401k

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Grow!  Grow Money Tree!Okay, now what?

Totally a fictitious question — I haven’t hit the contribution limits and don’t really expect to in 2008, but over the last few weeks, while crunching numbers to maximize my 401k contributions, my eyes were opened to the yearly limits placed on this type of retirement account.

Around ten years ago when Roth IRAs made their big splash, I had a co-worker who ranted and raved mindlessly over how great they were. I was already contributing to my 401k pretty heavily and sending an additional $150/month towards a mutual fund I randomly selected from Fidelity so I just gave it a quick looksie to see what all the fuss was about.

The $2000/year limit (at the time) turned me off. Maybe it’s just me, but that’s NOTHING!? Saving an additional $166/month just wasn’t worth the hassle of opening another account with another institution and keeping track of it — remember, you couldn’t do everything online back then.

Fast forward 10 years and the IRA contribution limit for 2008 is $5000. That’s a little better, but for the past few years, unfortunately (or fortunately, depending on how you look at it) we’ve been up against the income limit for contributing to one anyway, so it hasn’t been much more than an afterthought, but am I missing something?

I’m certainly not an expert on the subject, but five grand per year just doesn’t seem like very much, even with the tax advantages — which when we’re talking about such a small amount can’t be that much of an advantage.

So, back to a retirement account that I actually do have… The contribution limit on a 401k for 2008 is $15500 and as far as I can tell, that doesn’t the including employer match so if you work for a really great company, you could in theory sock away $31k per year. Now we’re talking…

But for most folks, a high enough salary and a 100% match to sock away that kind of money just isn’t in the cards.

I was unaware of the $15.5k limit until recently, and unfortunately my salary isn’t high enough to get me there, but it did get me thinking…

In theory, a typical Joe with the ability to hit the contribution limit across the board could save a maximum of $25,500 in 2008. (Broken down to $15,500 for a 401k, $5000 for a traditional IRA, and $5000 for a Roth IRA).

I’ve never come near that number in the past, but I have been averaging $2215/month in payments to credit card companies alone over the past three years. The credit card balances will be eliminated sometime this year, and once that happens, in theory, I could be saving $2215/month instead. That works out to $26584 per year.

So, what do people making 6 figures, say $250k per year, do?

They’d hit the 401k contribution limit by contributing just over 5% of their paycheck — not very much. They also make too much to contribute to a Roth IRA (which as I mentioned earlier would be a waste of time as it would only amount to a negligible 2% of their income anyway), so where do they save for retirement?

Now that I’m maxing out my 401k to get the maximum match (though still short of the contribution limit), and I’m nearing the finish line when it comes to debt repayment (which will give me a lot more money to save), where should my expected $26584 each year go?

I want to emulate the people who earn incomes that make 401k’s look like my meager ING account…

Mutual funds are my best guess…

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Pay Day!Being a Thursday and all, today was the first paycheck of the year.

And, as hoped and expected, my tax filing status moves last week increased my take home amount even when I also increased my 401k contributions at the same time.

No raise, but more money in my pocket and more money towards retirement…

Net pay increase worked out to $88.53 every two weeks. Not bad.

My 401k contributions jump up $153.29 every two weeks. Again, can’t complain.

It’s a great start for 2008 — though it is unfortunate that this paycheck already has the mortgage written all over it…

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IRS LogoBeing the end of the year, it’s time to start thinking about taxes…

In some ways, I’m looking very forward to February when we’ll file our taxes and get our nice big refund like we do most years but right now, I’m looking to change my filing status for 2008 on my Form W-4 so that I don’t have so much taken out of my regular paycheck.

In the past, I’ve filed single with zero exemptions, with an additional $50 taken out of each paycheck. This was due to the fact that I was earning more than $1000 per month from the hockey team without having taxes taken out so I was trying to cover that through overpaying from my full-time job. It worked out, or more accurately, I still over paid because I’ve received a large refund each February shortly after I filed my return.

But with that job done and gone now, it’s time to reassess things for 2008.

PayCheckCity.com has a nifty calculator, and one that I’ve been seeking for a long time, that calculates what your net pay will be based on how you file. Best of all, for me, it was accurate to within $0.74 for the 2007 tax year.

