Considerations Before Maxing Out Your 401(k)

Get an Employer Match.

Taking advantage of employer 401(k) contributions is the fastest way to build a nest egg for retirement. The amount you need to save to get the maximum possible 401(k) match varies by employer, but frequently requires saving approximately 6 percent of pay. "Any time there's an employer match, I think it makes sense to at least contribute enough to receive the full match," says Theodore J. van Gerven, a certified financial planner for Modern Wealth Builders in Woburn, Massachusetts.

Pay Down High Interest Debt.

If the interest rate you are paying on your debt is higher than the return you expect to earn on your investment, it makes sense to pay down the debt first. "Obviously, if you have high interest rate debt, such as credit card debt, that should take priority over additional 401(k) contributions, above the amount needed to receive any match," van Gerven says.

Those who have low interest debt, such as you might pay on a mortgage or student loans, may come out ahead by prioritizing saving for retirement. However, some people prefer to eliminate a specific debt before maxing out a retirement account. "Depending on the interest rate and repayment options, it can make sense to pay down student loan debt before increasing 401(k) contributions," van Gerven says. "In all honesty, it's not always about maximizing the financial outcome. A lot of times it's about creating a plan that a person will stick to because it makes them feel better."

Balance Other Savings Goals.

Many people have more immediate financial goals than saving for retirement, such as accumulating enough money for a home down payment. There are cases when it makes sense to contribute enough to the 401(k) plan to qualify for employer contributions, and then prioritize your more immediate savings goals. "When working with young professionals, we're often trying to balance short and long-term goals, such as saving for a down payment on a home versus maximizing employer benefits," van Gerven says. "If you're planning to buy a home in the next couple of years, but you're using your cash flow to max your 401(k) contributions, you'll obviously have less money to save for a down payment."