401k/403b Contribution Question

[Guest]

My wife and I (26 years old) make roughly the same amount of money. Her employer has a 403b that they contribute to (not sure how much) even if she does not contribute a dime. If she contributes they match 50% for the first 10% of her contributions. My employer has a 401k, they do not match at all.

I have roughly 10k in my 401k. We have not been contributing for the last year (paying off school loans, other misc debt). We are now debt free except for our house so are ready to start contributing.

We plan to start out with 6% each and see how it goes. We will bump it up if money is not tight.

So should we be putting 10% into her 403b and 2% into mine? Or should we just put the whole 12% into hers? Or 6% in each?

Thanks

[disneysteve]

Fund hers to get the full match. With additional retirement savings, you may do better to fund a Roth IRA instead of your non-matching 401k.

[Guest]

Fund hers to get the full match. With additional retirement savings, you may do better to fund a Roth IRA instead of your non-matching 401k.

So fund hers to 10%, and even though I have 10k in mine just leave it there and find a Roth IRA to start investing in? Then I am assuming if I were to switch jobs I should either roll my current 10k into the Roth IRA or my new employer's plan if it matches?

[disneysteve]

So fund hers to 10%, and even though I have 10k in mine just leave it there and find a Roth IRA to start investing in? Then I am assuming if I were to switch jobs I should either roll my current 10k into the Roth IRA or my new employer's plan if it matches?

Exactly. If you qualify for a Roth, that is generally the better option. More control over your money. Better investment options. Lower costs. And better withdrawal options in retirement. The only time the 401k might be better is if contributing to it would knock you down to a lower tax bracket since it reduces your taxable income.

[Guest]

Exactly. If you qualify for a Roth, that is generally the better option. More control over your money. Better investment options. Lower costs. And better withdrawal options in retirement. The only time the 401k might be better is if contributing to it would knock you down to a lower tax bracket since it reduces your taxable income.

One last question.

Lets say we contribute 6% total (divided up as we discussed) and we find that we still have extra money left over at the end of the month. Would it be best to:

A) Pay down our mortgage (our only debt)
B) Start a high-yield savings account (for example the one Amex is now offering @ 1.5% APY)
C) Invest more in our 403b/401k/Roth IRA

Thanks!

[disneysteve]

One last question.

Lets say we contribute 12% total (6% each, divided up as we discussed) and we find that we still have extra money left over at the end of the month. Would it be best to:

A) Pay down our mortgage (our only debt)
B) Start a high-yield savings account
C) Invest more in our 403b/401k/Roth IRA

Thanks!

Remember that if you each earn the same amount, it isn't 12% total. It is still 6% of total household income. Some people make that mental mistake and thing they are putting 10% toward retirement because each partner saves 5%. Doesn't work that way.

Ideally, you should be saving at least 15% of income for retirement. I would hit that goal before prepaying the mortgage. Assuming you have a fully funded EF, option B serves no purpose since those "high" yield accounts are only earning about 1% today.

[Guest]

Remember that if you each earn the same amount, it isn't 12% total. It is still 6% of total household income. Some people make that mental mistake and thing they are putting 10% toward retirement because each partner saves 5%. Doesn't work that way.

Ideally, you should be saving at least 15% of income for retirement. I would hit that goal before prepaying the mortgage. Assuming you have a fully funded EF, option B serves no purpose since those "high" yield accounts are only earning about 1% today.

Right, I was just doing the math and thinking it through at and realizing my logic was off. I was updating my post as you were posting.

I was thinking option B would be more for stuff like, saving for a car or saving up for a new home downpayment (we arent now but just example) or saving for a specific that takes a while.

Ok so it sounds like we need to do this in order:

1) Max out Emergency Fund
2) Work our way towards contributing 15% to retirement
3) Savings for specific items (new car, renovations, new house etc)
4) Pay down mortgage

Is this accurate?

[disneysteve]

I was thinking option B would be more for stuff like, saving for a car or saving up for a new home downpayment (we arent now but just example) or saving for a specific that takes a while.

Ah, that's different. Let me modify my earlier response.

A good overall target to shoot for is saving 20% of income. Of that, 15% would be for retirement and 5% would be other needs like your next car, vacation, home renovation, etc. I don't think you should save for retirement instead of saving for other needs. I think it needs to be in addition to other needs. You know that you will need to replace your current car one day so it makes sense to save for that inevitable expense. Having a great retirement plan balance and no money to get a car would be lousy.

If you can't yet afford to save 20% of income, you need to split up what you can afford to save. If at all possible, invest enough in the company plans to get the full match because that represents a 50% return on your money and passing that up is nuts. Then, you also need to have some non-retirement savings for other needs. I don't think I've seen any specific rules of thumb for this. I'm going to start a new thread and see what people think about that. Good question.

[jIM_Ohio]

One last question.

Lets say we contribute 6% total (divided up as we discussed) and we find that we still have extra money left over at the end of the month. Would it be best to:

A) Pay down our mortgage (our only debt)
B) Start a high-yield savings account (for example the one Amex is now offering @ 1.5% APY)
C) Invest more in our 403b/401k/Roth IRA

Thanks!

your initial logic is off

but even with bad logic, c) is the only answer I think...

until retirement savings approaches 15% of gross income, you should get in habit of spending less than you earn and saving money.

[creditcardfree]

So fund hers to 10%, and even though I have 10k in mine just leave it there and find a Roth IRA to start investing in? Then I am assuming if I were to switch jobs I should either roll my current 10k into the Roth IRA or my new employer's plan if it matches?

Just to clarify your comment a bit...

When you leave your current job, you most likely will not get a match on money rolled into your new company's plan. Although it doesn't hurt to check.

If you want to move the money to a Roth you first have to roll to a traditional ira, just to get the money out of the 401K plan. Once that is complete then do a roth conversion, which is a taxable event. You can just roll to the traditional ira, also known as a rollover ira.

I also agree you should put the most you can in your wife's 403b for the match and then consider a roth for the remainder of your contributions.

Great job getting an early start with your financial goals!

[Guest]

I don't think I've seen any specific rules of thumb for this. I'm going to start a new thread and see what people think about that. Good question.

Looking forward to it. Thanks for sticking with me through all my questions.

[disneysteve]

until retirement savings approaches 15% of gross income, you should get in habit of spending less than you earn and saving money.

Jim, I agree, but even if someone can't save 15% for retirement, he may still need to replace a car at some point or make some home repair or want to take at least a bare-bones budget vacation from time to time. I just started a thread about splitting up savings if it isn't up to 20% of income. I'd like to hear your thoughts on that.

[jIM_Ohio]

Jim, I agree, but even if someone can't save 15% for retirement, he may still need to replace a car at some point or make some home repair or want to take at least a bare-bones budget vacation from time to time. I just started a thread about splitting up savings if it isn't up to 20% of income. I'd like to hear your thoughts on that.

I knew what prompted the other thread and kudo's for starting such a good discussion.

I pointed out my issue with low retirement contributions- and we debate this from time to time on various subjects- the primary factor for success is the savings percentage (not the risk you take investing) so the best course for success is drive up the savings percentage and cut back on expenses (spend less than you earn).

Spending 94% of what you earn is closer to living paycheck to paycheck than it is to call that a savings plan.

IMO

[sherylcarter]

I would do a self directed IRA because you would have an unlimited number of investment selections (to even include going short) and the account would also have more liquidity.