Saving Too Much in 401k: Is It Possible?

Saving too much in 401k is more than a possibility. Many people think that 401k’s are best things since sliced bread but there are still limitations as well. The lack of liquidity that comes with saving in a 401k is crucial when you’re going through your life.

There is no doubt that the 401k is a wonderful tax advantaged retirement vehicle that’s made many Americans wealthy and better off. There are many people who became 401k millionaires in those accounts, alone. That’s how important it has become in wealth building.

When I started my first job in 2016, I contributed and put in as much money as I possibly could. I knew I didn’t need that money for the next 40 years so I might as well, was my logic. And it paid off big time. Six years later, I have a balance of $250,000 just in my 401k’s alone.

And I’m not done growing because I continue to contribute money onto the accounts. The company match that comes with a 401k can’t be beat, either. About 67% of private worker employees have access to a 401k as it becomes a popular retirement saving vehicle.

However, just as there are people who don’t take advantage of the retirement vehicle, there are people who take too much advantage of the retirement vehicle account by saving too much in 401k. Well how can that be too much of a good thing? It all comes down to one word: liquidity.

Saving Too Much in 401k: Is There Such a Thing?

Yes, there absolutely is such a thing as saving too much in 401k. Take it from me. I have $250,000 of tax advantaged money sitting on my account. However, that’s not liquid cash. I can’t spend that money whenever and wherever I want, without paying penalties and taxes.

Second, that account is estimated to grow to $4.7 MILLION by the time that I’m 65, using an 8% growth rate. Without me contributing an additional penny into the account. That’s not an insignificant amount of money, even after adjusting for inflation.

It has a similar purchasing power to me having $1.1 million in today’s terms. That’s a lot of money just for my 401k. A lot of money that I’m not even going to have access to until decades later down the road. That’s what saving too much in 401k looks like.

The cold hard truth is, you’re not going to need $50 million at retirement. That’s just too much money to have. Even more interesting to note is that the 401k contribution limit is projected to increase in 2023 to a whopping $22,500. That’s a lot of money to contribute to the account.

That’s how saving too much in 401k is possible. There’s only so much money that you’re going to need at retirement. At a certain point, you may be better off not contributing to a retirement account and putting that money in a savings account for added liquidity bonus.

What to do If You’re Saving Too Much in 401k

So then what can you do if you’re saving too much in 401k? There are many other alternative accounts you can take advantage of to build wealth from.

1) Contribute to Roth IRAs

Many people do not know this, but if the tax rates stay the exact same from now until you withdraw from a 401k, there is no difference between Roth IRA money and 401k money. Even if you have $8,000 by retirement in a 401k, after taxes it may come out to something closer to $6,000.

Same as the Roth IRA contribution limit for 2022. If you’re saving too much in 401k, then you can use the Roth IRA as a great retirement vehicle to take advantage of in the coming years. The biggest mistake I’ve ever made was waiting years before contributing to a Roth IRA.

Now I’m playing catch up by contributing my money in a Roth IRA in a declining stock market environment. That’s just not the right recipe to build wealth. Instead of maxing out your 401k, consider putting $12k or so in 401k and the remaining in a Roth IRA.

The added benefit of tax diversification can’t be ignored.

2) Contribute Less Money

If you’re saving too much in 401k, the simplest solution is to contribute less money into it. Although I’m still maxing out my 401k, I’m keeping a lot of money on the sidelines to act as both an emergency fund and to brace myself for opportunities that are about to come ahead.

I have about 1+ years worth of an emergency fund and I’m not done growing it. I’m not interested in maxing out my wealth and gains at this time. I’m more interested in protecting myself in case the worst case scenario happens. I think there’s a high likelihood that the worst case scenario will happen.

Although this is just my opinion.

Even though the maximum contribution limit is high at $20,500 for 2022, that doesn’t mean you have to contribute to the ceiling. You can always go lower and contribute a higher amount as you change your mind. There are no rules and laws when it comes to personal finance.

3) HSA Accounts

Many people discount the existence of an HSA account. The Health Savings Account is the best retirement account out of the 3, if not taking into account the company match for a 401k. It’s triple tax advantaged in that the government has no claims to the account if you use the account right.

If you’re saving too much in 401k, consider the HSA as a great alternative. I have approximately $25,000 in my HSA accounts that are growing by the month. I just never know if I may need a medical procedure done that may require the full $25,000 in order to get there.

