another very common piece of advice on a broader scale is to save at least 15% of your income for retirement. Which you've surpassed. I think % is probably more important than raw numbers here. $20k saved will probably serve you better than someone who makes $100k and spends $80k.

Most of the personal finance world is made up of high income people - sometimes very tone deaf. Also, most people who do max out their 401(k) didn't get to that point immediately. Don't be discouraged, you're doing exactly the right thing.
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vineviz
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Re: Maxing 401K frustration

Post by vineviz »

conservativeinvestor wrote: Sun Jan 23, 2022 8:56 am Why is this such common advice? Is there an assumption made that the only people reading this advice are high income and can meet the max contribution limit with little sacrifice?
I think what you're finding is that a lot of advice comes from minds who stubbornly see every problem as purely linear: they think that if "saving" is good then "more saving" is better.

Most Americans arguably save too little for retirement, but some clearly save too much. "Max out your 401k" is the kind of advice that assumes everyone is identical when clearly that's not the case.
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conservativeinvestor
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Re: Maxing 401K frustration

Post by conservativeinvestor »

sailaway wrote: Sun Jan 23, 2022 9:08 am The most common advice is to get the match, which tends to be a much lower bar.

Here at bogleheads, the order of operations does not even suggest that the next dollar would go to 401k.

Are you goal oriented or just keeping up with the Joneses? If you are goal oriented, you should be setting goals appropriate for your situation. Otherwise you are just trying to fit in because it is something you heard about.
My goals have changed over time starting back way before I even knew bogleheads existed or read any financial advice. My first goal was to invest enough to get the match, then 10%, then 15%, then 20%, I've been close to the maximum but can't quite get there. Thinking about all this made me realize how difficult it can be to achieve the "common" advice.
Last edited by conservativeinvestor on Sun Jan 23, 2022 9:38 am, edited 1 time in total.
bling
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Re: Maxing 401K frustration

Post by bling »

the average American can't even withstand a $500 unexpected expense without going into debt. nobody has time to think about a 401k when they're just trying to put food on the table.

if you're seeking personal finance advice, you're already in the minority of people who's taken in interest in improving their financial life. it first starts with debt elimination. once you're done that, then it goes into savings and that's where 401ks come in; because it's literally less taxes taken by the government, and also a potential company match which is free money. all of this is "simple", but that doesn't mean it's easy.
Last edited by bling on Sun Jan 23, 2022 9:36 am, edited 1 time in total.
knowledge
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Re: Maxing 401K frustration

Post by knowledge »

The number 1 rule of personal finance is...to make a lot of money. It's rarely so bluntly stated, but maxing all typical tax advantaged contributions means putting away $33k/year, with a 30% savings rate, that requires a six figure income. So realistically, maxing out a 401k isn't going to feasible for someone making the averages US income.
nigel_ht
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Re: Maxing 401K frustration

Post by nigel_ht »

conservativeinvestor wrote: Sun Jan 23, 2022 8:56 am Maxing 401K contributions each year seems to be common advice everywhere I look. The articles and forums make it sounds like every one is doing it and it's so easy everyone should be doing it.

I am a goal oriented person and have had a goal to reach the max limit, every promotion or pay raise goes into an increase in 401K contributions and while my contributions started out at 10% and have grown to over 20% I still haven't been able to reach the contribution limit over many promotions and pay increases.

A person making the U.S. mean annual salary of $56,000 per year would have to put in a whopping 36% of their pay to meet the maximum contribution limit this year.

Why is this such common advice? Is there an assumption made that the only people reading this advice are high income and can meet the max contribution limit with little sacrifice?
It’s common advice because it’s good advice and easy to understand.

Harder to implement early career but as many others have stated the long version is to at least get your match and then as much more as possible without killing yourself.

Super savers can hit that 36%+ savings rate even at $56K but it’s a lifestyle choice. It means roommates, careful picking of where to live to minimize transportation costs and frugal lifestyle in work and play.

And hey if you can save $20K of $56K in your 401K your taxes will be a lot lower…you might have $30K to live on. $2500 a month? Tight but not impossible in many places.

Personally I would max my EF savings before maxing 401K and keep a larger EF with some in iBonds.
bling
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Re: Maxing 401K frustration

Post by bling »

knowledge wrote: Sun Jan 23, 2022 9:35 am The number 1 rule of personal finance is...to make a lot of money. It's rarely so bluntly stated, but maxing all typical tax advantaged contributions means putting away $33k/year, with a 30% savings rate, that requires a six figure income. So realistically, maxing out a 401k isn't going to feasible for someone making the averages US income.
+1.

there are countless threads on BH debating asset allocation, emergency funds, US vs exUS, etc.. all of that pales in comparison to just being able to save tons of money every year.
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Re: Maxing 401K frustration

