Another retirement question...regarding 401Ks

[momx2]

What is the maximum one can put in your 401K? I thought I read somewhere it was 25%. Does this sound right? My DH and I plan on retiring in approximately 14 1/2 years. I'll be 52 and I have a state benefit of a set retirement for life, which will end up being about $45 - $50K per year. But DH will be 59 and as of now doesn't have much in the way of retirement. We have only been matching his employer contribution of 3%. We have one DD still in daycare and when she starts school in the fall, we plan on greatly increasing his contribution. I'm afraid that still isn't enough with only about 14 years left by then, but we will do the best we can. Any ideas on the best returns for his contributions?

 

[salmoneous]

Here's the thing. There are multiple limitations on 401(k) contributions. There are limits on the % of salary, the total $'s, and the total salary to which it can be applied. The company or plan sponsor can place their own limits on top of the government limits. Then you've got exceptions to the rules (right now people over 50 can put in an extra $5,000/year). And just to make things extra fun, the rules change every year.

So what you need to need is get all the information on the limits in your exact 401(k) plan. All the limits will be specified. In general, you can set your contributions to the maximum, but be careful. For example, if a plan allows 10% contributions up to a maximum of $10,000, and you have a salary of $120,000, you generally don't want to set your contribution rate at 10%. If you did, you would max out at the end of October, and not get the 3% match for November and December.

If the 401(k) plan is not going to provide sufficient retirement, keep in mind there are many other ways to save.

Best of luck,
Sal

 

[dvcgirl]

What is the maximum one can put in your 401K? I thought I read somewhere it was 25%. Does this sound right? My DH and I plan on retiring in approximately 14 1/2 years. I'll be 52 and I have a state benefit of a set retirement for life, which will end up being about $45 - $50K per year. But DH will be 59 and as of now doesn't have much in the way of retirement. We have only been matching his employer contribution of 3%. We have one DD still in daycare and when she starts school in the fall, we plan on greatly increasing his contribution. I'm afraid that still isn't enough with only about 14 years left by then, but we will do the best we can. Any ideas on the best returns for his contributions?

The maximum amount one can put in their 401K is 14,000 this past year and 15,000 for 2005. Employer contributions go on top of that. That's "maxing out" your 401K. However, employers often regulate how much their employers can put in. It varies from employer to employer. You definitely want to contribute to that 401K up to the employer match, but then I'd switch over and max out something called a Roth IRA. He can put up to $4,000 in that for himself and another $4,000 for you. 401Ks are tax deferred...meaning they aren't taxed on the way in, but they're taxed when you start to use the money in retirement. Roth IRAs are funded with money already taxed by Uncle Sam now, but then everything...the contribution and the profits are pulled out tax *free* later. That will help to balance your tax liabilities when you retire.

If your husband doesn't have much in the way of retirement at age 45, and you can't live on your pension alone, he's got a lot of catching up to do. I'm a bit of a fianancial nerd and do a lot of reading on the topic. Using 65 as a retirement age, to have anything near what your husband would need to contribute to your present income (assuming you plan to maintain a similar lifestyle in retirement), he'd had to save well over 20% of his take home pay to retirement account. And retiring at 59 (provided you need his income) may not be in the cards. That's *very* early for most people. Remember, we're all living a lot longer and at 59, he may have another 25 years (or more!) in front of him. Think about how much money you'd need to support your family for the next 25 years if you were unable to work. That will give you an idea about how much you'll need. The number will be very high.

Does all of this mean that you're doomed? No. But I would highly suggest that you go speak to a *fee-based* (not making money on commissions) certified financial planner. It sounds like you need some guidance. They'll simply start by asking what it is you see for yourselves in retirement. When you'd like to retire, how much do you make now (which will give them an idea about how much you'll need then), and what type of lifestyle you see yourself living. The sooner you go....the better.

 

[momx2]

Thanks for the info from both you guys. I had actually thought about the Roth IRA options because of the taxes. I think we will probably do the Roth and the matching from employer in 401K. DH does not have a big salary. Usually less than half of mine. We are aiming for no mortage (can't retire if we still have one). The DDs will be in college (we hope). They have 2 years pre-paid tution already and we put some in a 529 each month, the rest they will have to get loans for. We do hope to travel alot and I'll probably still work a little part-time. We will either stay in our house or down-grade, I'd love to go smaller. Actually I think we could do this with my pension and a little kicked in from DH (1-2K per month). That would actually give us about $5,000 a month to live. Surely, we could make it on that, but I know we never can be sure.

 

[imsayin]

Actually I think we could do this with my pension and a little kicked in from DH (1-2K per month). That would actually give us about $5,000 a month to live. Surely, we could make it on that, but I know we never can be sure

Not to be a doom & gloomer, but what if DH can't work? What if you die, does he get your pension? Don't forget to include what you'll have to pay for your own medical insurance. The thought of retirement overwhelms me (and I have a ways to go). Save as much as possible!

 

[momx2]

Yes, DH gets my pension if I die, thank goodness. There is an option for him not getting it if I die and my pension would be a little higher while I'm alive, but that is not an option to me because his family have great life longetivity, mine on the other hand isn't that long unfortunately. I will get health insurance, not DH, the same as the present plan for employees. But, I'm not sure that will still be around since the state (I work for the state) is having problems already paying for health insurance. I was hoping for DH to contribute a minimum of $1000 per month from his retirement, not from employment. I'll probably work a little in my present profession, but not near full time. Right now we live off about $8,500 a month before taxes and we have 2 kids. I'm hoping $5000 will get us through, of course that is pretax and my pension will be taxed, so maybe I should aim higher?

 

[m&m's mom]

If you are over 50 there is an extra "Catch-up" amount that is added to the standard 401(k) limit.
Should be an extra $5000.00 each year making the "real" limit for an 50 or over to be $20,00.00