Financial advisors often recommend maximizing 401(k) contributions to secure a comfortable retirement. In 2024, employees can defer up to $23,000 into their 401(k) plans, with an additional $7,500 for workers aged 50 and older. Despite the increase in contribution limits, not everyone should strive to max out their plan account, according to experts.
Certified financial planners emphasize the importance of taking advantage of employer matching contributions before contemplating further contributions to the 401(k) plan. These matching contributions provide extra money based on the employee’s deferrals, making it a wise decision to at least contribute enough to receive the full employer match.
Before deciding to max out your 401(k) contributions, it is crucial to prioritize certain financial obligations first. Experts suggest paying down high-interest debt, such as credit cards and auto loans, should take precedence over increasing retirement savings. With credit card interest rates hovering near 25%, eliminating high-interest debt can free up cash flow for future contributions.
Additionally, individuals should assess whether they have other short-term financial goals, such as funding a wedding or purchasing a home. Experts caution that a 401(k) may not be the most efficient account for saving for pre-retirement objectives. Savings strategies should align with a family’s specific goals, priorities, and timelines to ensure financial stability.
Maintaining an adequate emergency fund is essential to safeguard against unforeseen expenses or financial setbacks. Most financial advisors recommend having at least three to six months’ worth of expenses in cash or other liquid assets. However, entrepreneurs and small business owners may require a higher reserve. A significant percentage of Americans lack confidence in their emergency savings, highlighting the importance of building up cash reserves before maxing out 401(k) contributions.