Reader Mail: Why Do I Max Out My 401(k) So Fast?

Maxing out retirement.Any chance I get to talk about my love of 401(k)s! Although you could really apply this Q&A to any investing tool out there, I pretty much like ’em all ;)

Here’s the question I was emailed in more detail, followed by my original answer copied & pasted below:

“I’ve been reading your blog for probably about a year now, and I’ve been wondering one thing for a little while now. What’s your thinking behind making 90% contributions to your 401(k) in the beginning of each year until you reach the max contribution? I know that I would find it easier for budgeting purposes to just divide $16,500 by the number of pay periods in a year and make contributions that way. What brought you to the idea of doing it the way you’re doing it?”

I actually max out the 401k the way I do because of 2 things –

1) I never know if it’ll get cut one day. As you can imagine, it’s one helluva over-the-top perk ;) Our company has seen better days, and if there was one thing they could get rid of to save money (esp with just my contributions alone! haha…) it would be this 100% matching. So, I consume as much and as fast as I can just in case.

2) I’m pretty hardcore when it comes to certain goals. While I’d never recommend maxing out ASAP to the majority of people out there, I personally get antsy and feel like if I *could* max it out sooner, then I should. Kinda like a crazy challenge to myself. Plus, I had maxed out last year around September so I’d gone 3 months without contributing a penny and I was ready to rock in roll when the new year hit.

So basically, it all comes down to personal preference :) If I knew everything would run smoothly the entire year, I would budget it out evenly throughout and work on maxing out my Roth and other savings at the same time. But with this economy and my crazy start-up job ya just never know. So I’m taking whatever I can, baby!

[UPDATE: All our 401(k) benefits ended up getting cut 4 months later…]

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  1. Kate April 21, 2010 at 9:01 AM

    J, you’ve never shared the true magic secret – where in the heck did you find a job that matches 100%? As a military spouse, I’m not looking for health care, or certain other perks, but I am keenly interested in building my own retirement account. Do you know a good way to find companies that have generous matches?


  2. Sarah @MainlineMom April 21, 2010 at 9:15 AM

    Good post…hadn’t really thought of those reasons but they are all good ones!

  3. Shelley April 21, 2010 at 9:36 AM

    I mentioned that to someone the other day and they didn’t believe a company that matches 100%. That is incredible, but yeah that is certainly a perk that won’t stay around for too long. That is one that will always eventually get dialed back. Google with all their perks (free lunch and dinner), doesn’t offer it.

  4. Jess April 21, 2010 at 10:03 AM

    Don’t forget the power of compound interest! The sooner you get it in there, the more interest it would accrue!

  5. Favor April 21, 2010 at 10:30 AM

    I need to still with one consistent name….that being said, great post! :)

  6. Melissa April 21, 2010 at 10:44 AM

    I’m always amazed and envious of your 100% match. My company does 6% through the year and based on annual results, does a “bonus” 4% in February. My 10% pales in comparison to your 100% though.

    2010 is the year of renovations for me, which is sucking my cash dry. Next year, however, will be the year of maxing out my 401k (in addition to my Roth and HSA.)

  7. J. Money April 21, 2010 at 11:11 AM

    Don’t be envious, I might lose my job tomorrow! :) The reason I post all this up is to show the power of taking advantage of the benefits we are given at work – whether it’s 401(k), health, vacation, etc. I can guarantee that at least 1/2 of our co-workers at all our jobs don’t pay close enough attention to really max out this stuff. And most of the time it only takes a few minutes to get everything on track and then you’re golden!

    A few responses:

    @Kate – How did I find this company? I networked. And got lucky :) Startups are in their own little world from your mainstream businesses and corporations, and anything pretty much goes. it’s a work hard – play hard mentality (at least in our niche) and we’re bunch of 20 and 30-somethings trying to build something great out there. Sometimes times are good and we reap the benefits (like this 100% matching and other bonuses and non-financial rewards), and others it’s just down right shaky. Big risk for big reward right?

    If I were starting from scratch though, the first place I’d look for jobs like this are Craigslist. That’s where I initially found the job that led me here, and it’s the quickest/easiest way for startups (at least in DC) to attract good & hip employees. I’d then directly contact the companies you actually LIKE & use in real life (Starbucks, Motley Fool, Zappos) as companies who have cult followers usually have great benefits :) They may not all be financial, but there are def. pros to working there.

    But again, keeping your eyes open an being in the right place at the right time also helps :)

    @Shelley – I know, people never believe me either! haha…and I actually went out to Google last month and let me tell you – that joint is HOOKED UP! when you say free lunch and dinner, you’re not kidding. add breakfast, snacks, coffee machines, sodas, vitamin water, GYMS, and on and on…seriously, I could never imagine their headquarters in a million years – insane.
    @Jess – Yes! Compound interest for sure…although technically only if you’re “investing” in money markets right? If you’re investing in stocks/mutual funds it’s more like dividends and what not ;)

  8. Finance Nerd April 21, 2010 at 11:17 AM

    One thing to consider — many companies match paycheck by paycheck, so this would not work.

