A silly question most likely, but is there a point where you should reduce the amount you contribute to your 401K in lieu of other investments? Currently I'm 43 and have about 2.5X of my annual income in a 401K, and contribute the maximum amount. But it does prevent me from saving much elsewhere or paying down my mortgage earlier, etc. Another area is college funds which could probably go for a larger contribution.

Tks, FuwlEd

You ask an interesting question and one that has crossed our minds, as well. My husband is also 43, has about 2x annual income in his 401K, and contributes the max that the company will match but not the max that he could. I also have an IRA worth about 1x my annual income.

We wondered if we should increase his contributions to the max allowed (as it sounds like you have done), but decided to stick with only the max the company would match instead. We did it for three reasons:

1) We feel our retirement funds are already quite healthy and don't foresee any reason that we won't be able to continue to contribute for the next 12+ years.

2) My husband really wants to retire at 55, which means he couldn't access the 401K for almost 5 years anyway and we'll need something more than a pension in the meantime. That brings us to #3...

3) When we retire, we don't want a lump sum that we have to divvy up based on how many years we think we will live. We want a monthly cash flow - income properties, dividends, holding the mortgages on our nieces and nephew's homes, whatever.

After watching my mom successfully support both herself and my father's expensive medical care from the three apartment buildings they purchased and tended during their working years, I believe a financially secure retirement is more about a healthy cash flow then a large lump sum. My dad's pension, their IRAs and their social security would never have come close to covering both his medical care and her living expenses.

Just my humble opinion, thrown in as food for thought.

Yvonne,

Great reply.

Some folks assume 'retirement' means holding only investments that can be liquidated with a phone call or are managed in a fashion that produces a monthly check and no work.

Others think of investing more like a garden where there is care and feeding even if the owner is 'retired'.

There is a point in time when a person cannot active manage anything. Maybe in the minutes before death or maybe for 10+ years when they have difficulty remembering things.

I like the idea of the 3 apartment buildings but acknowledge that they require some specialized knowledge. Hence there likely needs to be some active estate planning and management decisions.

Holding all cash or fixed income assets such as bonds is only one alternative.

Coming back to the original question.

I would say that it might be important to fund the college expenses in a way that is efficient rather then funding further a 401K. This is based on my assumptions that most college expenses happen before retirement so need an earlier solution.

John

We've only ever contributed to 401Ks to the maximum that would be matched. It's turned out to be plenty for retirement. If we were qaulified for Roths, that would be our next move(and they could be used for collegeas a secondary purpose.) The change in the capital gains rates makes the 401K(which will be taxed as income) far less attractive to us.

I think "conventional wisdom" sometimes keeps people from really examining the best strategy for their own situation. Yours was a good question.

rad

A silly question most likely, but is there a point where you should reduce the amount you contribute to your 401K in lieu of other investments? Currently I'm 43 and have about 2.5X of my annual income in a 401K, and contribute the maximum amount. But it does prevent me from saving much elsewhere or paying down my mortgage earlier, etc.

I agree with everything that 'reallyalldone' said. I just wanted to point out that if you are paying a low fixed mortgage rate, that would be the last thing I would use 'extra' cash for (in spite of what Suze Orman says).

Conventional wisdom advises to contribute to a 401K up to the maximum that the company matches. Then to a Roth, if you qualify. After that, to either the 401K or a taxable account. Part of that decision has to do with one's marginal tax rate at the present time, and one's estimate of what the marginal tax rate will be post-retirement.

For example, my marginal tax rate is currently 33%, and I anticipate it will be much lower post-retirement, so I do max out my 401K beyond the matched amount. I am not eligible for a Roth, but happily for me, even after maxing the 401K I have enough funds to contribute to a taxable account.

I am 54 and my 401K represents 40% of my total portfolio. 30% is in IRAs/annuity. 30% in taxable accounts.

Sorry, I can't advise on the education funding question...

2old

FoolishYvonne: "2) My husband really wants to retire at 55, which means he couldn't access the 401K for almost 5 years anyway and we'll need something more than a pension in the meantime."

You seem to be ignoring SEPPs (72(t)); the 401-k money can be accessed before 59 without penalty.

Regards, JAFO

FoolishYvonne: "2) My husband really wants to retire at 55, which means he couldn't access the 401K for almost 5 years anyway and we'll need something more than a pension in the meantime."

You seem to be ignoring SEPPs (72(t)); the 401-k money can be accessed before 59 without penalty.

Also, if the original poster's husband retires from the employer where his 401(k) is at or after age 55, he can access that 401(k) without penalty, and without resorting to SEPPs, as well.

-Chuck

Another area is college funds which could probably go for a larger contribution.

Remember that while your kids can borrow money to fund their education, you cannot borrow to fund your retirement.

Save enough for yourself and if there's extra, put it towards the kids' college funds.

As for the 401K, I would fund it to the maximum employere match and then fund a Roth (if eligible) or a taxable account.

Adenovir