Financial Decision from a Vulnerable Position

Over the weekend, while my wife babysat the contractors installing our new doors and I “hid” upstairs, I did a little research on the benefits of increasing my contribution to my 401k.

Somewhere online, Bloomberg’s or something, I’ve seen a retirement gauge that indicates that if you have $60k in there at age 30, you’re in great shape.

Well, that’s where I am. And that doesn’t even include my wife’s savings.

But elsewhere, using silly retirement calculators, the end result for, say, retiring at 65 is all over the place. From a number that makes me very happy to a number I’m not sure will cut it. And I’m not planning on working until 65… so that number *REALLY* won’t cut it.

Right now, I’m contributing just under 5% of my gross income to my employers 401k plan. That’s…disappointing. In the past, before I bought my house 5 years ago, I was contributing 15% and that’s what I should be working my way towards again.

For my employer’s 401k plan, the match is 33% up to 15% of your income. So the 15% mark is the ceiling to make the most of the company match. By up’ing (is that even a word?) my contribution to take the most advantage of the match, my take home pay, using some really simplified calculations, would decrease between $325-350 each paycheck.

Can I afford that?

Sounds do-able. Especially when you look at the return.

Playing with the calculators out there, at my current rate of under 5%, and never getting another raise, I’ll hit the one million dollar mark when I turn 55. Jumping up to a 15% contribution, at age 55, it will be over double that! Now we’re talkin…

Is hitting a million dollars in my 401k by age 48 worth around $700/month? Toss in the company match, and it’s really like paying $700 to get over $900 back. That’s one hell of a deal. And that doesn’t even take into account the rate of return.

But again, can I afford it?

Right now… well… I’m not so sure.

I know lots of financial advisors say you should pay yourself first and I agree with that to a certain degree. And, yes, we could get by just fine with a hit like that to our take home pay.

But with the debt we’ve taken on in the past couple of months to finance the siding project and the possibility that the largest client for my side business might not renew my contract, well, I’m feeling especially vulnerable these days.

That monthly $700 (and then some) would undoubtedly be going towards debt. Taking it (the $700) out of the picture, yes, we can still make the minimum payments on all of the cards. But the balances won’t fall fast.

I’m not willing to do the math, but I’m sure that in the end, it would be advantageous to send it to the 401k now and pay down the debts slowly, but for my own peace of mind, I think I need to knock down the balances a lot before I make a move that large.

Add to the fact that we may not have the income we’ve grown accustomed to this fall, and it’s a little unsettling.

Will we be able to down balances like we have in the past? What if a tree falls on the house? What if the fridge dies? What if one of us loses our job? What if my auto insurance rates triple because of the accident? What then?

In any of those cases, I’d rather have a lot of available credit to fall back on over a fat 401k balance that I can’t access until I’m old and grey.

Maybe I’ll just jump to 10% for now. Eh, that’d give me $1.5 million at age 55. And that wouldn’t be so bad.