Friday, October 12, 2012

401k Contribution

I originally had a goal of maxing out my 401k this year but have since changed my goal and lowered my contribution rate.  Since my ultimate goal is to retire by 40 I need as much cash available to invest in taxable accounts as possible.  I was contributing 10% to my 401k which was going to have me on track to contribute around $11.7k this year.  I backed my contribution percentage down by two points to 8% and I am thinking of backing it down further to 6%.  Changing my percentage for the rest of this year is only going to put an extra $700 or so in my pocket before taxes; however, that's an extra $700 I can have full access to whenever I do hit financial independence.


My employer currently matches 100% of the first 4% and then 50% of the next 2%.  So if I contribute 6% they match with 5%.  They also contribute to my 401k a 4% profit sharing around February of each year.  Assuming the match and the profit sharing continue in the future I'll be saving 8% (my contribution) + 5% (employer match) + 4% (employer profit sharing) = 17%.  That is still well above average for most employees and I think it was time for me to back my contribution down so I can have full access to more cash for DGI purposes.  For this month at least I'm going to leave my contribution rate at 8% but I'm still heavily contemplating backing it down to 6%.

Based on my approximate earnings for this year I'll outline the difference between my 401k savings rates including the employer contributions as well as mine.  All calculations are including the 5% employer match and 4% profit sharing.  So a 10% contribution is my contribution only but the dollar amount includes the match and profit sharing of 9%.

10% Contribution - $21,467.44
8% Contribution - $19,207.71
6% Contribution - $16,947.98

The values are calculated assuming that I had that contribution rate for the entire year.  After tax that will be an extra $1,694.80 for the 8% contribution and $3,389.60 for the 6% contribution that I can invest in my FI portfolio.

This is subject to change as raises and tax changes occur but for now that's where I'm sitting at.  I feel that this will allow me to still reap the advantages of the employer match to get full value and saving for my goal of FI by 40.  The main reason I'm still investing in my 401k is because I can't justify passing up free money and there's still 12 years until I hit 40 and lots of things can change between now and then.  If I do hit my FI goal then there's ways to get around the money not being accessible and depending on whether the money is needed at all that could be a nice boost when it is available come normal retirement age or seed money for starting my future children off on the right foot financially.

10 comments:

  1. When my wife and I decided to work on paying off our mortgage a few years ago, we cut back on the 401k savings as well. My employer has a similar plan as yours, with a regular match every paycheck and a profit sharing dump once per year.

    We ended up cutting my 401k contribution amount to the minimum level at which I would still receive the maximum employer match (6% in your case).

    This came after I had spent about 7 years putting 15-20% into the 401k on my own, so the balance was respectable.

    Now that the mortgage is gone, I haven't increased the 401k contribution amount. Instead I'm diverting the cash to my taxable dividend-investment account.

    Unless you plan to work until at least age 59.5, it makes sense to keep some savings and investments outside of retirement accounts so you can readily access it at any time, and to help bridge the gap between "early" retirement and the age at which retirement accounts can be tapped without penalty.

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    1. That's about how I've figured it. Even if I drop it down to 6%, with the match and profit sharing that's still a 15% total contribution. That should be more than adequate considering the amount that I'm saving after tax as well. Since I could first contribute to my 401k at my previous employer, counting the match I was putting away between 15-19% and with HAL I've been putting at least 19%. So I have a pretty good chunk saved up and will still be contributing a solid amount, I just won't be maxing out the 401k like I had originally planned. I'm really focused on the early retirement so this is the best thing for me and my wife.

      Thanks for stopping by!

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  2. Update: This afternoon I went ahead and dropped my 401k contribution down to 6% which will give me a 15% total contribution counting the match and profit sharing.

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  3. This is a topic I am very much interested in exploring more on, especially as it pertains to early FI.

    Up to this point, I've been maxing out my 401k. Since I haven't been working for too long, I thought it would be a good idea to at least build a safety net for the traditional retirement years.