Post by nigel_ht »

knowledge wrote: Sun Jan 23, 2022 9:35 am The number 1 rule of personal finance is...to make a lot of money. It's rarely so bluntly stated, but maxing all typical tax advantaged contributions means putting away $33k/year, with a 30% savings rate, that requires a six figure income. So realistically, maxing out a 401k isn't going to feasible for someone making the averages US income.
If you can’t do that try to have a career with a pension…teachers, fire fighters, LEO, govt workers, etc.
BlueCable
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Re: Maxing 401K frustration

Post by BlueCable »

conservativeinvestor wrote: Sun Jan 23, 2022 9:32 am My goals have changed over time starting back way before I even knew bogleheads existed or read any financial advice. My first goal was to invest enough to get the match, then 10%, then 15%, then 20%, I've been close to the maximum but can't quite get there. Thinking about all this made me realize how difficult it can be to achieve the "common" advice.
Saving 20% is a strategy. Your goal would be something like "retire at age 60 with enough savings to support $60k annual spending" or "purchase a $200k house at age 32."

Savings isn't the end itself. We save to achieve some other end.
jand87
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Re: Maxing 401K frustration

Post by jand87 »

There are a lot of not only high income earners on this board, but super savers as well (40%+). You don’t need to max out your 401K to be a successful retiree. As long as you prioritize saving and it nets you being able to live comfortably in retirement, that’s success.

I finally reached a place last year where I was able to max my 457, but then I had a baby (insurance costs), and now they’ve raised the contribution limit, plus 2022 only has 25 pay periods, so one less check. I won’t put in the full 20,500 but I’ll be close and that’s fine.

As others have mentioned there are other investment priorities too prior to maxing a 401K.
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cockersx3
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Re: Maxing 401K frustration

Post by cockersx3 »

I think that the idea of "maximizing your 401k" is popular among the FIRE blogs, many of whom were (and in some cases, still are) high income people for whom saving $20K+ per year is actually possible.

I maximize my 401k each year - up to $27K this year for me now - but I also make >$200K per year so this is not really a high bar. But like the OP said, for an American with a median annual income, maxing one's 401k is probably not realistic. As long as you can at least put in enough to get the match, and as long as you're overall saving 10-15% for your retirement and have a decent emergency fund, you are probably fine.
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Re: Maxing 401K frustration

Post by KlangFool »

conservativeinvestor wrote: Sun Jan 23, 2022 8:56 am Maxing 401K contributions each year seems to be common advice everywhere I look. The articles and forums make it sounds like every one is doing it and it's so easy everyone should be doing it.

I am a goal oriented person and have had a goal to reach the max limit, every promotion or pay raise goes into an increase in 401K contributions and while my contributions started out at 10% and have grown to over 20% I still haven't been able to reach the contribution limit over many promotions and pay increases.

A person making the U.S. mean annual salary of $56,000 per year would have to put in a whopping 36% of their pay to meet the maximum contribution limit this year.

Why is this such common advice? Is there an assumption made that the only people reading this advice are high income and can meet the max contribution limit with little sacrifice?
conservativeinvestor,

<< A person making the U.S. mean annual salary of $56,000 per year would have to put in a whopping 36% of their pay to meet the maximum contribution limit this year.
>>

My daughter is making around that kind of money and maxing up her 401K plus Roth IRA. Ditto for my son.

The US Median Household Income is around 50K to 60K and the median household is about 2+ person. So, it clearly possible for a person to spend around 20K to 30K per year and live.

<<I am a goal oriented person and have had a goal to reach the max limit, every promotion or pay raise goes into an increase in 401K contributions and while my contributions started out at 10% and have grown to over 20% I still haven't been able to reach the contribution limit over many promotions and pay increases.>>

Because your goal is spend first and save later. If you reverse the order of maxing up your 401K first and spend the rest, you would reach your goal. And, to your surprise, you would find that a lot of your savings is subsidized by the tax savings.

<<Why is this such common advice? Is there an assumption made that the only people reading this advice are high income and can meet the max contribution limit with little sacrifice?>>

This statement is false. This problem exists at all income levels. Average American saves less than 5% of their gross income. In order to achieve this goal, the person would have to live one level below their income peers. Hence, sacrifice is needed at any income level. The person would be abnormal as compared to their peers.

If you are interested in achieving this goal, please post your financial details.

KlangFool
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Topic Author
conservativeinvestor
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Re: Maxing 401K frustration

Post by conservativeinvestor »

KlangFool wrote: Sun Jan 23, 2022 9:46 am
conservativeinvestor wrote: Sun Jan 23, 2022 8:56 am Maxing 401K contributions each year seems to be common advice everywhere I look. The articles and forums make it sounds like every one is doing it and it's so easy everyone should be doing it.

I am a goal oriented person and have had a goal to reach the max limit, every promotion or pay raise goes into an increase in 401K contributions and while my contributions started out at 10% and have grown to over 20% I still haven't been able to reach the contribution limit over many promotions and pay increases.

