Think Before You Dump...All Your Money Into Your 401(k)

Maybe I've just been noticing it more over the last few months or maybe it has really has undergone a new push, but it seems like everywhere I look I see the same three word phrase: "Maximize your 401(k)!" Just last week, CNN/Money reran an article about Smart Money Moves that included the quote:

Put as much as you possibly can into your 401(k).
Assuming a 7% return and a 50% match, upping your annual contribution by
a grand and maintaining that level for 30 years will add $153,110 (not a
misprint) to your nest egg.

I suppose most of this attention to 401(k)s is due to corporate America deciding, almost in unison, that it is fine to freeze all pension plans and put the onus on the individual employee to save for their future.

Perhaps I got lucky by only entering the workforce in 2000. Working at a small software consulting company I never had to worry about pensions, 401(k) was the only way to go. 401(k)s have numerous benefits. The money is gone before I ever have it in my hands, my company matches a portion of what I put in, and, best of all, I don't pay any taxes on it right now. Anyone who has the opportunity to invest in a company 401(k) should do so, as soon as possible, and should invest at least as much as their company will match to get the full benefit.

However, I don't necessarily agree that it's always a good idea to max out your 401(k). Why not? I think this because throughout a person's lifetime there are certain events that require planning and savings that could be harder to accomplish if all expendable cash is being pumped into a 401(k). For instance, I am saving right now to buy a house someday (after the housing bubble finishes bursting). A couple years ago I thought that I would be able to use some of the money in my 401(k) as a down payment on the house. Little did I know that that money is tied up and virually unavailable to me until many years from now. Sure, I could withdraw it now and pay a heavy penalty. I could even take out a 401(k) loan but then I would live in fear of losing my job and having to pay it back right away. Now that I am more knowledgeable I have scaled back my 401(k) a bit. I still invest enough to maximize my company's matching policy but now I put a little away into a decent interest-bearing savings account that I can use for that house.

So before you start investing in your 401(k), or even if you're already investing, take a step back and do some planning. If you can afford to maximize your 401(k) and still put a little away for other investments that come up along the way, by all means, do it! However, if you know of big investments coming up in the future just don't plan on using your 401(k) to fund it.