401K – How Much Should You Contribute?

May 21, 2006 at 7:36 pm 11 comments

After one service year with my current employer, the matching kicks in. The company matches 50% of employee contribution, up to 8% of base pay. Company contribution is not vested until after 4th service year with the company (with the exception of if the employment is terminates due to reduction in force or layoff.)

The pre-tax contribution limit is 30% or $15,000. I definitely cannot afford to put so much aside for 401k, but I would like to increase the current 2% contribution. Before I bought the house, I believe in “paying yourself first” so I max out my 401k contribution. However, with current salary and expense, I cannot even afford the 2% :”(

What % of your salary do (would) you contribute to your retirement?

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11 Comments Add your own

  • 1. Dennis T Cheung  |  May 21, 2006 at 9:23 pm

    At a minimum you should meet the matching. That’s free money.

    On the general note of retiring, you shoul d see this post and watch the show that I refer to (it’s on rerun on PBS): http://www.decheung.com/2006/05/will_you_have_1.html

    Reply
  • 2. Danny  |  May 21, 2006 at 9:32 pm

    first, i’m going to venture to say that there isn’t a way to cash out your 401k into IRA while you are working at your company.

    if you talk to most of the “old timers”, they’ll tell you to put in “as much as you can afford.” That’s somewhat debatable… Of course don’t leave any free money on the table, so fund it to the maxmium matching rate. Then, if you think you can make more profit managing your own money than the sets of funds available per your 401k plan, put in the annual limit for Roth IRA. If you still have money left over (other than rainy day savings), then fund more 401k. that’s my take anyway -_-

    Reply
  • 3. Dennis T Cheung  |  May 21, 2006 at 11:53 pm

    Roth IRA – good point!

    I would:
    1) Contribute to 401k up until you do a company match.
    2) Contribute to Roth IRA until you max it out.
    3) Continue to contribute 401k up to your affordability.

    Reply
  • 4. MoneyBabble  |  May 21, 2006 at 11:58 pm

    My take aways from the video:
    1) Pension is not carved in stone. Company can get out of their promise via bankruptcy (Ch. 11).

    -Scary.

    2) Most people are not capable of investing their own retirement. With 401K, what end up happening is (middle and lower class) people run their retirment to the ground.

    -I totally agree.

    3) Pension Plan –> Employer controlled.
    401 K –> Employee controlled.
    Pro for pension plan:
    Employee not capable of managing their retirement and many times, paralyze by too many choices (which is discussed in The Paradox of Choice), so let the professional do it.

    Pro for 401 K:
    IF it’s done RIGHT, it could be a great tool

    Reply
  • 5. Julie  |  May 22, 2006 at 3:08 am

    I’ve got TIAA-CREF for my retirement 401K and I’m putting in just enough to get the maximum matching. I want to up this amount but I’m worried about the house payment I will soon have so I’m postponing this. One of the big questions I’ve had is should I keep investing in my 401K or should I do an IRA and what are the limits for each.

    I’ve also been looking at sharebuilder.com so that I can dabble in stocks some and noticed they offer IRA accounts.

    Reply
  • 6. Jeremy Falk  |  May 22, 2006 at 10:55 am

    If you can, put in enough to get the company matching. Is the rule that you are not FULLY vested after 4 years (so you are becoming more vested a little bit each year), or that you get nothing until 4 years are up. If you are absolutely sure you will be leaving on your own before the 4 years, and you’ll get nothing from the company matching as a result, then contribute to the 401k as a tax free investment (the amount will depend on what you can afford).

    Personally I would not max out my 401k or Roth IRA contributions. I’m more interested in investing the money myself, real estate or a business. If you just want to “follow the market” and the ~10% (more like 8%) is good enough for your retirement needs, then they are a great way to save some tax money.

    To be honest it’s REALLY hard to screw up investing your 401k money with mutual funds. Since we’re (relatively) young we can afford to contribute to a more ‘aggresive’ mutual fund. You’re not going to get amazing annual returns (most mutual funds don’t match the market each year), but over the long haul compound interest is king. Most brokerages that handle corporate 401k’s offer mutual funds that automatically adjust their assets to more stable income producers (ie. bonds) as the retirement year approaches. Fidelity has such an account for us at Loral (and since Loral stopped giving stock as company matching this is where their free money goes).

