Time to increase your 401k contribution by 1%

[DVCcurious]

I read this tip on line a few years ago and it's worked for me.

If you are not maxing out your 401k what you do is just increase your contribution by 1% on January 1, and eventually you will be maxing out.

So I was saving 5% three years ago in 2010, and then I upped it to 6% on 1/1/2011, and to 7% on 1/1/2012, and 8% on 1/1/2013 and now I'm increasing it to 9% on 1/1/2014.

So I've almost doubled my 401k contribution amount and I haven't really noticed it because I've just done it in small increments.

 

[STLDisney_Freak]

I read this tip on line a few years ago and it's worked for me.

If you are not maxing out your 401k what you do is just increase your contribution by 1% on January 1, and eventually you will be maxing out.

So I was saving 5% three years ago in 2010, and then I upped it to 6% on 1/1/2011, and to 7% on 1/1/2012, and 8% on 1/1/2013 and now I'm increasing it to 9% on 1/1/2014.

So I've almost doubled my 401k contribution amount and I haven't really noticed it because I've just done it in small increments.

I do the same thing, but I do it when I get my raise each Feb.

 

[Jess30]

I increase in January and June! It's so easy.

 

[QVCshopper]

I work part time, but already put in the max, which for me is 50% + 6% company match. My DH was putting in the max for many years (up to the $16,500 limit), but recently went down to 11% + 4% company match + 10% profit sharing--so effectively 25%. We once again have a small mortgage after being mortgage-free for nearly seven years, so he cut back his 401(k) savings to accommodate that. We were also doing the $5k limit into our Roth IRAs, but cut back last year also due to the house purchase. Better school district and shorter commute = higher home prices.

Honestly, it's hard to keep up saving at such a high rate (which I think was around 40% of our income at one point), though, as our three kids get older and we also try to save $100/kid/month for college. I'm glad we started when we were only 22 years old and fresh out of college, as we had much more disposable income and I was working full time. We have now been married 15 years and have been able to squirrel away a good chunk of retirement and college savings, but I am expecting to return to work full time eventually.

 

[Alexle2007]

DH and I are already maxed out on our TSPs and have been for years. It really adds up and we have over $1.4M combined and I still have 15+ years to work and DH has several. He keeps saying he is taking early out but not with DS6 already talking PhD.

 

[vacationer1954]

Before maxing out your 401k contributions you should do a little research and determine if you wouldn't be better off contributing partially to a traditional (or Roth) IRA. The determining factors would be company match (generally you're always better off contributing enough to get the maximum company match if there is one), eligibility for deductible IRA contributions (if you income is too high you cannot deduct IRA contributions), and quality of 401k choices (how high the expense rates are and how good the choices themselves are compared to what you can get a Vanguard, Fidelity or Schwab).

 

[tvguy]

Before maxing out your 401k contributions you should do a little research and determine if you wouldn't be better off contributing partially to a traditional (or Roth) IRA. The determining factors would be company match (generally you're always better off contributing enough to get the maximum company match if there is one), eligibility for deductible IRA contributions (if you income is too high you cannot deduct IRA contributions), and quality of 401k choices (how high the expense rates are and how good the choices themselves are compared to what you can get a Vanguard, Fidelity or Schwab).

The advantages of Roth's always confuse me. The advantage of a traditonal IRA and 401K is it reduces my taxable income NOW, when I am working and have a greater income. Any tax liablity is deferred until I withdraw the money when I am retired, when my income will be sharply lower and I will be in a LOWER tax bracket. Or have too little income to even have to file income tax. My mom enjoyed 28 years of retirement, and between her Social Security, pension, an annuity and her mandatory minimum IRA withdrawals, only had enough taxable income to require her to file taxes 1 year, and that was a year that an investment she bought 40 years earlier matured. So she didn't pay a penny of tax on her traditional IRA money for 27 of her 28 years in retirement.

 

[vacationer1954]

I agree. People who choose to go Roth often expect to pay higher taxes in retirement than they are paying now mostly based on speculation that tax rates will increase significantly over time rather than stay near where they are now. I don't think that taxes will increase enough before we retire to come close to how much more we'll earn in gains on the money we would have paid in taxes now if we were making Roth contributions.

 

[sweetdana]

Unless your tax rate now is really low, or you have a huge inherit/other coming, where div/int will be more than current tax rates, very few advisers Roth over conventional. .. But any investment is better than none

 

[dayvewc]

Or, you work in a field that has a contributory pension. In which case your traditional IRA deposits are reduced by the amount you contribute to the pension fund. In my case, the required contribution to the pension is more than the maximum allowed IRA contribution, meaning that a traditional IRA is useless for me as it provides 0 tax breaks or incentives. But I can still contribute to a Roth IRA, done post-tax, and leaves all the earnings at tax-free.

