181 | Harmful 401(k) Contributions

Sometimes good financial advice can actually hurt your finances.

That’s exactly what happened to some of my clients and to me when we followed the common advice to maximize our contributions to our retirement accounts.

In this episode, let’s talk about our stories of saving for retirement to the detriment of our finances, why that advice wasn’t the best for us, and the importance of considering your personal financial situation in applying any financial advice you receive.

• • my husband’s and my experience with our retirement contributions hurting our finances
  • my clients’ experience with their retirement contributions hurting their finances
  • taking a step back to move forward more quickly
  • questioning the advice you hear and making decisions based on your personal situation

You’re listening to Wealthyesque. We are a community of lawyers who believe that true wealth is having control of our time. I’m Rho Thomas, and as a busy wife, mom, and former Biglaw associate, I know all too well the tension between the culture of the legal profession and pretty much everything else you want to do in life. That’s why each week, I’m bringing you the information and tools you need to improve your money mindset and manage your money to create true wealth. Because ultimately, it’s not about the money. It’s about the freedom and flexibility the money affords.

Hey friend. Welcome back to the show. I hope you’re doing well and having an amazing day so far. Today we are talking about when your retirement contributions are harmful to your finances. I have talked in the past about my husband and my experience with this where we were maxing out our 401k is doing what we thought we were supposed to do because the experts always say max out your retirement accounts and put as much in there as you can. And so we were doing that. But at the same time, we had a bunch of student loan debt, it was almost $500,000 of student loan debt between the two of us and the interest accruing on that amount of debt was pretty high in general, like just because of the balance, but also our student loans were at pretty high interest rates when we were in school. So the majority of our loans were at 6.8 and 7.9%. And my husband even had one that was around 9%. And so when we were looking at our finances, we realized that the money we were putting into our retirement accounts, like the interest that we were paying on the student loans was basically cancelling out what we’re doing in the retirement account. And so we dropped down our retirement contributions down to where we got, well, I didn’t get a match the firm that I was working with did not offer a match for attorneys, but my husband got a match. So we dropped it down to where he would get the match. And then we just did that same percentage for my account as well. But we felt we were doing the right thing with our money by putting so much into retirement, especially because we got a later start than people who like came straight out of college and started working immediately. So like that’s the kind of thing that you hear a lot. But for us, our retirement contributions, were actually hurting our finances. We were paying out so much money just in interest on our student loans. And we were putting money that could have been used to pay those loans down faster into these retirement accounts. We’re putting money for decades. And to be fair, when we first started putting the money into retirement accounts, we weren’t thinking about paying down our student loans faster or anything like that, but after learning more about personal finance and seeing how the state of our finances was constraining what we could do with our lives, we started looking at how we could pay the loans down faster, which led to us decreasing how much we were putting in our retirement accounts. And so that decision to decrease our retirement contributions accelerated our student loan journey. I was having this conversation with a couple that I’m working with recently. They are in a similar situation where they have been aggressively saving for retirement, but their retirement savings have been harmful to their finances, because they’ve been saving so much. They didn’t have as much coming home and their paychecks and what was happening is when those one time purchases came up where they needed something or they wanted something that wasn’t part of their typical monthly expenses, they didn’t have the money for it. So they were putting it on credit cards, which has led to them building up some credit card debt and that means another expense in the form of the minimum payments on those credit cards every month. That has been increasing. But the only reason or maybe not the only reason but a big part of why they didn’t have the extra money for those purchases is they work so much to their retirement accounts and I think maybe it’s not the only reason because there also wasn’t a plan for how they were using the money that they did have coming in. So maybe if there had been that planned and there wouldn’t have been so much going on the credit cards. But anyway, now they’re working on paying off that debt, and the minimum payments on the debt have become a major expense for them each month. And I was telling them our story about how we dropped down our retirement contributions. To have more available to pay off debt with. As we’re looking at the retirement contributions for their accounts and the interest rates on their debt, the interest that they’re paying on the credit cards is much higher than the interest that they would earn on retirement contributions. Like for us it would have kind of canceled out right like we were paying 6.8 7.9% you typically get around 8% in the stock market. But for them, their credit cards are at like 20 or 30% interest and on the high end, right, they might get 10% in the stock market. Plus having that extra money going into retirement would kind of cause them to tread water because even with a plan for their spending. They didn’t have much wiggle room in their budget because of how high the minimum payments have gotten. So we decided to completely pause their retirement contributions temporarily. And now I am big on saving for retirement especially when you have an employer match. I say all the time like the employer match It’s free money, but in this particular situation because of their numbers and what’s happening with their finances and the debt contributing to retirement right now is just hurting them like that little bit. of extra that they would get with the employer match, again would be canceled out were completely eaten up by the interest that they’re having to their credit cards. And now they have done a tremendous job with what they’ve been able to achieve in terms of what they’ve already saved for retirement. And they’ve still got decades ahead of them. So the money that they’ve already saved will continue to work for them they will still be earning interest on that money that’s already in the accounts, but the money that they’ve been putting into retirement each month will be better used to clear up the debt and that’s going to free up a significant amount of their monthly income as they get those minimum payments down. One thing that I told them is, this might feel like a step back because they’ve been moving forward with their retirement contributions so aggressively. So this might feel like a step back as we pause, but it’s just for a little bit like just for a minute to set them up to take off later because the money that they are currently paying out for the minimum payments on their credit cards is eating up a decent chunk of money that they then can use for other things. And then on top of that they had a lot of money going into the retirement accounts as well. So pausing the retirement contributions is going to allow them to have more money back in their pocket in their bank account each month. And they’re going to be able to use the strategies that they’ve been learning and the intention that they’re now bringing to their finances to direct that money to pay off their credit cards. Then once they have the credit card pay down and and not paying someone else minimum payments, they can ramp those contributions back up. But this time they’re doing so with the knowledge of how to manage their money more intentionally, so they don’t end up back in a situation where they’re basically using credit cards to supplement their income. So I offer both of these stories to say you want to look at your personal situation and determining how you want to apply any advice you receive. I tell all my clients I question everything question even things I tell you ask yourself, is there something like some piece of my personal situation that makes this different for me? Experts say put as much as you can toward retirement but in my situation and in my clients situation, putting so much into retirement was hindering our financial goals. For my clients, I think how aggressively they have been contributing to their retirement accounts over the years has contributed to them having the credit card debt in the first place because they didn’t have extra funds available when something came up. And of course, part of that too was the money management piece like I talked about where they weren’t being intentional. They didn’t have a plan for their finances yet, but they would have had a little bit more wiggle room when those one time expenses came up even without a plan if they had had an extra couple $1,000 in their account each month, you know. So all that to say question all the advice you hear, look at your specific situation, and make sure that you’re making decisions that make sense for you. Make sure that in following the things that you think you’re supposed to do, you’re not also holding yourself back from your financial goals. And if you’d like help with questioning the financial advice you’ve heard and your financial goals, come join us in Money Mastery, just head to rho thomas.com/join To get started. All right, that is it for this week’s episode. Please take a second and share this episode with a friend or two so that more lawyers can get this information in their hands and get on top of their finances. I greatly appreciate your support. As we close out friend I pray that you take the information you learn here apply it in your life and open up to the realization that wealth is available to you. As you do that consistently. Week after week. You’ll continue to take steps to regain control of your time, build wealth, and live the life of freedom of choice you deserve. Talk to you later.