Why Maxing Out Your 401(k) Is Not Always Ideal


By Russell Holcombe

If you’re like most employees, you’ve probably heard about the importance of a 401(k) plan from more than a few of the experts. It makes for an easy headline. But maxing out the 401(k) for many may not be the best strategy. Yes, 401(k) plans can be powerful tools in your retirement planning tool kit. But the decision to max out your 401(k) needs to take other factors into consideration.

Over the last year, we have seen clients firsthand trying to deal with a liquidity crunch. The house bidding wars have tested the financial strength of the personal balance sheet like no time in history. Above-market cash offers are the only way to win, and, sadly, a large lump sum nestled away in the 401(k) plan is not much help. We had a recent situation where cost overruns caused by COVID-19 price increases forced a very difficult decision: stop the renovation or take a premature distribution from the retirement account. Unfortunately, the funds in a 401(k) plan couldn’t help them out. The 401(k) is meant for retirement so the optionality of that investment is exchanged for a tax deduction today or future tax-free growth in the case of a Roth account. 

We love maximizing the 401(k), but prior to making that decision, we perform a secondary exam to test liquidity. The Liquidity Test and the Cash Flow Stress Test calculate exactly how much is available in 24 hours in case of need (good or bad) and how long it will last if income stops.  Both examinations expose fragility on the balance sheet.


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Most financial advisors recommend contributing as much as you are comfortable up to your employer’s match, but after that, additional contributions should depend on the strength of your balance sheet. Investments in after-tax accounts are still retirement assets, but they are also available to you before retirement if you find yourself bidding for the house of your dreams or want to quit a job you hate. Saving for retirement is important, but so is having a healthy rainy-day fund for your family, saving for your children’s college education costs, or investing in other avenues. We work with a lot of entrepreneurs, and if they plan to leave their company or start a new company in the next few years, we recommend focusing on cash flow before 401(k) contributions. 

Are You Contributing Too Much to Your 401(k)?

Contributing to your 401(k) is a great savings goal, but there is such a thing as contributing too much to your 401(k). As shown above, testing the strength of your balance sheet is required before making the decision to maximize your retirement account.  

Do you know the strength of your balance sheet? Our Holcombe Financial team is here to help. Schedule a no-obligation introductory meeting to see how we can help by calling us at (404) 257-3317 or emailing hello@holcombefinancial.com

About Russell

Russell (Rusty) Holcombe is the CEO and strategist at Holcombe Financial, a financial advisory firm serving entrepreneurs and corporate executives and managers. With over 25 years of experience, Rusty spends his days leading Holcombe Financial (a firm his father founded) and providing financial services that help his clients grow and protect their wealth so they can experience financial independence. Rusty is the author of You Should Only Have to Get Rich Once, which has won multiple awards, and created Holcombe Financial’s proprietary financial planning software, which helps clients make smarter financial decisions.

Rusty earned a bachelor’s degree in business administration with a focus in finance and real estate from Southern Methodist University and a master’s degree in taxation from Georgia State University. He is also a CERTIFIED FINANCIAL PLANNER™ professional. In his free time, Rusty and his wife, Regina, tend to their personal farm and grow their own food. You can often find him pursuing his hobby of long-distance running. To learn more about Rusty, connect with him on LinkedIn.

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