 

[QVCshopper]

We did a Roth for years because the standard deduction was much higher than our itemized deduction. And because we saved so much we were easily in the 15% tax bracket. I'll have to look at what we will do this year, now that we have a mortgage again, but I like the idea of balancing out the pre-tax 401(k) with after-tax Roth IRA. I am not counting on Social Security or pensions at all, but hope to have a couple million saved for retirement. Hopefully time is on our side, my DH is 39 and I'm 37.

 

[ilovemk76]

The advantages of Roth's always confuse me. The advantage of a traditonal IRA and 401K is it reduces my taxable income NOW, when I am working and have a greater income. Any tax liablity is deferred until I withdraw the money when I am retired, when my income will be sharply lower and I will be in a LOWER tax bracket. Or have too little income to even have to file income tax. My mom enjoyed 28 years of retirement, and between her Social Security, pension, an annuity and her mandatory minimum IRA withdrawals, only had enough taxable income to require her to file taxes 1 year, and that was a year that an investment she bought 40 years earlier matured. So she didn't pay a penny of tax on her traditional IRA money for 27 of her 28 years in retirement.

That is a big assumption.

The traditional IRA started in 1974.

1974 to 2013 is 30 years. She was retired for 28 years and made draws for 27 year. How much could she have put into her IRA?

 

[crisi]

That is a big assumption.

The traditional IRA started in 1974.

1974 to 2013 is 30 years. She was retired for 28 years and made draws for 27 year. How much could she have put into her IRA?

Is it? Most people don't plan for having an increase in income in retirement, and most people's ability to save doesn't support it. Generally, if you can replace 80% of your income, you've done really well (barring something like a salary replacment pension - in which case you are out of the IRA, 401k, Roth discussion completely). Particularly for middle class people, at which the Roth is aimed. I really think the Roth is the wealthy who own Congress getting taxes raised today on the middle class and selling it to you as a good deal. I also think there is a better than even chance that the deal to "save" social security will be means testing, with a significant tax break on people who don't get social security but live off traditional 401k income - and if that is the deal, the wealthy get the biggest cut.

 

[ilovemk76]

Is it? Most people don't plan for having an increase in income in retirement, and most people's ability to save doesn't support it. Generally, if you can replace 80% of your income, you've done really well (barring something like a salary replacment pension - in which case you are out of the IRA, 401k, Roth discussion completely). Particularly for middle class people, at which the Roth is aimed. I really think the Roth is the wealthy who own Congress getting taxes raised today on the middle class and selling it to you as a good deal. I also think there is a better than even chance that the deal to "save" social security will be means testing, with a significant tax break on people who don't get social security but live off traditional 401k income - and if that is the deal, the wealthy get the biggest cut.

Nobody knows what Congress will do to taxes. Most likely, Congress will raise taxes to pay all their overspending, over promises and over borrowing.

Look at the minimum tax. When it was enacted only the super wealthy got hit with it. They did not index for inflation and now many are getting hit with it.

You forget to take into account inflation. If one makes $50K today and retire in 30 years, they will need way more than $50K to retire. Why? Because that future $50K, depending on inflation, is way less than half of that $50K today. Inflation alone will put you into the higher tax bracket.

I would not put all my faith in the ROTH either. They say it is tax free to remove. Guess what, Congress can change that little rule.

Bold - I don't think that is going to be the deal. They will raise the retirement and and do means testing but not the rest of your hypothesis. Only time will tell.

The most important thing is to be preparing for when you will no longer be working.

 

[littleelf]

That is a big assumption.

The traditional IRA started in 1974.

1974 to 2013 is 30 years. She was retired for 28 years and made draws for 27 year. How much could she have put into her IRA?

Actually it's 40 years. Or else I'm ten years younger than I thought I was--yay!

 

[crisi]

Nobody knows what Congress will do to taxes. Most likely, Congress will raise taxes to pay all their overspending, over promises and over borrowing.

Look at the minimum tax. When it was enacted only the super wealthy got hit with it. They did not index for inflation and now many are getting hit with it.

You forget to take into account inflation. If one makes $50K today and retire in 30 years, they will need way more than $50K to retire. Why? Because that future $50K, depending on inflation, is way less than half of that $50K today. Inflation alone will put you into the higher tax bracket.

I would not put all my faith in the ROTH either. They say it is tax free to remove. Guess what, Congress can change that little rule.