A person making the U.S. mean annual salary of $56,000 per year would have to put in a whopping 36% of their pay to meet the maximum contribution limit this year.

Why is this such common advice? Is there an assumption made that the only people reading this advice are high income and can meet the max contribution limit with little sacrifice?
conservativeinvestor,

<< A person making the U.S. mean annual salary of $56,000 per year would have to put in a whopping 36% of their pay to meet the maximum contribution limit this year.
>>

My daughter is making around that kind of money and maxing up her 401K plus Roth IRA. Ditto for my son.

The US Median Household Income is around 50K to 60K and the median household is about 2+ person. So, it clearly possible for a person to spend around 20K to 30K per year and live.

<<I am a goal oriented person and have had a goal to reach the max limit, every promotion or pay raise goes into an increase in 401K contributions and while my contributions started out at 10% and have grown to over 20% I still haven't been able to reach the contribution limit over many promotions and pay increases.>>

Because your goal is spend first and save later. If you reverse the order of maxing up your 401K first and spend the rest, you would reach your goal. And, to your surprise, you would find that a lot of your savings is subsidized by the tax savings.

<<Why is this such common advice? Is there an assumption made that the only people reading this advice are high income and can meet the max contribution limit with little sacrifice?>>

This statement is false. This problem exists at all income levels. Average American saves less than 5% of their gross income. In order to achieve this goal, the person would have to live one level below their income peers. Hence, sacrifice is needed at any income level. The person would be abnormal as compared to their peers.

If you are interested in achieving this goal, please post your financial details.

KlangFool
You are right, If I cut out all discretionary spending I could get there, I'm sure there a number of things I could do that to me personally would be huge sacrifices. I don't get the impression from reading the advice to max out the contribution that most people are making these kinds of sacrifices to reach the max contribution. It seems pretty commonly thrown around like it's a piece of cake to achieve.
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quantAndHold
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Re: Maxing 401K frustration

Post by quantAndHold »

The advice to max out your 401k comes mainly from people who are making 2-3 times what you’re making, or who are saving unnecessarily large amounts of money (FIRE people, usually). If your 401k contribution rate is north of 20%, you’re doing fine.

If you don’t have a pension, and your goal is to retire comfortably at a normal retirement age, you need to save somewhere around 15-20% of what you make. The Bogleheads Wiki has a page explaining how to prioritize investments. Only people who are both high earners and prodigious savers will get all the way to the end of the list.
260chrisb
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Re: Maxing 401K frustration

Post by 260chrisb »

conservativeinvestor wrote: Sun Jan 23, 2022 8:56 am Maxing 401K contributions each year seems to be common advice everywhere I look. The articles and forums make it sounds like every one is doing it and it's so easy everyone should be doing it.

I am a goal oriented person and have had a goal to reach the max limit, every promotion or pay raise goes into an increase in 401K contributions and while my contributions started out at 10% and have grown to over 20% I still haven't been able to reach the contribution limit over many promotions and pay increases.

A person making the U.S. mean annual salary of $56,000 per year would have to put in a whopping 36% of their pay to meet the maximum contribution limit this year.

Why is this such common advice? Is there an assumption made that the only people reading this advice are high income and can meet the max contribution limit with little sacrifice?
I wouldn't lose any sleep over this. But would lose the frustration. The bottom line is that for a lot of people simply being able to save anything in a 401K is an accomplishment. Contributing at a high rate yet another and simply considering contributing to the max yet another. Only 10-12% of savers reach these thresholds and at 56K per year, a savings rate of 36% is unrealistic. That aside, it's very difficult even at twice that level of income as it takes desire and discipline. I don't know what constitutes high income but for me looking back twenty years as I began earning more I saw the goal of maxing out my 401K as reachable and once I did it, I wanted to do it again and did so for 18 years. I don't know that I had to sacrifice much along the way but for many of those years I had very low overhead and my 401K became my largest asset and still is. Relax and keep what you're doing. You'll be fine. If your under fifty the max is 20.5K. If you only contribute 16-17K you're doing just fine and better than most.
AlexanderTheMediocre
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Re: Maxing 401K frustration

Post by AlexanderTheMediocre »

conservativeinvestor wrote: Sun Jan 23, 2022 10:00 am You are right, If I cut out all discretionary spending I could get there, I'm sure there a number of things I could do that to me personally would be huge sacrifices. I don't get the impression from reading the advice to max out the contribution that most people are making these kinds of sacrifices to reach the max contribution. It seems pretty commonly thrown around like it's a piece of cake to achieve.
That's one reason why the most important advice folks give around here is to invest in yourself and grow your income. Whether that's pursuing a new job, promotion opportunities, etc, growing your income is the easiest way to achieve these milestones and has the largest long-term benefit. Cutting expenses always has a clear floor - your income doesn't necessarily have as hard of a ceiling.

