Title pretty much says it all – our 401K open enrollment period is 1-1-09, and I have the form I need to fill out on my desk right now due by end of business day 12-31.
The background:
I am fully vested in my 401K. Since I went full-time the beginning of the year, I have had 10% come out of my check each week, with the company matching 6%. I am 36 years old, and have no reason to believe I will retire prior to my 70th birthday (good health, women in my family live to ungodly ages). I have no control over the investments in my 401K other than the options “high-risk” “low-risk” or “balanced.” I chose balanced, and it has done reasonably well, all things considered. I, like many have lost money in my account the last 2 quarters, but not as much as I would have expected, FWIW.
So, Dopers are a smart lot, should I defer more, less or stay the same at this point? If more information is needed to make recommendations, I will try to get the information and share it.
At only 36, you probably want to be in higher risk investments. You have ~30 years to make up for any market wiggles, and a more conservative investment will almost certainly drag down your returns.
16% is a healthy allotment; if you’ve done that since a fairly young age you’re well on track for a comfortable retirement. Should you have upcoming expenses like children or college for children, at that point you may even be able to cut back a bit on the 401k to give you extra cash on hand. However, you may want to run some retirement calculators now to give you a ballpark idea of how you stand.
Depending on how the numbers add up, and what exactly your money is invested in, and the fees, you might want to consider scaling back your investment to the extent that you’re still able to get the maximum company match.
My 401K is with a brokerage with a good balance of index funds with a very low expense ratio, so I stick my money in there to the maximum 15,500. If you don’t believe expense ratios can make a difference, play with the Fool.com calculators. A mere few tenths of a percentage make a difference of many thousands. Also, if your funds are hand-managed, you are very unlikely to outperform the stock market. so find out what you’re investing in.
To complicate everything: I believe that when you do get distributions, you will be taxed according to the rules of that year. Income taxes are unlikely to go down, so unless you actually plan on being a lower income bracket than you are now, you may be shooting yourself in your foot, especially if you take a lump sum distribution out. Our taxes right now are quite low by the standards of most of 20th century. e.g., you might pay 28% on this lump of money now, but by the time you retire, the taxes on the same amount of money may well be 40%. We got to pay down that 7 trillion bailout somehow. This reasoning caused one of my friends to empty his 401K, incurring penalty and all.
Lots of questions to ponder, but at a minimum, contribute to the extent that you’ll be able to max out that company match. free money is free money.
You’re not considering tax-free (ok, actually tax-deferred) compounding. You earlier were talking about the differences a few tenths of a percent expenses can make. Outside of a 401K (or IRA), you will be paying taxes every year on any distributed gains. In many cases, this amounts to much more than just a few tenths of a percent of invested capital. The advantages of NOT paying taxes on those gains and letting that money grow and compound tax-deferred can make a significant difference in how much money you end up with at retirement.
The OP has 30 years of compounding left. My recommendation: now is a great time to INCREASE your contributions, because you will be “buying low”, and your gains will be much greater when the market recovers.
I appreciate all the replies so far and would love to hear any other advice. I am inclined to leave it as is – at 10% (Gaudere, I can see why you thought I had 16%, but what I meant was that I increased it from 6 up to 10), because I have been living without that 10% for all this time, I can continue to do so. I just had my evaluation, where my boss reminded me that no raises are being given out this year, to which I joked I could easily give myself up to a 10% raise if I so chose.
Since I will likely be dropping my insurance coverage of me and the kids now that my husband has us covered through his work, that will end up about a 9% pay raise by itself. I am (fortunately) not hurting for money, so that leaves me a bit inclined to increase my deferral – like jharvey963 said, it will be buying low.
Keep the advice coming, I am taking all into consideration.
Maybe you should take that extra 9% you’ll be getting and open up a Roth IRA with another company. I didn’t see you mention IRAs in your posts. You don’t want to have all your eggs in one basket anyway.
Oh and I think 10% is good for now. I would keep it at that level if I were in your position.
If you can afford to invest more, open a Roth IRA. You contribute post-tax money, so when you take your distributions later, they are tax-free. As jharvey963 points out, taxes are unlikely to go down, and since you are investing in your 30s it’s likely you’ll end up in a higher bracket anyway. Pay the (lower) tax now if you can. Roth 401(k)s offer post-tax contributions, so find out if your employer offers that option. The employer match will still be pre-tax, so you’ll have to pay taxes on that at distribution, but you could contribute your 10% post-tax (if you wanted to, not sure if that option would fit your situation).
Bottom line is, if you can afford to contribute more to retirement, do it. Of course, make sure you have kids’ savings, emergency funds, recreation/vacation funds, semi-liquid assets with decent interest, etc, etc…
If you can afford more - and have a savings cushion - putting more money away now for retirement is almost always going to be a good idea. The time may come when you do need to give yourself that 10% raise - or you are out of work for a while - and more money put in now means you have it later.
Since you say the investment options are limited, you probably should consider a self-directed Roth IRA for anything beyond the 6% match. You can buy any funds you want.
The only reason to put more into a 401K than your company match is that you can borrow from it easily, other than that, it is better to go outside your plan for the excess.
Ok, so I don’t just let this die. It looks like everyone is about equal on “leave it as is” vs “add more if you can” with no votes for “decrease it” so I have made my decision. Since I will be dropping my insurance here, which will amount to abut a 9% increase in pay for me, I will be leaving my 401K at 10%, but I will be enrolling in the company sponsored Christmas Club (through a local credit union) and deferring 5 of the 9% extra to that. I figure that will make for a decent Christmas next year, while still allowing me to pretend that I got a raise.