Bold - I don't think that is going to be the deal. They will raise the retirement and and do means testing but not the rest of your hypothesis. Only time will tell.

The most important thing is to be preparing for when you will no longer be working.

You are right, no one knows what Congress will do - but I'll bet against them taking any action which makes the wealthy less wealthy. Which includes any action to means test SS without giving those who would be means tested something.

 

[eliza61]

You are right, no one knows what Congress will do - but I'll bet against them taking any action which makes the wealthy less wealthy. Which includes any action to means test SS without giving those who would be means tested something.

That's my thought also.

This year my company will actually be offering a roth alternative in our 401K benefits package. They are also upping the amount that they will match. currently they match dollar for dollar on the first 6% that's going up to 7%,
so I'll definitely make sure I'm at 7% before going roth.

I generally don't try to factor in congress in my financial planning. I have a hard enough time dealing with the hear and now.

 

[tvguy]

That is a big assumption.

The traditional IRA started in 1974.

1974 to 2013 is 30 years. She was retired for 28 years and made draws for 27 year. How much could she have put into her IRA?

First, a little math error, 1974 to 2013 is 39 years.

Second, why would it be a big assumption? I don't know anyone who has greater income in retirement than they had working. And every retirement planning formula I have seen suggests you will need less than 100% of your working salary per year once you retire.
I have no idea what the total amount was when she retired. I do know she used my age as her beneficiary to lower her minimum required distribution each year. I know that her distribution was around $5,000 each year and that the investments she had the IRA in most years returned at least that much.
And don't forget, back in 1981 the average bank CD rate was over 16%, and over 15% in 1982. So even the most conservative investment paid pretty big returns. And I just sat down with her financial planner 2 weeks ago, and for the 2013 the mutual fund she put her money has had a return of 34%. So most years, her minimum withdrawal was less than interest earned, or when she shifted to mutual funds, the amount the funds grew that year. Some years, like this, a whole lot less.

 

[ilovemk76]

First, a little math error, 1974 to 2013 is 39 years.

Second, why would it be a big assumption? I don't know anyone who has greater income in retirement than they had working. And every retirement planning formula I have seen suggests you will need less than 100% of your working salary per year once you retire.
I have no idea what the total amount was when she retired. I do know she used my age as her beneficiary to lower her minimum required distribution each year. I know that her distribution was around $5,000 each year and that the investments she had the IRA in most years returned at least that much.
And don't forget, back in 1981 the average bank CD rate was over 16%, and over 15% in 1982. So even the most conservative investment paid pretty big returns. And I just sat down with her financial planner 2 weeks ago, and for the 2013 the mutual fund she put her money has had a return of 34%. So most years, her minimum withdrawal was less than interest earned, or when she shifted to mutual funds, the amount the funds grew that year. Some years, like this, a whole lot less.

That darn typo. 39-29 is only 10 years. I remember in the mid-80s it was $2000/year. There were great CDs at that time, but they were only 5 year CDs, so not long enough to grow $20K to a million.

Bold #1 - You are comparing the year or two before they retire to the year they retire. Saving for retirement should start in your 20s, when you have 40 or more years to retirement. There is not way to know how taxes will be 40 years from now. See my minimum tax comment above. I did know people who made more after retirement than the year before they retired. They were lower to middle middle class people with two working in the family. Their 2 SSs and two pensions were more than they made the year they retired.

Bold #2 - you have your mother is far too risky investments for her age. She is probably not very diversified either, as you state "the mutual fund she put her money".

 

[tvguy]

That darn typo. 39-29 is only 10 years. I remember in the mid-80s it was $2000/year. There were great CDs at that time, but they were only 5 year CDs, so not long enough to grow $20K to a million.

Bold #1 - You are comparing the year or two before they retire to the year they retire. Saving for retirement should start in your 20s, when you have 40 or more years to retirement. There is not way to know how taxes will be 40 years from now. See my minimum tax comment above. I did know people who made more after retirement than the year before they retired. They were lower to middle middle class people with two working in the family. Their 2 SSs and two pensions were more than they made the year they retired.

Bold #2 - you have your mother is far too risky investments for her age. She is probably not very diversified either, as you state "the mutual fund she put her money".

Yes, retirement savings should start when you start working, and yes there is no way to what the tax rates are going to be, but I stand by my comment that most people will be in a lower tax bracket when they retire. And the way things are going, pensions are getting rare too.

Mom passed away in May so the IRA is now paying annual benefits to me because of how she had it set up. Given that mom's Social security more than covered all her expenses, she felt comfortable taking a greater risk with her IRA money, and it clearly paid off.