I recently got myself a condo, which is very nice and reasonable within my earnings, but I’m spending more on housing expenses now than I do renting (for the time being), so I’m taking another look at my budget.
I’m still a couple of decades away from retirement, and I’ve got a 401k at work and an IRA and index fund I contribute to now and again. I tend to be a cash hoarder (the game player in me, I guess), so I’m trying to reduce that tendency at least a smidge so I can do better with my investing (which, as has been pointed out, I’m kind of doing with the home purchase). I’ve been trying to max out the 401k as much as possible, thinking it was just something everyone did and advocated as a matter of course. I’ve been told differently, but since my company has an extremely generous matching policy implemented recently, I still absolutely want to take advantage as much as I can.
I have enough cash savings for eight months of expenses, and I don’t tend to spend a lot on myself in general. After all usual expenses I could think of (might be more, of course), I have about $1500 a month left. Right now, my 401k contribution (mostly set as a guess; I had it way way higher before, to give you an idea of how I managed to save up a down payment) is about $1300, leaving about $150 to save and occasionally spend.
This seems low to me. But on the other hand, my previously mentioned cash hoarding instinct may be leading me astray. (I mean, those instincts were fighting against me getting my own home in the first place solely and purely because of the increase in spending of any significant amount whatsoever, despite any other factor). Plus, like I said, I want to take advantage of the 401k match to the maximum extent possible.
Any thoughts on how to balance out my remaining money and coming to a decision I can make peace with? I could obviously seek to make more somehow,but right now I wanted to concentrate on how to deal with the money I’m making now.
Max out your 401k now. As you get closer to retirement…2-3 years…Max out your savings. Then retire on your savings before you get social security to keep you in the lower tax bracket. Then you can start taking out your 401k
Your situation and questions sound familiar… they’re the reason I got a financial planner.
I’ll tell you, I must’ve been more worried than I’d thought. When I was able to say “Ok, I trust her, and the mix of stocks/bonds/401k/cash that she’s recommended”, it felt like a weight was lifted. And I realized that researching and worrying about it had basically been a part-time job of mine.
As a bonus, one day she said “Well, judging by these calculations, you should retire… right now!”
Hm. So my instincts with the 401k may be correct? I’m not sure how well I’ll be able to live and replenish cash savings if I just max it out through salary. Or do you just mean “max to the best of my earning ability with other considerations kept in mind”?
@digs Ahh, financial planner… didn’t think of that! Any tips on finding a good/trustworthy one?
Certainly if maxing out your 401K puts you in poverty, don’t do so. But take advantage of your employer match at the maximum you can afford; that is a clear money multiplier. After that there is a balance to be struck between your current lifestyle and your retirement. Keep in mind that the more money you can put into your 401K early in your working life the more time it has to work for you.
I have a brother and a close family friend who are very successful Financial Planners. They get so many positive referrals they have to turn over prospects to less successful colleagues.
Both of them will skin you for everything they can. Their #1 interest is in how much your account will yield. Not yield in return for you. Yield in fees for their firm and therefore their commissions and bonuses.
My brother boasts that he has 100 ways to avoid answering the question “Are you a fiduciary?”
Isn’t the usual advice with regard to financial planners to hire a fee-only one? So you’d pay them a fixed fee (of perhaps a thousand or two), perhaps once, perhaps once a year or every few years to set up a financial plan.
I have a sister-in-law who was using a relative as a financial planner for years (he was a professional). This guy was taking an all-expenses-paid two-week vacation in fees off the top every year regardless of performance. Now she’s dropped him and takes that yearly vacation herself, but got some family grief over it. Moral: Never have a financial advisor to whom you have any familial or other obligations.
Yup. In many cases you can hold your investments with them through their broker-dealer if you want that level of involvement, but a fee-based solution will give you plan, and an investment allocation you can run yourself through Fidelity/Schwab/etc. For someone like the OP who has a lot of their funds in a 401, it’s a great solution.
I had something like this, too, at a “free” consulting session arranged through my employer with Fidelity, who manages our company linked 401k accounts. He can see my company 401k. He’s looking it over and says, gee, this isn’t good, you’re going to have a shortfall in retirement. But that’s not my only retirement account, I tell him. I tell him about another, and he says that helps. Then I tell him about one more, and he says OK, this can work. Then I tell him about one more, which is even bigger, and he says, great, it does look like I’m in good shape. Then I say, wait, still not done, I haven’t even told you about the biggest one, and I tell him about it. He leans back and starts laughing, and finally says, “Dooooood! Why are you still working?!”
And this from somebody that would make money if I increased my investing.
As a former advisor, I found it far more beneficial to be up-front with those sorts of potential customers. Being transparently honest opens up a lot of doors and referrals.
I appreciate your posting this – and I don’t doubt it. I think there are a great many people who have learned to be this way even though they are in a position that they could abuse.
But there are also many who do the opposite, and on behalf of the Universe, or something like that, thank you for being one of the decent ones!
Seems to me that the obvious choice is to pour everything you can into your 401k at this point. There are two advantages to this- first, it’s taxed differently than regular income (deferred), so you earn on that tax money until you actually withdraw it. Second, a 401k is going to be invested in things that actually make money, unlike the vast majority of savings accounts.
Let’s say you hypothetically had say… 5000 in income to put somewhere. If you put it in a regular savings account, you’re going to pay income tax on that 5000- let’s say 25%. So you have $3750 that’s actually invested. And you’ll make what… 1% at best on a savings account? After 20 years, you’ll have 4579.12 (1% compounded quarterly). It might be a tiny bit more or less depending on how the interest is compounded.
Meanwhile, if you put that same $5000 into your 401k, you’d earn something more like 5% for 20 years on the full 5000, giving you $13507.42 at the end of the period, assuming 5%, quarterly compounding. So even if you have the same tax rate at the end of it, you’ll still have $10130.57 when you withdraw it. And that tax rate may well be lower for you after you’ve retired.
I have a financial advisor who charges an annual fee but makes all transactions without brokerage fees. So there is no incentive (or disincentive) for him to trade as he sees fit. So far he has weathered the various ups and downs of the market quite well
Well, in your situation, there likely was an incentive for that advisor to push you to retirement. Being the advisor on a 401k doesn’t net very much in commissions or flow - especially from just one employee. But if he was able to show you he was trustworthy, he might be able to get you to roll your accounts over all with him. Managed IRAs (or other non-ERISA accounts) are far more flexible and advisor-friendly.
My question was more like, should I do that at the total expense of cash savings? Never building accessible money for like a car or to rebuild emergency funds if I have to dip into it? It seems like not, so how do I juggle that?
I do have a virtual appointment with a fiduciary financial planner through a company my employer has joined, so we’ll see what they say as well!
By budgeting. Figure out how much you need to live the way you want. See how much that leaves over for retirement saving. If that is too little for retirement, adjust what you want.
This is exactly what I was told when I began contemplating retirement. Track your expenses for a period of time, say 3 months. Track them down to the penny. You should then be able to see how much you’re spending, which expenses you can cut, and how much you might save by not commuting and buying clothes and other-work related stuff. That will give you a pretty close picture of what you’ll need to live on in retirement. Then do as good as you can estimate of how much income you’ll have after retirement, from SS, pension, IRAs, etc.