    You said that after buying the house you can’t afford to contribute as much. Remember that the mortgage interest (and any HELOC interest) are tax deductable. So you should increase your ‘deductions’ on your W4 form. A higher number means less is taken out of your paycheck for taxes. So no huge refund at the end of the year, which is good since the IRS doesn’t give you any interest on the money you loaned them. If you want to loan the government money buy T-bills / T-Bonds.

    I’m sure you know this already, but cover the “basics” before you start worrying about saving. No outstanding CreditCard debt, 6 months expenses in liquid savings, etc. I’m sure you’ve done this stuff but a friendly reminder just in case. =)

    Jeremy

    Reply
  • 7. Danny  |  May 22, 2006 at 2:45 pm

    “401 K –> Employee controlled.”
    nope… 401k -> government controlled. there was talks of doing away with 401k before, and it could still happen in the future. after all, the us gov’t is in a boat-load of debt and at some point, they might want to increase revenue via tax and fund current account defecit, hence out goes 401k.

    dunno ’bout vesting at honeywell… i think boeing’s fully vested right away -_-‘

    Reply
  • 8. Nate  |  June 3, 2006 at 4:57 pm

    A few comments:

    1. “Company contribution is not vested until after 4th service year with the company”

    In order for an employer to use a vesting schedule that requires 4 years of service for matching contributions, you would have to be at least 20% vested per year starting in the second year.

    2. A 401(k) is not a Pension Plan.

    In a Pension Plan, the Employer is required to make a contribution to eligible employees regardless if the employee contributes or not (some plans force the employee to contribute also).

    Regardless if it is a Pension Plan or a 401(k)/Profit Sharing Plan, the money in your retirement plan today is protected regardless if the employer goes into bankruptcy. However, if your former employer is headed into bankruptcy, I would suggest rolling the money over as soon as possible. Often in this case there are excessive fees charged to the plan because the employer is unable to pay plan related expenses.

    In a Defined Benefit Pension Plan, benefits are guaranteed by the PBGC. However they only guarantee the amount you are due TODAY and not the amount you are due at retirement age.

    3. What should you invest in and how much should you save?

    Unlike what Suze Orman wants you to believe, there is no cookie-cutter answer. But here are a few things to keep in mind.

    A 5% 401(k) contribution does not reduce your pay by 5%. This is because the money is pre-tax. If you can forgo 5% of income, you can afford to defer 7% – 8%.

    Know your own weaknesses. If you are a bad saver, you may want to contribute to your 401(k) even if your company doesn’t match so that you build into the habit of never having that money in your hand.

    Social Security Benefits. The myth for us who are not retiring for another 30+ years is that there will not be any money left for us to receive SS benefits. Myth. However, under current laws, there will not be enough to pay you your FULL SS benefit due. A change in legislation is inevitable. Either the government will need to raise additional revenue or cut back benefits/raise retirement age.

    4. Rollovers

    If you decide to roll your old employer’s 401(k) money into your current employer, you are USUALLY allowed withdrawal this money back out even if your are still employeed. This includes rolling the money to an IRA. However I do say “usually” because your employer can prevent you from doing this.

    Reply
  • […] I asked about contribution to 401K back in May and received many good advice. I also found some good articles regarding 401k as well. However, thus far, I had not increased my 401k contribution. […]

    Reply
  • 10. Dom  |  July 23, 2007 at 5:16 am

    I want to know if I should contribute my full 20% for my 401k or just contribute my company matching (6%) and save that extra money to buy a house? I already max out my roth IRA.

    Reply
  • 11. absolute-retirement  |  July 30, 2007 at 10:36 pm

    A study done by the Congressional Research Service in late 2002 took a look at employer-sponsored retirement plans such as a 401(k)s. Its findings show that for worker between the ages of 55 and 64, the average value of their households’ employer-sponsored plans was a mere $107,000… more

    Reply

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