Should I reach the maximum contribution to my 401(k) account or continue to grow my short term investments?

My wife and I are in our late twenties. We have both maxed out our Roth IRAs. I'm currently contributing 3% of my salary towards my 401(k) with no match. When I retire, I will collect a pension and 99% of my salary. I feel comfortable about my retirement plan: a full lump sum pension, a salary of $7,500, and a maxed out Roth account with 25 years of contributions. I also have an emergency fund. Should I work towards increasing my 401(k) contributions until I reach the maximum (to limit my taxable income)? Or should I continue to grow my short term investments? Or is a combination of both recommended?

Pensions, 401(k), IRAs
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January 2018

It's great that you've begun to think long-term about your financial security. The earlier the better! 

In regards to your pension, that's great you've found a company you want to work for until retirement. However, a lot can change between now and when you retire. It sounds like you have the mindset to save and invest and not necessarily only rely on your pension which is great. Keep in mind Roth contributions can only occur up until a certain income limit. There are a few other options if you want to keep contributing to an after-tax account like a Roth. Your employer may offer a Roth 401(k), which you'd be able to contribute all the way up to 18.5k in 2018. You could also look into a "backdoor roth" strategy. I'm not sure when you'll cross the income limit, but those are two things to think about if you are nearing that decision and want to grow an after-tax account.

To answer your original question, it's hard to give a definitive answer without knowing what your short-term goals may be? Do you want to buy a home in the near future? If that's the case, growing your investments in a taxable account, or accumulating cash may be in your best interest. If your goal is to put more away for retirement, then certainly increasing your 401(k) contributions would be the way to go. As you suggest, working towards multiple financial goals is commonplace, and shouldn't be done linearly. You can save more in your 401(k) AND put away savings for shorter term goals. At that point, it just comes down to prioritizing. 

Best,

2 weeks ago
2 weeks ago
January 2018
January 2018