401K or Savings

[Steelart99]

So, I'm planning to exit the workforce this year (not sure exactly when) ... but completely forgot about 'maxing' out my 401K. My contribution was at the same level as last year for a full salary to get to the max contribution by the end of the year.

So, my question is: Should I change my contribution rate now to max out about the time that I 'retire', or should I just leave it alone so that the money I'd add to my contribution just goes into my savings? FWIW, I have about one year of cash (including mortgage) which will actually draw down a bit if I raise my 401k contribution.

My initial guess was that I should raise my contribution to take advantage of the tax break. I will have access to my current 401k if needed (rule of 55) after I retire.

 

[Ronstar]

Since maxing your 401k would drain some of your one year of cash, I think I would put it in savings.

If you increase your savings, it will give you an extra cash cushion to ride out bumps in the market when you don't want to sell equities.

Since retiring 2 years ago, I've learned that a good cash cushion is key - and probably more valuable than the tax break gained by maxing out your 401k for one year.

 

[2017ish]

If you don't have a good cushion already, I'd follow Ronstar's suggestion--unless you'd be leaving a noticeable employer match on the table.

For us, we expect to have a decent enough cushion for our not-so-early-for-this-board retirement; will come down to how long we work next year and, therefore, what marginal rate we are looking at.

 

[Senator]

I would max out the 401K. Live on less. You will pay less taxes this year.

If you can live on less, that is the way to go. It is your last chance to do it.

 

[DrRoy]

I recently started my countdown clock and will do some of both. Keep my 401K at 15% of pay and put the extra toward a cash build.

 

[RockyMtn]

I would contribute enough to 401k to get max company match. If no match I would probably go toward cash build.

 

[target2019]

For the last few years at Megacorp, I went 25% every year, and maximum to catchup.
They matched half of my first 8%.

When the executioner started showing up more and more, at the beginning of last year I planned on 3 months for the catchup, and dumped everything possible into that. Also continued the 25% regular contribution, which was the max allowed by company.

 

[Aerides]

If you can afford to, max out the 401k. Mine allows me to rachet up and I've been putting in about 40% pretax and will clear cap this month, cleared the 5% Co. match in 1Q. Given the trough we went thru in 1Q I'm glad I took this approach as I was buying more than usual during this dip.

You don't say when you are ending, if it's anytime after 2Q you have time to play around with both numbers, depending on salary of course. I'd figure out what you can afford to do and when your end date might be, and then back track both cash savings and 401k from there.

 

[Steelart99]

If you can afford to, max out the 401k. Mine allows me to rachet up and I've been putting in about 40% pretax and will clear cap this month, cleared the 5% Co. match in 1Q. Given the trough we went thru in 1Q I'm glad I took this approach as I was buying more than usual during this dip.

You don't say when you are ending, if it's anytime after 2Q you have time to play around with both numbers, depending on salary of course. I'd figure out what you can afford to do and when your end date might be, and then back track both cash savings and 401k from there.

I have to admit to the OMM (one more month) syndrome. I'd tentatively planned for slightly after mid-year but hate to get out just as the market takes a dive. Timing ... I know.

I believe I have already passed the company match, but still have a ways to go before I'd max out at the $24K limit.

Like I said, I have about a year in cash, just at $1M saved (401K, IRA, smaller after-tax), about 5 more years on a mortgage and yearly expenses that would easily be covered by $55K per year. All the calculators give me about 95+% success ratio given several small non-COLA pensions and SS at 62yo.

What I may do lower my contribution to up my cash amount some and if time permits (and I don't bail out), then I can always get back into the 401k later in the year.

Thanks to all for giving me a few more ways to look at my issue.

 

[meierlde]

If as you hint you would be 55 or above when you separate from service then the question really is somewhat moot. The difference really is that you will pay the wage tax rate on any gains in the interim, which depending on where you invest might be lower in an after tax situation.

 

[Lucantes]

I will be in a similar position as you in 2017, with only Jan-Feb-Mar available for contributing to our 401K as we will FIRE early Apr 2017, except that I have a larger cash position to carry us for at least 2 years and will not need the 401k money for 10 years after FIRE (FIRE at age 50 but have enough taxable that we will not use the 401k money until age 60 and onwards in our plan).
I have mostly decided to just reduce our 2017 contribution rate down to receive the maximum company match (9%) for those 3 months of 2017, with the excess just going into our cash reserves. I did look at instead maximizing our contributions for those 3 months (can do up to 50% in our plan) to reach the $18k annual max contributions in those 3 months (we could afford to do this with no impact on our monthly budget etc.) but am unsure that it would be worth doing in the long run? I guess I have 8 months to make a final decision by Dec. 2016.

 

[Sunset]

I will be in a similar position as you in 2017, with only Jan-Feb-Mar available for contributing to our 401K as we will FIRE early Apr 2017, ....... I did look at instead maximizing our contributions for those 3 months (can do up to 50% in our plan) to reach the $18k annual max contributions in those 3 months (we could afford to do this with no impact on our monthly budget etc.) but am unsure that it would be worth doing in the long run? ....

Probably not worth maxing 401K, since your income for 2017 will be much lower as you are only getting 3 months salary.

 

[Lucantes]

Probably not worth maxing 401K, since your income for 2017 will be much lower as you are only getting 3 months salary.

Thanks Sunset, plus in the grand scheme of things I am not sure it provides enough benefit to even bother (although the benefit would have to be computed out over the 10 years that it would be invested tax free I guess) as opposed to just having the extra cash in-hand for those 3 months.
I think just getting the company match for those 3 months might be all I need to do.