When to Stop Funding Your 401-k

Traditional advice given by investment advisors in financial magazines suggest that there is something wrong with you if you don’t fully fund a 401-k…But when does this advice become nonsense? Let’s take a look at a fluffy article in Kiplinger’s called “When It’s Time to Retire.” I call this a fluffy article because it really does not give you enough facts to make good investment decisions but there are a few that I would call into question.

1. The gentlemen in this case is turning 60 years old this spring-and he is putting $20,000 in his 401-k. The article points out that he is saving money on his taxes and this couple has been super savers. Assuming that they have done this fabulous job of saving, they have a ton of cash in tax deferred savings, such as 410-k’s. Ask yourself one question-if you were this 60 year old would you rather pay taxes now and fund a Roth or would you bet that taxes will go down and he will be in a cheaper tax bracket 5 years from now? Please Kiplinger’s-take a little more critical view of the mush you are writing!

2. Here’s another item that scares the bejesus out of me. According to the article:
“They hope to improve their investment choices and boost their return from 6% to 10% after expenses through a portfolio of actively managed accounts and exchange-traded funds.” Really, at age 60 their new strategy is to increase their investment returns by almost 70%!! I got news for those folks. People don’t like change especially 60 year olds who are seeking comfort and wealth preservation in their “Golden Years”.

3. Without all the facts it’s hard to really asses their strategies but I hope this has given you food for thought and would urge investors to look at cash flow and plan your financial exit strategy early on. One last mention. After having seen literally thousands of accounts and strategies I can tell you that people will sit with a ton of cash in 401-k’s, afraid to take money out because of the tax consequences. I’ll bet this couple will experience some of this drama.

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