If you grow your income to hit these contributions, you don't have to cut something else and sacrifice it.
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Re: Maxing 401K frustration

Post by sailaway »

conservativeinvestor wrote: Sun Jan 23, 2022 10:00 am
You are right, If I cut out all discretionary spending I could get there, I'm sure there a number of things I could do that to me personally would be huge sacrifices. I don't get the impression from reading the advice to max out the contribution that most people are making these kinds of sacrifices to reach the max contribution. It seems pretty commonly thrown around like it's a piece of cake to achieve.
Where are you seeing this so commonly? What other advice is being offered in those venues?
Wannaretireearly
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Re: Maxing 401K frustration

Post by Wannaretireearly »

Haven’t seen this, but after hitting your 401k match, see if you can fund a Roth IRA? Baby steps win the game. In some ways having a lower income, can ‘force’ you to live cheaper/lower annual spend, so you don’t need to save as much overall as your retirement nest egg goal.
“At some point you are trading time you will never get back for money you will never spend.“ | “How do you want to spend the best remaining year of your life?“
nigel_ht
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Re: Maxing 401K frustration

Post by nigel_ht »

conservativeinvestor wrote: Sun Jan 23, 2022 10:00 am
KlangFool wrote: Sun Jan 23, 2022 9:46 am
conservativeinvestor wrote: Sun Jan 23, 2022 8:56 am Maxing 401K contributions each year seems to be common advice everywhere I look. The articles and forums make it sounds like every one is doing it and it's so easy everyone should be doing it.

I am a goal oriented person and have had a goal to reach the max limit, every promotion or pay raise goes into an increase in 401K contributions and while my contributions started out at 10% and have grown to over 20% I still haven't been able to reach the contribution limit over many promotions and pay increases.

A person making the U.S. mean annual salary of $56,000 per year would have to put in a whopping 36% of their pay to meet the maximum contribution limit this year.

Why is this such common advice? Is there an assumption made that the only people reading this advice are high income and can meet the max contribution limit with little sacrifice?
conservativeinvestor,

<< A person making the U.S. mean annual salary of $56,000 per year would have to put in a whopping 36% of their pay to meet the maximum contribution limit this year.
>>

My daughter is making around that kind of money and maxing up her 401K plus Roth IRA. Ditto for my son.

The US Median Household Income is around 50K to 60K and the median household is about 2+ person. So, it clearly possible for a person to spend around 20K to 30K per year and live.

<<I am a goal oriented person and have had a goal to reach the max limit, every promotion or pay raise goes into an increase in 401K contributions and while my contributions started out at 10% and have grown to over 20% I still haven't been able to reach the contribution limit over many promotions and pay increases.>>

Because your goal is spend first and save later. If you reverse the order of maxing up your 401K first and spend the rest, you would reach your goal. And, to your surprise, you would find that a lot of your savings is subsidized by the tax savings.

<<Why is this such common advice? Is there an assumption made that the only people reading this advice are high income and can meet the max contribution limit with little sacrifice?>>

This statement is false. This problem exists at all income levels. Average American saves less than 5% of their gross income. In order to achieve this goal, the person would have to live one level below their income peers. Hence, sacrifice is needed at any income level. The person would be abnormal as compared to their peers.

If you are interested in achieving this goal, please post your financial details.

KlangFool
You are right, If I cut out all discretionary spending I could get there, I'm sure there a number of things I could do that to me personally would be huge sacrifices. I don't get the impression from reading the advice to max out the contribution that most people are making these kinds of sacrifices to reach the max contribution. It seems pretty commonly thrown around like it's a piece of cake to achieve.
It’s easier if you start that way (frugal). Harder to get that way after you are used to what you are used to.

Save first and then party with what’s left is what I did. It did mean living like a college student longer than my peers with 3-4 roommates and a beater car.

That’s Klang’s one level below income peers.

If I had to live one step below today it would kinda suck but we sorta do. We drive Hondas and live in a cheaper neighborhood. So a half step below our peers and it’s apparent to the kids when they visit the much nicer homes with two teslas in front.
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anon_investor
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Re: Maxing 401K frustration

Post by anon_investor »

conservativeinvestor wrote: Sun Jan 23, 2022 9:32 am
sailaway wrote: Sun Jan 23, 2022 9:08 am The most common advice is to get the match, which tends to be a much lower bar.

Here at bogleheads, the order of operations does not even suggest that the next dollar would go to 401k.

