Why Maxing Out Our 401(k) Was Not the Brightest Thing I've Ever Done

Life has a nasty way of throwing curveballs. Just when my husband and I thought we were killing the whole "saving for retirement" thing, something would go terribly wrong. It may have been a job loss, a serious illness, or the Great Recession. Whatever caused the setback, once we were back on track, we started maxing out our 401(k).

Lately, though, I've realized that maxing out our 401(k) may not have been the smartest move.

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It wasn't a long-term plan

Ultimately, throwing everything we had at our 401(k) was a great short-term strategy. It got us back in the practice of saving, and because it was automatic, we never missed the money. The market was relatively strong for the first decade of investing, meaning the money grew. The more it grew, the more dedicated we became to maxing out that account.

Unfortunately, doing so has left us in a bit of a pickle.

A new priority

The closer my husband gets to full retirement, the more we realize we should have diverted some of the 401(k) contributions to other investment accounts. Here's why:

Taxes

I sometimes fast-forward to age 70, imagining my husband and me traveling through Europe, visiting 11th-century castles (my dream, not his). However, I know that any funds we draw from our 401(k) to pay for the trip will be taxed as ordinary income and may even push us into a higher tax bracket.

Instead of putting all our eggs in one basket, we should have put a portion of our contributions in a certificate of deposit (CD), treasury bond, a high-yield savings account, or some other kind of after-tax account -- money we could easily access if needed -- without getting hit by a large tax bill.

Yes, we would still be responsible for paying taxes on the earnings from a CD, bond, or high-yield account. However, with less tax due, we'd have less to worry about in retirement.

The biggest issue

While we were among the 55% of adults who set aside enough money to cover three to six months' worth of expenses, we weren't thinking about how much more we would need during retirement when the market is in the dumps.

If we withdraw money from our 401(k) during a market downturn or recession, it means selling more of our assets to cover the amount we withdraw. And, having fewer assets to grow as the market improves could seriously impact our long-term financial picture.

Because we failed to plan for down markets as thoroughly as we should, we're now focused on building another emergency fund -- this one to keep us afloat when we don't want to withdraw from our 401(k)s. It would have been so much easier to have taken care of this new emergency fund a little at a time rather than figuring it out now.

I appreciate what those early years of maxing out our accounts did for us as savers. However, I wish we'd thought ahead enough to spread the wealth to other types of accounts.

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