If you have access to a 401(k) match at work, you should be investing enough in this account to claim the matching contributions. Taking advantage of an employer match should almost always be your top financial priority after paying your bills, except in very unusual circumstances such as when you have payday loan debt to repay.
Once you have earned your full employer match, though, there are times where it does not make sense to put any more money toward retirement savings, either in your 401(k) or even in other retirement accounts like an IRA.
Here are a few examples of situations where you shouldn't be focused on increasing your retirement account balances just yet.
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When you have high-interest debt to pay
If you owe a lot of money on your credit cards or have other high-interest debt, then you should focus on paying off these creditors first before you devote extra money toward saving for retirement.
This does not mean you should pay off your mortgage or low-interest debt like student loans. But if the return on investment (ROI) that you would get from saved interest is above what you could reasonably expect to earn if you invested in the stock market, then paying off debt should take priority over retirement savings.
For example, the S&P 500 is a good barometer for the performance of the market as a whole. It's an index that tracks around 500 large companies and it has consistently produced 10% average annual returns over the long haul.
If your interest rate is well below that 10% -- like because you have a mortgage at 4% interest -- then retirement savings should absolutely be a priority over early debt payoff. You should pay the minimum on your home loan and focus on saving more for your later years.
But if you have credit card debt, which has an average rate of 21.47%, you'd want to work on paying that off before sending any extra money to your retirement accounts beyond what's necessary to earn your employer match. That's because the guaranteed ROI you'll get from saving 21.47% (or whatever similar rate your card is likely charging) is much higher than any returns you can reasonably expect to consistently earn in the market over the course of the year.
When you do not have an emergency fund
There's one other situation when it doesn't make sense to increase your retirement savings: when you have no emergency fund.
See, emergencies can happen at any time, and if you have no money to cover surprise costs, you could find yourself going into debt to pay for the unexpected expenses. That's because you can't easily take money out of a retirement account to cover emergency expenses since most retirement plans charge early withdrawal penalties of 10% of the amount withdrawal. Furthermore, the withdrawn funds count as taxable income. If you have your retirement money invested, you could also be forced to sell during a market downturn, thus losing money you would likely have been able to make back if you'd been able to leave your funds invested and wait for the recovery.
For those reasons, you're better off having at least a few thousand dollars (and ideally three to six months' worth of living expenses) in a high-yield savings account before you increase the amount you're saving for retirement beyond what's necessary to earn your employer match.
If you're hoping for a secure retirement but you have credit card debt or no emergency fund, start prioritizing those goals ASAP. The sooner you have your debt paid down and your emergency savings in place, the sooner you can begin putting money into your retirement plans to build a more secure future.
