Apr 18 2010

Putting a raise toward 401k contributions

For about a year, Shane’s Roth 401k contributions were at about 9%. Not enough. His company halted their generous 100% match (up to 6% of his salary) so when it was in place, that was technically about 15% of his gross pay going toward retirement.

Because of the recession, the company not only got rid of the 401k match, but they also suspended bonuses and cost of living raises. Yuck.

But the economy seems to be turning around! Shane had wonderful news last week. He got a raise! He really deserves that.

In addition, the cost of living raise (usually around 2%) will return later in the year. They are also bringing back the 401k match. This time, it will be a 50% match up to 6% of his salary. Better than nothing, right?

I started to get really excited thinking about what we could do with his raise. We could speed up our savings goals, which are currently trudging along at a snail’s pace. Right now, we’re saving for a second vehicle and after that is set, we’ll be saving for a down payment on a house.

But then I started to think about our long-term financial goals.

We knew we had to increase our 401k contributions to at least 15%, and the sooner the better to take advantage of the 34 years or so it’ll take until we see it again.

So, we’re doing that now with his raise, and bumping it up to 15%.

That means that we probably won’t have a higher net paycheck. In fact, it might be $20-30 less per month, which is ok.

We reasoned that we wouldn’t miss the money now (since it was money we didn’t have before anyway) and that hopefully it will have plenty of time to grow and do us a lot of good on down the road — more good there than it would do in our savings accounts.

Once we get into a house, we’ll probably start nudging up the retirement contributions until we’ve hit the maximum amount per year of $15,000. That will probably take awhile!

As I mentioned earlier, we had used the company’s 6% match to put us at our target 15% contribution. We saw how that can go away without much warning. We think it’s probably better for us to put 15% of our money toward retirement on our own, and to treat company matches as just a nice bonus.

It’s not as fun putting all that money toward retirement. I think we’ll be happy we did it, though. And since we’re now at that 15% mark, all future raises will then increase his take-home pay. It’s easier to get used to living on a little less right now than trying to make those adjustments on down the road.

7 Responses to “Putting a raise toward 401k contributions”

  1. I completely agree with you…good for you for learning from experience how quickly the economy can turn around.
    And yay for Shane and his raise! He definitely deserves it :)

  2. That is great that he got a raise!

    Just wondering why you would bump up the 401K instead of putting the money in a ROTH IRA. Just wondering your thoughts on that
    .-= Promises Fulfilled´s last blog ..Helping to Relieve Stress =-.

  3. Our 401k is actually a Roth 401k, so it has the same tax benefits. The fees are pretty small with it, too. We know that IRAs have special benefits (like we can borrow the money if we’re in a serious jam without huge penalties and things) but to tell the truth, we just haven’t gotten around to figuring out the whole IRA thing.

    It’s just easier for us to make an adjustment to an account that already exists. Lame excuse, I know. But it’s the truth! :)

    We really ought to look into setting up an IRA and once we do, we might lower the 401k contributions just to the point where we get the full company match, and put the rest with the Roth.

    Is that along the lines of answering your question?

  4. Good for you for planning ahead. When the Co. my husband worked for first offered their tax defered savings plan (1983). we were allowed to contribute up to 5% of income. At the time we had 2 small children ( kind of poor)..friends all said “we can’t do without that money” .. we did it from day 1..because it was before taxes it didn’t seem so bad…and..My husband just retired ( after 36 years)…people ask how he as able to retire at his age…we know..we saved…and saved…it wasn’t a lucky accident..we planned for it… Everytime a portion of a bonus would go in to TDSP we would groan and say ” one day we’ll appreciate it”..we aren’t spending it yet, still letting it grow.. but it is so nice having the money in the account..it gives us the freedom to enjoy our old age.

  5. You are doing great with Shane’s retirement, way to go. We definitely need to bump ours up, but never seem to have the money to do that. Oh and congrats on the pregnancy. We did the “every 2 year” thing through 4 kids. It was so weird when my youngest hit 3 and there was no baby in sight.
    .-= Jennifer´s last blog ..Passing by the deals =-.

  6. Kacie, that does answer my question. A ROTH 401k is new to me, so I looked it up and it seems to have similar benefits as a ROTH IRA. We are upping what we are placing into investments this year too!
    .-= Promises Fulfilled´s last blog ..Helping to Relieve Stress =-.

  7. Increasing retirement contributions by the amount of your raise is a good idea. Your paycheck stays the same so you don’t really miss anything.
    .-= Mike @ Saving Money Today´s last blog ..The Movie Lover’s Guide to Saving Money =-.

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Hey! I'm Kacie, wife to Shane and mother to Jonathan (7), Vivienne (5) and Amelia (2) . I write about my family's finance: how we save money, improve our spending, and plan for the future.

I hope I can inspire and encourage you to improve your situation. See disclosure.

I'm adopting a much slower-paced posting schedule, and treating this as a hobby blog now.

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