I plugged in numbers for 6 different scenarios for the 2008 tax year just to see how each change would affect my bottom line — the net pay that I’d take home.

Filing single, married, zero exemptions, one exemption, two exemptions, 10% for 401k, maxed out 401k, that sort of thing…

I settled on the most conservative option (because I still have a fear of owing money to the IRS) by switching my federal filing status to married (from single), and switched from zero to one for the federal exemptions.

I also maxed out my 401k. It was just under 10% — as of my next paycheck, it will be 15%.

Bottom line? Well, it’s one of those wacky scenarios where by saving more, I’m giving myself a raise.

My net pay increases $85.78.

It’s not a huge increase, but the 401k increase is quite large.

Best of all, it’s not even 2008 and I can already cross off one of my goals for the year. How about that?

Brainy SmurfWith all remaining bills for 2007 paid already, it’s time to start looking ahead to 2008. This will be my official “Goals for 2008″ posting. Earlier this month, I had a preliminary version, but as I’ve thought about it some more over the past few weeks, there were a few things I felt I should add.

In no particular order:

  • Eliminate all credit card debt by the end of June 2008. Current credit card debt is $10318. I’m aiming to achieve this goal slightly ahead of schedule, by about a month, according to the snowball plan I started in November. Achieved 03-27-2008
  • Eliminate PMI from the Mortgage by the end of December 2008. Right now, it’s costing me over $1000 per year. For what? Nothing. To meet this goal, I’ll have to contribute an additional $160 per month towards my mortgage. Achieved 07-08-2008
  • Pay off my auto loan by the end of December 2008. Current balance is $7418. This is also included in my snowball plan and it’s scheduled to be paid off in October if all goes as planned. I’m not looking to speed this up — just finish it off. Achieved 09-25-2008
  • Increase my 401k contributions to 15%. This way I’ll receive the maximum match allowed from my employer. Right now, I’m contributing just under 10%. I’ll plan to make this move once the credit card debt is eliminated. Achieved 12-27-2007
  • Increase my passive income. Now that I’ve dumped my largest client, the hockey team, I’ll soon find myself bringing in a lot less income. But, I also find myself with a lot more free time. Free time that I should use to optimize my other ventures to make up the difference — except now I’ll focus on more passive income streams because, in all honesty, I’m tired of working so much. Right now my 100% passive income hovers around $50/month. With the least effort possible, I’m looking to triple that in 2008 and pick-up a few low maintenance clients as well.
  • $10k in savings. This is my lofty goal. I’m not sure it’s even possible. Right now my ING account is holding a mere $1k. No matter how far rates fall, with a 5-figure balance working in my favor I’ll have to be making atleast $1/day in interest and for whatever reason, I like that. I’d also like to pay for some still needed interior renovations in 2008 with cash and this is where I’ll draw from.

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Ben BernankeWith the monthly net worth update looming in the next few days, I’ve got a pretty good idea of what it’s going to look like — granted Bernanke’s rate cut on Wednesday (Already? Why???) could sway the results.

Either way, October will end up being another month headed in the right direction. Problem is, most of the “gains” are coming in my 401k.

I guess that’s not a problem — it’s just not helping the debt reduction any. Untouchable income which, yes, is a good thing, is also like invisible imaginary income.

I look at the bottom line and see that I went up, say, $5k in the grand scheme of things. Hey, at that rate, I could wipe out all of my credit card debt in 3 months time. But my debt total hardly moved. And that’s frustrating.

I know I said that was going to be the new plan last week, but I haven’t implemented that plan yet.

But enough complaining about an increasing net worth… (Seriously, why am I moaning about that?)

The good news is that, by delaying the plan to boost my cash resources for another pay period, I’m ahead on my mortgage again. Next payment is due in January 2008, and that’s a load off of my shoulders. I generally like to have a buffer like that and there have been a few months where it’s been a little tight.

In other mortgage news, Countrywide did their annual Escrow Analysis on my account a bit earlier than usual this year and my payment has gone down around $40/month. While I’m not going to change my payment amount (I like to write checks for nice round numbers), it’s an additional $40 that will go towards the principal each month. Added to the $25/week I’m still throwing that way, that’s $140/month extra towards the principal, which according to Countrywide’s amortization schedule calendar will put me on pace to pay off the mortgage nearly 10 years early. No complaints there.

