When it comes to getting ahead on your retirement savings, most people advise saving as much money as possible and putting everything you have in your 401(k). But while the advice is well-intentioned, it can possibly do more harm than good.
It is a good idea to contribute as much as you need to earn your employer match (because that's essentially free money you'd be missing out on otherwise). After you've earned all your matching dollars, though, what should you do with the rest of your money?
The maximum amount you can contribute to your 401(k) in 2017 is $18,000 (or $24,000 if you're age 50 or over). And although most people are nowhere near that limit (69% have less than $1,000 stashed away), if you do find yourself with extra cash, there are a few scenarios in which you shouldn't be putting everything you have into your 401(k).
1. You're paying high fees
401(k) fees are sneaky, and about 92% of people don't fully understand how much they're paying in fees -- which can cost hundreds of thousands of dollars over a lifetime.
The average 401(k) plan charges roughly 1% of assets managed. While that may not seem like much, the typical American worker earning a median salary can expect to pay over $138,000 in fees over a lifetime. While it's impossible to avoid 401(k) fees altogether, you can figure out what you're paying to decide whether the investment is worth it.
To determine your 401(k) fees, your best bet is to talk to your employer or plan administrator. You likely received a booklet or document detailing fee information when you signed up for your plan, but it never hurts to double check.
If you learn you're paying too much in fees, assess your options. IRAs typically offer a wider variety of investing options than 401(k)s, and you may find lower fees associated with an IRA as well. If that's the case, continue contributing enough to your 401(k) to get the company match, but then put the rest of your savings in an account with lower fees to maximize your returns.
2. You don't have all your bases covered
While saving for retirement is important, having enough cash to cover emergencies is more important. Experts recommend saving enough money to cover three to six months' worth of expenses in case you lose your job, find yourself making an unexpected trip to the hospital, or face any other expensive emergency.
Fifty-seven percent of Americans can't come up with $500 in the event of an emergency. If you don't have enough cash in the bank, it will be tempting to pull it from your retirement fund (which could result in paying penalty fees and interest). So instead of putting your extra money toward retirement and then withdrawing it later, build up your emergency fund first.
Similarly, if you have high-interest debt that's costing you thousands in interest payments, it's wise to pay that down first before putting everything you have into your 401(k). If you're paying more in interest on your credit card debt than you're earning on your investments, it's not doing you any good to contribute as much as you can to your retirement fund.
3. You expect to make a large purchase in the near future
If you plan on buying a house, new car, or making any other major purchase within a few months or a year, it may be a good idea to save for that first before putting your extra cash into your 401(k). Like emergency expenses, if you're not financially prepared to make a large purchase, you may resort to pulling money from your retirement fund to cover it.
You'll need to draw the line, though, between large purchases you have to make and ones you want to make. If your car is on its last miles and you know you'll need to replace it within a few months, start saving for that first. But if your car works perfectly fine and you simply want the newest upgrades, that's not necessarily a good reason to forego saving for retirement.
Keep in mind that in each of these three scenarios, you should still aim to make at least small contributions to your 401(k) to earn your employer match. Not contributing at all for a significant period of time can seriously set you back in your retirement journey, but contributing too much when you have other financial areas that need help can also hurt you in the long run. Find a balance, though, and your wallet will thank you.