Are you goal oriented or just keeping up with the Joneses? If you are goal oriented, you should be setting goals appropriate for your situation. Otherwise you are just trying to fit in because it is something you heard about.
My goals have changed over time starting back way before I even knew bogleheads existed or read any financial advice. My first goal was to invest enough to get the match, then 10%, then 15%, then 20%, I've been close to the maximum but can't quite get there. Thinking about all this made me realize how difficult it can be to achieve the "common" advice.
Don't sweat it, being able to max your 401k has a lot to do with overall income levels. Hard to max it making $30k, easy to max it making $300k.
Volando
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Re: Maxing 401K frustration

Post by Volando »

Not everyone can max 401k or go beyond that to max IRAs and HSAs and top off the taxable for good measure. I know I certainly can’t do it all at this point in time. It can be frustrating to see that advice being given but I just try to do my best given my own personal circumstances. In the future you may have the means and opportunity to do more but it’s all about achieving a balance. Maximizing all possible accounts shouldn’t necessarily be the goal. Find a plan that works for your life, that you can stick with and that gives you a good shot at achieving your goals. That might involve maxing 401k or it could mean saving 15-20% even if not hitting max. At the same time try to enjoy your life by using money to share life with those you love and hopefully help those in need.
Last edited by Volando on Sun Jan 23, 2022 11:55 am, edited 3 times in total.
wander
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Re: Maxing 401K frustration

Post by wander »

There is no reason for frustration. The more you save, the more money you have. It's your money anyway and you are saving it for yourself. Spend it now or later is up to you. I used to make less than $35,000 and was still able to contribute 15% to my 401k account. I did not feel any frustration knowing that was all I could do.
Last edited by wander on Sun Jan 23, 2022 11:05 am, edited 1 time in total.
averagedude
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Re: Maxing 401K frustration

Post by averagedude »

Why do you feel like you have to maximize 401k contributions. I believe the most important thing is saving and investing on the very first paycheck that you receive. According to my calculations, if a single 62 year old today always made the median salary in the US, saved 10% of their income starting at 22 years old, invested it conservatively in 60% US stocks and 40% intermediate treasury, they would have over 1.3 million dollars today in their retirement accounts. A married couple who did the same and made the median salary, they would have 2.6 million dollars. Surely that would be enough for the average person to retire comfortably. I really believe the dirty little secret in personal finance is to start investing with your very first paycheck, but I do realize that exposing this truth discourages those who aren't in their twenties and have saved very little. Me personally, I started investing in my early twenties and never maxed out my 401k, although I did have a much higher savings rate. My income has never been over 70k and resembles very closely the median income charts. I will be retiring this year at 52 years old. Personally, I believe a median income earner who starts investing earlier can actually get by with a lower savings rate and retire earlier because they will pay lower taxes in retirement, can qualify for ACA if they retire a few years earlier, and social security will make up a larger portion of their income needs when they are older. People in the US who make the median salary have it better than they think as long as they make good decisions and have some luck with their health.
bogledogle
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Re: Maxing 401K frustration

Post by bogledogle »

conservativeinvestor wrote: Sun Jan 23, 2022 8:56 am Why is this such common advice? Is there an assumption made that the only people reading this advice are high income and can meet the max contribution limit with little sacrifice?
The articles and forums you are reading are targeted for a specific audience. This forum as an example, is overpopulated with types who make it look like everyone is doing it.

Most people do not max their 401k - this is a fact.

"Max out your 401k" is the most common advice because for most people that is the right thing to do before you look at other options.
phantom0308
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Re: Maxing 401K frustration

Post by phantom0308 »

Don’t get discouraged. Even if the median salary is too low to max out, that doesn’t mean the median here is the same. Bogleheads is very very skewed towards high income earners, so the advice you’ll receive will reflect that. Income is heavily dependent on location and industry. In a VLCOL place 50k income is enough to be comfortable and save a decent percentage, in a VHCOL place it doesn’t cover your annual rent. The advice would be better stated as put the max you can into 401k, the once that is done do B, then after that do C…. 99% of people can’t max out a Mega back door Roth (61k saved per year including company contribution), but if you browse personal finance sections of tech focused Silicon Valley people then what to do after that is a normal topic (along with whether they can afford a starter townhouse going for $1.5-2M). There will always be another number you can’t reach.
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Re: Maxing 401K frustration

Post by firebirdparts »

conservativeinvestor wrote: Sun Jan 23, 2022 8:56 am
Why is this such common advice?
I could be wrong here, but I think the assumption is that you want to be financially independent (rich) but somehow you need advice on how. I mean, if you have your own plan to get rich, then don't follow that advice. But anybody with an ounce of sense would have to agree that for people of modest income, it would be good advice for them to avoid spending their money and to use whatever advantages they have available. For a person of modest income, it becomes even more important for them to set a goal of maxing that 401k, because they don't have a better option available.

If you make $500,000 a year, then you don't need this advice to become financially independent.