Anyway, the goals for November are to aggressively pay down the Bank of America Business credit card like I mentioned in the “Goal for the 4th Quarter” posting and increase my cash pile by paying the minimum on all of my other bills.

I guess that’s the Dave Ramsey method. Well, we’ll see how that goes…

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401k Nest EggToday was payday and I more than doubled my 401k contribution last week so I was, as a result, prepared to take a major blow to my take home pay but… it only knocked off $110.

I was ready to have it drop nearly 3 times that much?!

If I were thinking clearly, I’d submit the form to the the plan administrator to double (or triple) it right now for the next pay check, but I’m not going to because I really want to maintain the streak I’ve been on when it comes to paying down credit card debt.

This lesser blow makes that very do-able and I can stratch most of what I laid out last week.

Once the credit card balances are under 5 figures, I’ll be sure to up my contribition again.

In the meantime, it’s nice to know that I can throw an additional $160 or so towards my 401k each paycheck and only suffer a $110 hit to my take home pay. That’s a great return. Tack on the company match, and it’s like getting $100 for free every two weeks.

I’ve seen calculators online that let you play around with your contribution amount and how your resulting take-home pay will pan out, but I’ve never found one to be very accurate. It’s a pretty complex calculation when you toss taxes and insurance into the equation — and it would be different for each state and tax bracket, which is probably why I’ve never come across an accurate one.

Some number out there makes you the most while taking the least — it’s just a super pain to find out what that number is. Any ideas?

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Gumby, err, Financial Limbo!So, I went ahead earlier this week and up’ed my 401k contributions to 10% of my gross income (up from just under 5%).

This will result in a considerable hit to my monthly income, presumably starting with the next paycheck, so I’ve come to the conclusion that it would probably be a good idea to alter my debt repayment strategy in advance to compensate for the smaller amount coming in and so as not to get caught with my pants down next month.

Currently, I’ve been paying my mortgage payment (obviously my largest debt) one month in advance. I also set up that additional $25/week that goes towards the principle. I’m not going to change that.

My auto loan is currently 6 months ahead of itself. Next payment due date is January of 2008. Auto loan rates are generally so low, there isn’t a lot of benefit to paying them off early, but with most of my credit card debt sitting on promo rates right now, the rate is actually higher than the total combined average of my credit card accounts. Even so, I plan on cutting this back for the rest of the year to half of what I’ve been paying on a regular basis. Usually I send $350/month… now the plan is to send $175/month at least through December.

Next come the credit cards. From my deck of plastic, the only cards in play right now are the Bank of America Business MasterCard (9.9% APR), the CitiBank AT&T Universal MasterCard (0% APR until April 2008), and the Chase Bank Visa (4.9% APR). As of today, their balances are $5484, $6200, and $7000, respectively.

For new readers, the balances are so high because we ended up financing our most recent (and on-going!? argh?!) home renovation by spreading the damage across various credit cards by utilizing creative balance transfer techniques and those annoying convenience checks they include with your monthly statement.

In regards to those convenience checks, if you’re not one to use a specific credit card but keep the account open, keep an eye on those each month — you may have to wait months or even years, but they do eventually sweeten the deal enough to make it worth your while.

Anyway, I don’t think my plan of attack will change much from what I laid out a couple of weeks ago:

I guess the plan is to continue aggressively on the 9.9% card, throw $250 each month at the 4.9% card, and $100 each month at the 0% card (while keeping in mind that it will jump to 13.49% in 8 months).

The big change, with the smaller paycheck, will be how aggressively the $5484 balance on the 9.9% card comes down. This month, to-date, I’ve sent them $975.65. By months end, the total will be $1125.65 due to a $150/week payment I have automatically set up.

I’m thinking I’ll continue the $150/week auto-payment, but pull back from writing a check for any additional payments.

For the ING Savings account, I’ve got it set-up to pull $100 from my checking account bi-weekly to coincide with my pay day. Nothing huge, so I’m going to keep that up as well.

Hopefully just cutting back the auto payment and the credit card payment will be enough to absorb a roughly $700/month hit on the monthly income we’ve grown accustomed to.

I know we can do…it will just take some time getting used to.

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401k Nest EggOver 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.

Can You Dig It?

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