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Why Maxing Out Your 401(k) Is Not Always Ideal

Why Maxing Out Your 401(k) Is Not Always Ideal

April 12, 2022

Where will your retirement money come from? If you’re like most, several different income streams will come into play, such as Social Security, personal savings, and investments. You’ve probably heard about the importance of a 401(k) plan—and likely from more than a few experts. Yes, 401(k) plans can be powerful tools in your retirement planning tool kit. But the decision to max out your 401(k) needs to take other factors into consideration, and may not actually be the best strategy. 

Test for Liquidity and Cash Flow

Recently we’ve seen clients firsthand trying to deal with a liquidity crunch. The bidding wars over houses have tested the financial strength of the personal balance sheet like no time in history. Above-market cash offers are the only way to win, and, sadly, a large lump sum nestled away in the 401(k) plan is not much help. We’ve also seen situations where cost overruns caused by COVID-19 price increases force a very difficult decision: stop the renovation or take a premature distribution from the retirement account. Unfortunately, funds in a 401(k) plan can’t help out. The 401(k) is meant for retirement, so the optionality of that investment is exchanged for a tax deduction today or future tax-free growth in the case of a Roth account. 

We love maximizing the 401(k), but prior to making that decision, we perform a secondary exam to test liquidity. The Liquidity Test and the Cash Flow Stress Test calculate exactly how much is available in 24 hours in case of need (good or bad) and how long it will last if income stops.  Both examinations expose fragility on the balance sheet.

Most financial advisors recommend contributing as much as you are comfortable up to your employer’s match, but after that, additional contributions should depend on the strength of your balance sheet. Investments in after-tax accounts are still retirement assets, but they are also available to you before retirement if you find yourself bidding for the house of your dreams or want to quit a job you hate. Saving for retirement is important, but so is having a healthy rainy-day fund for your family, saving for your children’s college education costs, or investing in other avenues. 

Are You Contributing Too Much to Your 401(k)?

There’s no denying that a 401(k) is a great savings goal, but there is such a thing as contributing too much to your 401(k). As you see above, testing the strength of your balance sheet is necessary prior to the decision to maximize your retirement account.  

Do you know the strength of your balance sheet? Our Center for Wealth Management team is here to help. Call (248) 220-4321or email You can also schedule a meeting by visiting

About Rob

Robert Moore is senior partner, financial planner, investment advisor, and co-owner of Center for Wealth Management, an independent, fee-based wealth management company based in Troy, MI. With more than 15 years of experience, Rob provides customized advice and solutions that are in the clients’ best interest. He strives to always go above and beyond his clients’ expectations, helping them retire with more security than they had before, and invest their time and energy in what’s most important to them. Rob specializes in working with DTE Energy employees, helping them maximize their benefits so they can reduce taxes, prepare for retirement, and protect their families through a comprehensive planning process. Rob graduated from Michigan State University and holds the CERTIFIED FINANCIAL PLANNER™ and Chartered Financial Consultant® (ChFC®) certifications.

Rob is known as a diehard family man who enjoys spending time with his beautiful wife, Jill, his daughter, Brookelyn, and his son, Brayden. When he’s not working, you can find him playing basketball once a week, squeezing in a round of golf, and watching college football and basketball with friends and family. He is passionate about enriching the lives of others through his church involvement and service at a community addiction program. Learn more about Rob by connecting with him on LinkedIn.