If your goal is to be not rich, well, then it was a bad assumption. To be not rich, you should spend your money.
This time is the same
sailaway
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Re: Maxing 401K frustration

Post by sailaway »

firebirdparts wrote: Sun Jan 23, 2022 11:15 am
conservativeinvestor wrote: Sun Jan 23, 2022 8:56 am
Why is this such common advice?
I could be wrong here, but I think the assumption is that you want to be financially independent (rich) but somehow you need advice on how. I mean, if you have your own plan to get rich, then don't follow that advice. But anybody with an ounce of sense would have to agree that for people of modest income, it would be good advice for them to avoid spending their money and to use whatever advantages they have available. For a person of modest income, it becomes even more important for them to set a goal of maxing that 401k, because they don't have a better option available.

If you make $500,000 a year, then you don't need this advice to become financially independent.

If your goal is to be not rich, well, then it was a bad assumption. To be not rich, you should spend your money.
I know people who earn $500k and absolutely need this basic advice to become financially independent.
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Garco
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Re: Maxing 401K frustration

Post by Garco »

For the 39 years with my last employer, I stayed with the plan offered: I contributed 5% of my gross salary each paycheck, and my employer double-matched that with 10%. My salary increased from ca. $20K to ca. $200K. Just sticking with the plan, staying employed, and staying invested, allowed me to build a sizeable retirement holding by the time I retired. I never took any money out of my RA until I was required to do it at age 70.

This also allowed me to manipulate the distribution of my contributions and my holdings within the plan. For most of that time I put 60-70% of my monthly contributions into equities.

The most important factors for my "success" were: a) staying employed and annual salary growth, b) persisting in contributing the minimal required percentage, and c) longevity. In later years I also made some supplementary contributions to other funds -- outside my 403b RA.
KlangFool
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Re: Maxing 401K frustration

Post by KlangFool »

conservativeinvestor wrote: Sun Jan 23, 2022 10:00 am
You are right, If I cut out all discretionary spending I could get there, I'm sure there a number of things I could do that to me personally would be huge sacrifices. I don't get the impression from reading the advice to max out the contribution that most people are making these kinds of sacrifices to reach the max contribution. It seems pretty commonly thrown around like it's a piece of cake to achieve.
conservativeinvestor,

<< I don't get the impression from reading the advice to max out the contribution that most people are making these kinds of sacrifices to reach the max contribution. >>

Average people are not rich. Rich people are not average. You have to choose to be average or rich. You cannot be both.

It is very simple.

We do not consider those things as sacrifices.

Let me give you another point of view.

If you are not maxing up your Trad 401K, you are paying full marginal tax rate on those additional expenses. Is it worthwhile to pay 10+% to 20+% taxes on those additional expenses?

<<You are right, If I cut out all discretionary spending I could get there,>>

I disagreed. To reach 30+% gross saving rate, it has to do with the big items rather than discretionary spending. Aka, housing, car, and college education. Aka, major lifestyle changes.

For example, my kids shared apartments with roommates. I paid for their college education. They have no student loans. My son had savings to pay for a new car. My daughter paid for a used car. Hence, minimal to no car loan.

With those big items taking care of, they could spend a fair amount on the discretionary savings and still save 30+%. They just came from a Hawaiian vacation.

KlangFool

P.S.: Your choice your life. My point is folks save at 30+% rate has a different way looking at things. They choose to live at a lifestyle of 2/3 of their gross income. They live like other folks with 2/3 of their gross income.
Last edited by KlangFool on Sun Jan 23, 2022 12:02 pm, edited 1 time in total.
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Re: Maxing 401K frustration

Post by willthrill81 »

Not everyone needs to max out their 401(k). And many need to do more than max out their 401(k).

Telling everyone to just max out their 401(k) would be irresponsible.
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KlangFool
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Re: Maxing 401K frustration

Post by KlangFool »

firebirdparts wrote: Sun Jan 23, 2022 11:15 am
conservativeinvestor wrote: Sun Jan 23, 2022 8:56 am
Why is this such common advice?
I could be wrong here, but I think the assumption is that you want to be financially independent (rich) but somehow you need advice on how. I mean, if you have your own plan to get rich, then don't follow that advice. But anybody with an ounce of sense would have to agree that for people of modest income, it would be good advice for them to avoid spending their money and to use whatever advantages they have available. For a person of modest income, it becomes even more important for them to set a goal of maxing that 401k, because they don't have a better option available.

If you make $500,000 a year, then you don't need this advice to become financially independent.

If your goal is to be not rich, well, then it was a bad assumption. To be not rich, you should spend your money.
firebirdparts,

I live in a very affluent neighborhood with a median annual household income of 150K. Most of my peers save less than 5% of their gross income.

When my daughter's high school sport club need the parent to pay $600 for the annual fee, many parent need an installment plan to pay for the $600. They did not have enough money to pay $600 in one lump sum.

Average American saves less than 5% of their gross income. This is across all income levels.