I’m fairly confident that I’ll have a lot of medical expenses throughout my life as well. There’s nothing wrong with preparing for a rainy day by contributing to the best retirement account that no one hears or knows that much about. Protection is very valuable in my life.

4) Make More Money

Saving too much in 401k is possible if you don’t make that much to begin with. If you already make $400,000, then contributing an extra $20,000 to your retirement accounts isn’t anything meaningful. Making more money by taking on a side hustle or taking on a second job is possible.

When you literally already have too much money that you don’t know what to do with, then the world opens up to you. There are many things that I’m doing to make sure that I’m financially leveling up. Making more money is on top of the bucket list going forward.

There’s never been a better time to start a side hustle like starting a YouTube channel, blogging, walking dogs, etc. Some take up more time than others but whatever the case is, there’s ample opportunities to make more money more so than ever.

it’s time to take advantage. Having a single stream of income is dangerous.

My Story of Saving Too Much in 401k

I started reading personal finance blogs when I was in college. Therefore, I understood all of the benefits that come with a 401k. Therefore, after I graduated, I put in as much money as I possibly could to the 401k. I maxed it out year after year without fail.

My logic was, if I was going to be irresponsible with my after-tax money, I might as well at least protect myself for retirement 100%. Therefore, I put in as much money as I could without any regrets. However, by doing so, my net worth is not very liquid.

It’s heavily skewed and favored towards tax advantaged accounts like the 401k. My biggest single regret and money mistake is not contributing to a Roth IRA. I can’t imagine just how much larger my net worth would be if I decided to invest my money into the Roth.

As a result, approximately 60% of my net worth is in illiquid assets such as the 401k. That’s the result of me saving too much in 401k. Even though I’m slowly building my liquid assets up, I estimate it would take me an additional 3 – 4 years to parallel my 401k, if I even make it that far in the first place.

Saving too much in 401k is something that not many think of. And it’s not many think of because saving money in a 401k in the first place is already a good move. Take it from me from someone who invested 6 years worth of money into his 401k. These are some of the money regrets that I have.

Why I Saved Too Much in 401k

I saw it as a way to protect myself from myself. If the money was socked away in a retirement account in the first place, that means I can’t buy anything from it. I can’t pay for a brand new car with my 401k money, it just doesn’t make sense.

The downside to this approach was that whenever I did get after-tax money from my job, it was difficult to know how much should go towards investments and how much should go towards savings. Because I was so used to not using my after-tax money, actually having money became a problem.

However, by the end, I ended up putting money in the S&P 500 as well. However, no personal finance blog actually talked about the problems with having too much money in the 401k. That it’s a possibility in the first place. There’s multiple six figures worth of money in my 401k.

And I’my barely 28 years old. I can’t imagine just how much more money that I can’t access will be there by the time I get to 35 years old. Even though I’m appreciative of my past self for putting my dues, part of me wishes that I went a different route in the past couple of years.

You don’t want to be me by saving too much in 401k. Otherwise, one day, you will wake up with regrets wishing that you went another direction than the path you’re on. Because I’m young, I have plenty of chances to reverse course. That is still the upside in the situation.

Even though my 401k is the only account that had positive returns until August 2022 due to dollar cost averaging, I still wish I had less in it.

Saving Too Much in 401k is a Real Problem With Caveats

If you are generally bad with money or you are happy with the amount your retirement accounts will grow into, then it’s perfectly OK to continue to contribute to 401k. Many people are getting into CoastFIRE where they put in effort upfront and continue working anyway.

Saving too much in 401k is generally a problem but that doesn’t mean it’s always a problem. Some people are completely happy being 100% protected with their retirement accounts. They don’t mind spending the rest of their after-tax dollars on things they enjoy.

Without contributing towards my retirement accounts, I might have actually done some bad things with my money. It’s what allowed me to ride the wave in the S&P 500 increase in the past seven years in order to get to where I am today. I wouldn’t be where I am without the account.

Will I stop contributing towards my 401k now that I said this? Absolutely not. My income grew to a level where I can support maxing out the retirement accounts without any issues whatsoever. Even after maxing out my 401k, my after-tax dollar amount is on track to outpace my 401k accounts.

Saving too much in 401k isn’t an issue that you want to face after decades of contributions. Deliberately making sure you are making the right financial decision for yourself is very important. It’s not a decision that you can reverse easily because it is such illiquid money.