Contributing to Your Jobs Retirement Account. The Max, Or the Match?
When it comes to retirement plan contributions on your job, there are a number of schools of thought, but there are two prevailing ways of thinking that dominate much discussion in the arena of retirement accounts. The first one says "max out your 401k/403b". The other school of thought says "contribute up to the match and invest the rest". There are pros and cons to each.
"Max out your 401k/403b contributions to the limit allowable."
1. Ensures plenty of money for retirement. Compounding
2 Allows your to grow as much pre taxed money as possible
3. Contributions reduce your taxable income for the year
1. Can't touch money, without penalties, until retirement. No liquidity
2. No guarantee you will live to see the payout. Life expectancy unknown
3. Locked in to the funding options offered by the job only
"Contribute up to the match and invest the rest."
1. Fully taking advantage of the free money (the match)
2. Money freed up to partake in various investment options
3. More choices can equal higher rates of return
4. Roth, Growth Stock Mutual Funds, Index Funds, etc. all are available
5. Liquid options = most of your money isn't tied up until retirement
6. Compounding effects are still relevant
7. Opportunity for greater diversification equals less risk
1. Life can get in the way
2. Tendency to touch the money, if liquid. Lack of discipline
As you can probably notice, my personal preference is to contribute up to the match that is offered at your job, and then invest the rest in other investment vehicles. Maxing out your retirement account at your job ties up a lot of your money for too long, and can cost you dearly for early withdrawals. After all, whose to say you want to retire at age 62. You might want to retire at age 50 or age 55, and have access to your money right away. Not to mention, the life expectancy of Black men and women, according to the CDC, is less than that of other ethnic groups. That is just a fact that we must consider when dissecting these options and having this discussion.
If you only contribute up to the company match, and invest the rest in a more liquid asset class that doesn't carry early withdrawal penalties, such as growth stock mutual funds, or index funds, then you have some clear advantages, as shown above.. These options diversify your portfolio, while, at the same time, allowing you to take advantage of the free money being matched, and have access to your money earlier than your retirement age. The other important and noteworthy piece of information is to be sure to check the investment options in your jobs retirement plan. Sometimes the options are slim and the management of the plan is lacking. Allocate the money you have in the plan and remember that proper allocation is extremely important for strategic long term growth. Don't get caught being too conservative, or worse, unaware of how your money is distributed inside your jobs retirement plan!
The bottom line is this: Contribute, at least, up to the company match. As long as you are contributing, whichever school of thought you decide, is better than not contributing at all. Everyone's discipline, risk tolerance, and choices, are different, based on various factors, the most important thing to remember is this: If you aren't contributing at all, you are going to suffer long term. Choose an option that works for you and your family situation, and change it accordingly, but NEVER NEVER NEVER fail to, at least, take advantage of the free money offered by your company!