Overrating Responsibility: The Case Against Contributing Extra to Your 401k

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An employer-matched 401k is an outstanding benefit from any angle. An employer match for your contributions effectively doubles your money instantly, and all of it sits safe and undisturbed, patiently waiting for the day you’ve finally saved enough for that retirement cruise around the world. Saving for retirement seems like such a noble pursuit, it can seem like every dollar placed in the account is in the best possible place and for the thrifty type, the allure of contributing above the match maximum can be hard to ignore. However, is this really the case? Is contributing extra to your 401K the move of the savvy or the suckers?

The most commonly cited benefit of a 401k is that it builds value over time and allows your money to work for you. While this is true, the fact is that as an investment method, an employer-run 401k is extremely underwhelming in its potential. Check out Suncorp to learn more about planning for your own retirement.

These funds are set up to be as stable as possible, which sounds like a good idea until you realize that this strategy also limits your return. Interest rates on 401k investments are typically under 2 percent, and if you are already investing in your 401k at work, there are many places where your money could work harder without significantly increased risk.

An extra contribution to your 401k also reduces your day-to-day cash flow. This is certainly worth the deferral in the case of a full employer match for your contribution, but without such an appealing incentive it becomes much less beneficial to you. Many people would be better served applying their resources to immediate needs and retaining an emergency fund equal to about 6 months pay in case of an emergency.

Another reason not to overvalue employer contributions is that they can be temporary. Most employers only provide the match amount for as long as you are with the company, and if you part ways you may be left with the dual issue of no immediate income and limited liquidity.

Contributing to your 401k plan is a solid and prudent investment. However, there is certainly a point of diminishing returns on the concept, and an overinvestment here is an underinvestment elsewhere. The future cannot be overstated in its importance, but you have to go through the present to get there. Keeping as many financial options as possible open is the way to arrive fastest.

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