What to Do After Maxing Out Your 401(k): Exploring Smart Financial Strategies
If you’ve maxed out your 401(k) contributions and still have the capacity to save and invest, congratulations—you’re in an excellent position to build a strong financial future. But what comes next? As a financial advisor, I often guide clients through this exciting stage. Here are some strategies to consider for making the most of your money beyond your 401(k).
Assessing Retirement Goals First
Before diving into other savings options, it’s crucial to understand how much you need for retirement. I use examples like these to show how different savings scenarios can play out:
- On Track: A 55-year-old with $800,000 saved and contributing $30,000 annually at a 6% growth rate will exceed a $1 million goal by age 65.
- Needs Flexibility: A saver with $350,000 is on track to meet their goal but would benefit from extra savings for flexibility.
- Behind: Someone starting from $0 will need to explore aggressive saving and investing strategies to catch up.
Your specific savings goals and timeline will determine the best next steps.
Health Savings Account (HSA)
If you’re eligible, an HSA is one of the most tax-advantaged accounts available. Contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. For 2023, you can contribute up to:
- $3,850 for individuals
- $7,750 for families
- $1,000 additional catch-up for those 55+
HSAs can also double as long-term savings vehicles for healthcare costs in retirement, offering a unique blend of flexibility and growth.
Roth IRA Contributions
A Roth IRA is another excellent option, offering tax-free growth and withdrawals in retirement. For 2023, contribution limits are:
- $6,500 for those under 50
- $7,500 for those 50+
If your income exceeds the direct contribution limits, a backdoor Roth IRA conversion is an option worth exploring. And if one spouse isn’t working, the working spouse can contribute to a Roth IRA for them, as long as there’s enough earned income to cover it.
After-Tax 401(k) Contributions
For those who have maxed out their traditional 401(k) contributions, after-tax 401(k) contributions are an attractive option. These contributions aren’t tax-deductible, but they grow tax-deferred and can be rolled into a Roth 401(k) for tax-free growth. Consult with a financial advisor to handle these conversions properly and avoid unnecessary taxes.
Brokerage Accounts
A brokerage account provides unmatched flexibility for saving and investing. While it doesn’t offer the tax benefits of retirement accounts, it gives you unrestricted access to funds for short-term needs, major purchases, or even additional retirement savings.
Paying Down Debt
For those with high-interest debt, such as credit cards, prioritizing debt repayment often makes the most financial sense. Paying off this debt provides a guaranteed return, often higher than investment returns. Low-interest debt, like mortgages, may not need to be rushed, but paying it off can offer emotional peace and financial simplicity.
Employee Stock Purchase Plans (ESPP)
If your employer offers an ESPP, take a close look. These plans typically offer a 5-15% discount on company stock, providing a built-in return. This can be a smart way to diversify your savings, often before fully maxing out your 401(k).
Building Cash Reserves
While cash doesn’t provide growth, it’s essential for liquidity. A solid cash reserve can cover upcoming expenses, act as a buffer in retirement, or provide peace of mind during transitions.
Don’t Forget to Enjoy Your Money
Saving and investing are important, but so is living your life. Money is a tool to help you achieve your goals and enjoy the present. Whether it’s traveling, pursuing a hobby, or spending time with family, make sure your financial plan reflects your personal values and aspirations.
Beware of Living Solely Off Interest
Relying exclusively on interest from high-yield savings accounts or bonds might seem safe, but inflation can erode purchasing power over time. For example, $40,000 in interest today may require nearly $97,000 in 30 years to maintain the same purchasing power. Growth-oriented investments are crucial to keeping up with inflation.
Investing for Growth
Stocks remain a cornerstone of any long-term retirement plan. The S&P 500, for example, has historically provided significant returns over decades. A diversified portfolio with small-cap stocks, international equities, real estate, and a mix of bonds ensures resilience and balance.
Final Thoughts
After maxing out your 401(k), the next step is crafting a strategy that aligns with your goals and values. From HSAs and Roth IRAs to ESPPs and brokerage accounts, there are many options to grow your wealth while maintaining flexibility.
You should always consult a financial, tax, or legal professional familiar about your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns.
Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost.