    However, I'm starting to feel the conflict, as it is very difficult to try and fund: taxable account, real estate properties, 401k, Roth IRA, etc.

    Unless you make an exorbitant amount of $$$, something has gotta give. I'm thinking about maxing out the 401k for maybe 1-2 years more, at most. Since traditional retirement is so far away, the number of years to compound should still help build a sizeable portfolio, even if stopped completely.

    I wonder if anyone does max out retirement accounts all the way up until early FI... at what point do you say, that's enough?


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    1. I kept going back and forth on that in the past. Last year I maxed out my 401k for the first time although I've always had a total contribution of at least 15%. I'm at the point now where I'm really focused on reaching early FI so I need the cash now to be easily accessible in the future. I make pretty good money and it's hard to fund a taxable account, 401k and Roth IRA, so I imagine it's even more difficult when you throw in real estate properties.

      If your company has a solid matching/profit sharing program I can't justify throwing away free money. I backed my contribution down to be able to take full advantage of the matching they do for that very reason. Since I'm still able to save 15% annually for the 401k, I figure that's still a solid savings rate in case things don't go as planned and I end up retiring at a more traditional age. Plus if I can still reach early FI, then oh well, the money in the 401k will be a bonus come time to withdraw from it.

      I know one of our fellow bloggers said they had been researching ways to access 401k money early without being hit with the penalty. I'll have to search around to see if I can find who it was to see what he's come up with.

      Thanks for stopping by!

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    2. After searching the internet for a bit I found out about 72(t) distributions or substantially equal payments.

      http://www.fool.com/retirement/iras/2010/04/08/tap-your-iras-to-retire-early.aspx

      The link was one of the best that I found explaining how the 72(t) distributions worked. You can avoid the 10% early withdrawal penalty this way; however, you would still owe the income tax on the distributions. When I get closer to FI and actually retiring early I'll have to look into it more, but that should at least help anyone that is trying to learn more about accessing the funds. Unfortunately you can't have full access to them, but you can get a annuity type payout on your investments without signing up for an annuity. I'll have to keep this in the back of my mind for whenever I do start getting close. Hope that helps.

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  4. My company has a great match, which makes it very hard to stop contributing. In fact, they match all the way up to the full 17k.

    Thanks for the link to the 72(t) early distribution. I'll take a look. It's still early in the game, but my current plan is to not rely on accessing retirement accounts until due time. I'm hoping that in 1-2 years, I'll have enough built up to stop contributing entirely. We shall see...

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    1. That's crazy that they match 100% up to the limit to contribute. That would be very difficult to pass up since you start off with a 100% gain the day your contribution hits.

      My plan is to also not have to worry about the 401k and just let it grow between early retirement and 59.5 when I can access it penalty free and without the 72(t) distributions.

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  5. 401k is a great savings vehicle, not so great investment vehicle. Look at it as extra tax advantaged savings. You can also access it by taking a loan, or use it for first time home purchases...all of this is off the top of my head, so dont qoute me. I put as much as I can into my 401k--dont make enough to max--because one day when I leave this job I can roll it over into an IRA where I will have more control over it, in the meantime I get the 50% match up to 6% which comes out to about 1500 extra dollars a year, which is more than my current dividend income from my taxable broker account...add it all up and its hard to argue with at least getting the match.

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    1. HYS,

      The 401k is definitely a great place to be able to save on a tax advantaged basis but most of the plans offerings are just horrible. Whether it's poor or expensive options. There's ways to get at the money but I'm hoping that I don't have to worry about it until I reach the traditional retirement age.

      I could max out my 401k and actually did so in 2011. But I'm really focused on trying to hit early FI so the contributions have been scaled back to allow me to invest more money now. It might not be the most efficient route but it'll be the easiest as far as being less of a headache when I need access to the money.

      There's very few situations where I wouldn't recommend that someone shouldn't at least invest enough to get the employer match if one is offered. But those are rare circumstances. The chance to get a 50-100% return immediately just can't be passed up.

      Thanks for stopping by!

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