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stoptothink
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Re: Maxing 401K frustration

Post by stoptothink »

Confused about this thread; save as much as you are comfortable with...the end. There is no law that you have to max 401k (or any other investment vehicle) to be able to retire.
Triple digit golfer
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Re: Maxing 401K frustration

Post by Triple digit golfer »

Focus on percentages in this scenario. Broadly and generally speaking, if you save 20% of gross, you'll retire comfortably. That may be much less or much more than the arbitrary 401(k) maximum. I'd ignore it. Just make sure you max out tax advantaged accounts before using taxable accounts. For most people, that probably means never using a taxable investment account.
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Devil's Advocate
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Re: Maxing 401K frustration

Post by Devil's Advocate »

Focus on increasing your savings rate not the actual dollar amounts. Comparison is the thief of joy.

You may be better off getting 401k match and then focus on maxing Roth IRA contributions.

DA
makeitcount
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Re: Maxing 401K frustration

Post by makeitcount »

Devil's Advocate wrote: Sun Jan 23, 2022 12:48 pm Focus on increasing your savings rate not the actual dollar amounts. Comparison is the thief of joy.

You may be better off getting 401k match and then focus on maxing Roth IRA contributions.

DA
Agree with that highlighted above.
This seems to be a case of "keeping up with the Joneses", only instead of spending it is saving and "the Joneses" = "the Bogleheads".
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Re: Maxing 401K frustration

Post by Longdog »

If you’re contributing 20% that’s awesome! Don’t believe anyone who suggests otherwise.
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sjwoo
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Re: Maxing 401K frustration

Post by sjwoo »

I always thought this advice was more about the tax advantage than anything else. Like even though I could have maxed out my 401k for a good ten years before I actually did, I did not, because i was afraid I could not access that money before retirement age. Then I learned that if leave your company, you could transfer the 401k to a traditional IRA, then convert portions of that T-IRA to a Roth. You'd of course pay income tax on the conversion, but you wouldn't pay the 10% penalty in addition to the income tax. (FYI, https://www.madfientist.com/how-to-acce ... nds-early/)

I wish I'd known about this earlier in my career...I would've paid less taxes and saved more. 😞
KRP
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Re: Maxing 401K frustration

Post by KRP »

.....
Last edited by KRP on Sun Jan 23, 2022 9:26 pm, edited 7 times in total.
KlangFool
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Re: Maxing 401K frustration

Post by KlangFool »

sjwoo wrote: Sun Jan 23, 2022 2:18 pm I always thought this advice was more about the tax advantage than anything else. Like even though I could have maxed out my 401k for a good ten years before I actually did, I did not, because i was afraid I could not access that money before retirement age. Then I learned that if leave your company, you could transfer the 401k to a traditional IRA, then convert portions of that T-IRA to a Roth. You'd of course pay income tax on the conversion, but you wouldn't pay the 10% penalty in addition to the income tax. (FYI, https://www.madfientist.com/how-to-acce ... nds-early/)

I wish I'd known about this earlier in my career...I would've paid less taxes and saved more. 😞
+1,000.

As I had usually said,

They are tax-advantaged accounts. They are not retirement accounts.

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Mopar440
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Re: Maxing 401K frustration

Post by Mopar440 »

Pay yourself first, get the match and then work yourself up over the years.
Forget the Jones's, they don't have a pot to p in or a window to throw it out off.
When you get a raise put part into increasing your contribution rate.
Main thing is to start and watch the magic of compounding.
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teen persuasion
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Re: Maxing 401K frustration

Post by teen persuasion »

conservativeinvestor wrote: Sun Jan 23, 2022 8:56 am Maxing 401K contributions each year seems to be common advice everywhere I look. The articles and forums make it sounds like every one is doing it and it's so easy everyone should be doing it.

I am a goal oriented person and have had a goal to reach the max limit, every promotion or pay raise goes into an increase in 401K contributions and while my contributions started out at 10% and have grown to over 20% I still haven't been able to reach the contribution limit over many promotions and pay increases.

A person making the U.S. mean annual salary of $56,000 per year would have to put in a whopping 36% of their pay to meet the maximum contribution limit this year.

Why is this such common advice? Is there an assumption made that the only people reading this advice are high income and can meet the max contribution limit with little sacrifice?
Why is this common advice? Easy - most people need a quick, soundbite answer to the question: where should I save, and how much?

It's not really an optimal answer, because everyone's situation is different. But it's a good enough first pass answer. Save in 401k first (match, tax deferred, reduces both w2 wages and AGI (important for EITC)), reach for the max limit. For those with lower incomes, it will take them time to achieve the stretch. For those with higher income, it's not a challenging % of income (but at higher tax brackets it's likely a bigger tax break).

It's really a dumbed down version of a longer list for prioritizing savings: https://forum.mrmoneymustache.com/inves ... g1333153 . A good beginning for newbies, and not as scary for beginners as that advanced list might appear.