    For example, my company matches 100% of the first 3% of pay you put in, and 50% of the next 3%. So, if you put in 6%, they give you 4.5%.

    But they do it paycheck by paycheck, not all at once. So, if you max out by September, and don’t put anything in Oct-Dec, you would get less of a match. To max out the match you’d have to put at least 6% in from EVERY check. You could frontload it, but putting more in at the beginning of the year, but you’d want to make sure to leave enough room to put 6% of each check in.

  9. J. Money April 21, 2010 at 11:34 AM

    Yeah, that’s a great point. In fact, that reminded me that our company originally did NOT have 100% matching – we had something like matching up to 20% of each paycheck which effectively allowed senior folks to max out every year. The only problem being, like you mentioned, was that some people preferred to pump it out earlier in the year so when they had it set to 30 and 40% they’d only get partial matches. Eventually the boss just agreed to set it at 100% to make things easier since the only people it really affected were those smarty senior folks who actually took advantage of it….and me. Who is not senior, but also not stupid ;)

  10. Shelley April 21, 2010 at 6:32 PM

    At my job, you can max out the $16.5K in the 1st quarter and they will continue to match 6% for the remainder of the year (they don’t do it on a paycheck/quarter basis). You only lose out if you max out in the first quarter, get laid off in the second – you will only be matched for the 6% based on earnings in the first quarter.

    Confusing, but it made sense when I wrote it. =o)

  11. Meghan April 21, 2010 at 8:48 PM

    Thanks for explaining this. I was wondering the same thing.

    I decided last week to put money toward one “major” savings goal at at time instead of to multiple ones throughout the year. It gives me a sense of accomplishment faster than when I spread it all out.

    I can’t wait to open up a 401(k) in November when I am eligible with my employer. I’ll be opening up my Roth before that though. Both exciting events. =)

  12. StackingCash April 22, 2010 at 4:17 AM

    I cannot stand it when people throw out the words compound interest. It implies an exponential rate of growth without any chance of loss. Only those terrible 1 to 3 percent savings and CD’s can truly give you compound interest, which amounts to diddly squat, unless you had a few million. When it comes to other types of investing, like stocks and mutual funds, a rate of return should be used. Those rate of returns should be then used carefully because those are not guaranteed either. Don’t be suckered into bad investments claiming compound interest and big rate of returns…like I did…grumble…

  13. Christian April 22, 2010 at 1:43 PM

    My question made it to the blog! Awesome! Thanks for explaining things. Of course like most people, Im jealous, but hell I’d consider doing the same thing if I were in your shoes. My agency matched our 403(b) contributions up to 4% I think, but they could only afford to do it for a year. I work for a non-profit and when budgets got slashed by our funders that was the first thing to go. It was nice while it lasted…

  14. J. Money April 23, 2010 at 5:30 PM

    Well it was a great question, sir :) I’d probably be wondering myself if I weren’t me!

  15. K May 4, 2010 at 6:38 PM

    I did this, too, maxing out as fast as I could, until I started at my current employer–they limit your per-paycheck contribution so you can’t quite achieve this goal, although I can still max out by around September. One of my reasons that you didn’t really mention is that it teaches me to live with less. When I get my first big paycheck after the deduction stops, I let myself spend the per-paycheck deduction amount on one thing–whatever I wanted most but couldn’t afford through the beginning of the year. Then I go right back to saving the same amount, but now into one of my other savings accounts. I started this when I finally got a job that paid me twice what I had previously been making–I figured I wasn’t used to having the money yet so it wouldn’t hurt me not to see it, which turned out to be true. Even if you’re not in a position to try it now, it’s a good idea to have in your back pocket if things turn around for you.

  16. J. Money May 5, 2010 at 12:30 PM

    YES! Great point. Learning to live on less is one of the best things you can do – esp as you get promotions and raises and bonuses and whatever else extra $ down the road. The problem most people have is upping their lifestyle anytime they get more money – it’s crazy. Unless you don’t care about your financial future ;) I know plenty of people that would rather enjoy life now than later (which is fine if that’s what they want) but you just have to be aware of the pros and cons to everything. The more money you have, the more options you have – and that usually trumps splurges.

  17. Darren June 2, 2010 at 3:33 PM

    Nice! I max out my 401k ASAP for similar reasons. I’m not a full-time employee, so I feel like I have less job security.

    And I don’t get a match, do spreading out the contributions doesn’t matter anyway

  18. J. Money June 2, 2010 at 8:59 PM

    Rock it bro – gonna be SO well off down the road!