Beyond the 401(k): Where Financial Planners Say To Save Next
Maxing out out your 401(k) is treated as a gold standard of retirement advice. However, once you've crossed that finish line, next steps can feel murky.
Financial planners say it’s a mistake to assume there's only one right place for your next dollar. Here’s what they recommend doing after maxing out a 401(k) plan each year.
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Don't Rush Into Another Account
If your first instinct is to jump into another account without consideration, Alex Langan, chief investment officer at the Langan Financial Group, doesn’t recommend “one specific account for everyone.” Instead, he suggested a pause to evaluate your entire financial picture, taking in everything, like “your goals, tax situation, investment time horizon, risk tolerance, emergency savings, debt and what you ultimately want your money to accomplish."
You can pat yourself on the back for already demonstrating "that you're a disciplined saver,” he said. The next question becomes: “Are you saving in the right places and in the right tax buckets for the life you want to live?"
Make Sure You've Covered the Financial Basics First
Before investing additional dollars, make sure the fundamentals are in place. Colton Richards, a certified financial planner (CFP) at Apeiron Planning Partners, recommended what he called the “savings waterfall,” a hierarchy of priorities. It entails the following seven steps:
Make sure you’ve got an emergency fund (3 to 6 months of expenses).
Capture your full employer 401(k) match.
Pay off high-interest debt.
Max your health savings account (HSA), if eligible.
Max a Roth IRA or backdoor Roth IRA.
Build a taxable brokerage account.
Max the remainder of your 401(k).
Langan agreed that “simply putting more money into another investment account may not be the best next step” if someone is still carrying debt or lacks emergency reserves.
Build More Than One Tax Bucket
Rather than piling every retirement dollar into one type of account, the experts recommended creating tax diversification so you have more flexibility when it's time to spend your savings.
Langan explained that means your entire financial future is not dependent on one tax treatment. He recommended a mix of pre-tax, Roth and potentially taxable assets, since “you can't predict exactly what future tax laws will be, but you can build flexibility into your financial plan."
Richards stressed that the strongest retirement plans are built across all three buckets — what he calls the “tax triangle.” This includes:
Taxable assets
Tax-deferred assets
Tax-free assets
"The clients who retire with the greatest confidence usually have money in multiple places,” Langan said.
Don't Become Retirement Rich but Cash Poor
Retirement isn't the only financial goal you'll have. Taxable brokerage accounts can provide flexibility for life's major expenses years before retirement.
"One of the biggest mistakes Richards sees is “people becoming retirement rich but cash poor." This is when they accumulate a substantial 401(k), “but every dollar is locked away until age 59½ while life's biggest expenses like home repairs, career changes, helping children or dream vacations arrive much sooner,” he explained.
Langan clarified that the goal “is to build a financial structure that gives you the greatest ability to use your wealth when and how you need it."
Avoid These Common Mistakes After Maxing Out Your 401(k)
Reaching the contribution limit doesn't mean your retirement planning is finished. Langan said, "One of the biggest mistakes is continuing to save without actually planning,” and another is thinking you’ve maxed out your 401(k), so you’re done saving for the year.
“That's when the planning conversation should get more sophisticated, not stop," he said.
However, Richards warned against the temptation to “suddenly get complicated,” doing such things as investing in private real estate deals, oil and gas investments or other niche alternatives.
As with most forms of investing, once you decide where your dollars should go, be consistent and stay the course.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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