Pulling the Trigger: Raising 401K Contribution to 6%
Compound interest has me under its spell. And so does the idea of free money.
When my spouse first took the job he has now, he had to wait a year to contribute to their 401K program. He had a 401K at his previous position, which he rolled over into an IRA when he was laid off from that job, so he had experience contributing to 401K plans before. But I would call us the people that the “forced savings” and “company matches as motivation” were created for – we didn’t really have much of a plan or reason behind how much we contributed, we just picked a number that seemed okay and went with that. The definition of seemed okay is debatable.
This position he has now, the company matches 20% of your contribution up to you contributing 6% of your income. To explain that further – for every dollar my spouse contributes, the company contributes 20 cents. Once my spouse reaches a 6% contribution, the matching maxes out and any money my spouse contributes on top of that is not matched. Once he is there for 5 years, the company contribution fully vests (which means it then completely belongs to my spouse), which actually will happen this year – next month to be exact. This is not the most amazing 401K program ever, but at least there is matching of some sort – and a 20% return on investment immediately is not too bad at all.
When my spouse started contributing, we started at 2% because we felt we wouldn’t notice the change in paychecks too much. In hindsight, we should have just started at 6% and been done with it but hindsight is always 20/20. We have increased it twice since then, once about a year later to 3% and then once when I started this blog to 4%. This year, when my spouse got the notification that he could change his % contribution, we upped it to 6% at once instead of just 5%. His next paycheck will be the first the the new amount (hopefully followed within the next month by a raise since his annual review is at the end of April, but we’ll see) so we’ll see what the effect on his paycheck is, but I know we’ll adjust. With my new position bringing in more money per month, I knew it was the right thing to do to stop leaving part of the company match on the table and take advantage to the fullest any free money we can get. As well as increase our retirement savings – because every minute that passes is a minute of compound interest we’re not getting back.
Our retirement investing will not stop there of course, but until sometime next year (hopefully) or however long it takes us to get out of all but mortgage debt, this will have to do. And then the real fun of saving 15% or more of our income begins. But this is a positive step in taking control of our retirement for us.
March 27th, 2008 at 5:29 pm
Congratulations on another baby step towards the right direction. Right now I’m at a 6% contribution, which is where i started from day 1…. but I’ve often wondered if I should lower it and spend more money on a house… or raise it and try to deal with the missing money in my budget… it’s a hard decision. Good post.
March 27th, 2008 at 6:22 pm
Congrats on raising your contribution level!! My company offers a 100% pre-tax match up to 4% of salary (plus its vested immediately). But, guess what? Only 60% of the employees take advantage of it. It boggles the mind that so many people pass up free money….
March 27th, 2008 at 6:31 pm
Congratulations. Free money (in the form of matching) is great. And tax deferred compounding is great. I agree it makes sense to try to maximize the amount of matching you get. However, so many of us fail to save for retirement much at all that even starting out at 2% is a great step. If you do this and then raise it each year (or each time you get a raise…) that can be a good long term strategy. And very importantly – don’t withdraw funds or borrow from your 401k prior to retiring.
March 27th, 2008 at 7:40 pm
That’s awesome! As someone who works in the financial industry and sees way too many people not saving enough for retirement, I’m very, very happy you’re taking it seriously
March 27th, 2008 at 7:59 pm
every minute that passes is a minute of compound interest we’re not getting back.
Nice work! This is exactly the reason I’ve upped my retirement contributions even while I’m eliminating my debts. I can’t go back in time to top up my retirement funds, and I need to plan for my future right now.
March 27th, 2008 at 8:53 pm
I’m like you and your other commenters. I also contribute to my company’s 401k plan while in the debt elimination phase. I feel like I HAVE to though. My company has a 100% match up to 8% and I was fully vested on day 1 of employment. It’s given me a great head start on my retirement savings. Good job for raising your husbands savings too. Every little bit helps!
March 27th, 2008 at 9:04 pm
The great thing is that the money is pretax money. We have 12% of our money going for taxes so when we put $100 in retirement it only decreases our amount of take home by $88 because of the tax savings ( we used to pay the other $12 in taxes-does that make sense?)
March 27th, 2008 at 9:45 pm
Great job! It sounds like an excellent step.
My employer forces us to contribute 10%, and they contribute the equivalent of 12%. I KNOW I wouldn’t put in that much voluntarily, but I don’t really miss it. And it’s great to log in to my account and see how quickly that savings adds up!
March 28th, 2008 at 2:31 pm
20% return on investment is a great way to look at it. Southern Seven is right too that the percentage of the pay you’re putting in doesn’t even cost you that amount. Everyone that can get in a 401(k) should do what they can to contribute to the company match. I started very similar – 1% then after a while 2%. I wish I could go back and change but past is past.