Personal Finance

We're in our early 40s and already have $1 million in our 401(k) - is it a bad idea to start decreasing the amount we contribute?

David Beren

Published: December 8, 2024 1:44 pm

Key Points

• This Redditor has a question about slowing down 401k contributions. 
• The family already has a net worth of over $1 million. 
• They are considering stopping 401k contributions and shifting money to a brokerage account. 
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As you can imagine, everyone hopes to earn enough to retire as early as possible and enjoy as much time as they can without the daily stress of working. In the case of one Redditor, they’re hoping to max out their 401k and question if they should pull back on dropping more money into this account. 

Posted in r/ChubbyFIRE, this post is not uncommon in conversations with individuals or couples who make enough to spread money between various account types. This is especially true with individuals who have already put money aside to find the sweet spot to retire without money concerns. 

I love that this post is an interesting frame of mind for someone unsure where to help make their money grow. It’s also refreshingly honest and truthful about how couples may disagree about the next best step to prepare for the future. 

The Scenario  

This 40-year-old female Redditor and her husband (44m) earn approximately $375,000 annually. The couple’s goal is to retire or find a more laid-back job in 10 years, and to that end, they are looking to make sure they have enough funds available so they don’t have to work by the time they turn 60. 

Currently, the couple has a net worth of around $1.3 million, 80% of which is in retirement and tax-deferred accounts, while the rest is in index funds through a brokerage. The crux of the post is that the Redditor is conversing with her husband about whether or not they should continue maxing out their 401k. 

They consider their current amount “relatively small,” but they know that every opportunity to save on taxes later will be beneficial. In addition, the Redditor and wife recognize that in ten years, the husband will be closer to accessing his retirement funds. However, the couple only contributes up to the company match, leaving them wondering if they should cap their 401k contribution and switch to brokerage accounts. 

The Recommendation 

There are very few situations in which many of the Redditor comments in any r/ChubbyFIRE agree, so it won’t come as any surprise the recommendations are all over the place in the comments. Similarly, while I’m not a financial planner and recommend talking to a professional above all else, there are multiple paths this Redditor and her husband can follow. 

It would be much easier to make a single recommendation if we knew their intended spend during retirement so we know how much they would need to withdraw every year. However, without that information, we’re left to do some guesswork. 

However, one caveat here is that I’m concerned that this couple won’t be ready to retire in the timeframe they are hoping. Something doesn’t match up when the couple only has $1.3 million put away against the $375,000 income they are earning. This makes it so important to know how much they want to spend versus their standard of living today. 

Without this knowledge, the recommendation would be to max out the 401k and keep going until you do. Given that a 401k has tax advantages and is protected from creditors, it’s the best choice based on the information we have. Given the couple’s earning power, maxing out this account should be their first action before looking at brokerage accounts. 

The Takeaway

While I would love to know some of the missing information here, primarily related to annual spending, there is no question that a strong argument in favor of maxing out the 401k exists. Even though it’s not easy to withdraw penalty-free, if there were an emergency and the couple needed money for a large purchase or medical bills, they could pull the money out without incurring any significant tax burden. 

My biggest concern is that this couple is making money because of recent salary increases, all while living in a high-cost-of-living area and not yet reducing their spending, something the Redditor openly acknowledges. This couple needs to sit down and have a real moment of clarity on how much they can put away to ensure they are ready to retire and walk away from the workforce by the time they turn 60.