Once you begin looking more deeply, and question why/where/how much to save, then you are ready for the deeper dive.

Initially, DH was only contributing 5%, capturing the match. When his employer cut the match, he wanted to stop contributing. I wanted to contribute more, to replace the match. So I tweaked his withholdings, doubled the contribution to 10%, without changing take home pay noticeably. When that resulted in larger refundable tax credits, I realized I could reduce withholdings more, and doubled it again. Paid off student loans, doubled contributions again. When we paid off the mortgage early, we could finally max his 401k at 55% of his income. Significantly reducing w2 wages and AGI increased EITC and the state 30% matching EITC (on top of CTC and AOTC), so tax refunds grew large enough to fund Roth IRAs for both of us, too.

Eventually I learned it was better to max the HSA before the 401k, so diverted some to HSA and stopped maxing 401k. Then I began working - more household income, but no 401k for me. We again increased DH's 401k, especially after he hit 50 catchup territory. Then I got access to a SIMPLE IRA, and we again reduced his 401k contributions to max mine (for more balance between our accounts, due to a quirk in state retirement income taxation). I need 80% to max my SIMPLE IRA. And now DH has retired, while I continue working a few more years. I just reduced my SIMPLE IRA contributions to 50%, because I need a minimum of earned income to max our EITC refunds.

So in each case, I figured out my own personal target for contributions to retirement accounts, or other like HSA, to maximize our overall financial situation each year.
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Re: Maxing 401K frustration

Post by JS-Elcano »

conservativeinvestor wrote: Sun Jan 23, 2022 8:56 am Maxing 401K contributions each year seems to be common advice everywhere I look. The articles and forums make it sounds like every one is doing it and it's so easy everyone should be doing it.

I am a goal oriented person and have had a goal to reach the max limit, every promotion or pay raise goes into an increase in 401K contributions and while my contributions started out at 10% and have grown to over 20% I still haven't been able to reach the contribution limit over many promotions and pay increases.

A person making the U.S. mean annual salary of $56,000 per year would have to put in a whopping 36% of their pay to meet the maximum contribution limit this year.

Why is this such common advice? Is there an assumption made that the only people reading this advice are high income and can meet the max contribution limit with little sacrifice?
Based on various recent publications: Only 65% of workers contribute to a 401k and of those only 12% max out their 401k, which basically means 7.8% of workers max out a 401k. Most of those who max out make more than 150k. So, as you surmised, there is nothing average about the person who is maxing out their 401k. I couldn't right away, but it was a goal and a few years ago I reached it. Now I am doing catch-up contributions as well.
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Re: Maxing 401K frustration

Post by dboeger1 »

KlangFool wrote: Sun Jan 23, 2022 11:50 am
firebirdparts wrote: Sun Jan 23, 2022 11:15 am
conservativeinvestor wrote: Sun Jan 23, 2022 8:56 am
Why is this such common advice?
I could be wrong here, but I think the assumption is that you want to be financially independent (rich) but somehow you need advice on how. I mean, if you have your own plan to get rich, then don't follow that advice. But anybody with an ounce of sense would have to agree that for people of modest income, it would be good advice for them to avoid spending their money and to use whatever advantages they have available. For a person of modest income, it becomes even more important for them to set a goal of maxing that 401k, because they don't have a better option available.

If you make $500,000 a year, then you don't need this advice to become financially independent.

If your goal is to be not rich, well, then it was a bad assumption. To be not rich, you should spend your money.
firebirdparts,

I live in a very affluent neighborhood with a median annual household income of 150K. Most of my peers save less than 5% of their gross income.

When my daughter's high school sport club need the parent to pay $600 for the annual fee, many parent need an installment plan to pay for the $600. They did not have enough money to pay $600 in one lump sum.

Average American saves less than 5% of their gross income. This is across all income levels.

KlangFool
So true, and it's not just with money either. There are a lot of people who look like they have everything together, but their marriages and other relationships are falling apart. I have some non-blood-relatives who were this big happy family in one of those executive McMansions out in the countryside in the Midwest. The mother was highly educated, the father was a successful business owner, and the kids had every advantage under the Sun. I was shocked to learn one day that the parents were getting divorced and having a pretty nasty custody battle over the children. The argument was supposedly over the mother going back to work after being a stay-at-home mother during the children's younger years. She was highly educated and wanted to restart her career, while he thought she should stay home with the children given he was making great money. The divorce completely ripped their family apart and I believe it cost them the nice house, the business, and everything, and the kids went on to struggle with school and friends.

Bogleheads obviously has a strong financial tilt, but it's amazing how financial success is often so predicated on otherwise healthy and stable circumstances. It's great to be able to max out tax-advantaged accounts, but even people who are barely saving but living happy and healthy lives are ahead of the curve, in many ways.
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