401(k) Planning w/ Variable Income

[Spud]

What would you do if you were us?

Last year, DH made $77,400 in regular salary. He also gets quarterly bonuses. In 2007 the first two bonuses were $5300 and $6000. Then the last two were $12,000 and $12,900, and then at the very end of the year they gave another check (an extra bonus??) of $3,500. This makes the bonus total for 2007 $39,700. In 2006 the bonuses totaled $22,300, so of course we were pleasantly surprised, but we had under-contributed to the 401(k)

In 2007 we were putting $500/month into his 401(k), figuring that would be a little more than the 6% match including bonuses. At the end of the year his HR department emailed him to tell him he was below the 6% match, and would he like to put in extra $ in December to compensate? We put in $1,500 in December to cover the difference.

This year, DH got a $4800 raise, so he will be making approximately $80k before bonuses. It's unclear if these larger bonuses are a new trend (I hope so!), or if they were just having a really good year, or what. They never changed his 401(k) contribution back to $500/month, so we are still putting in $1500/month. We'll need to change this before month-end, when they run payroll again.

What would you be putting into the 401(k) every month?

[sweeps]

In the companies I have worked for, bonuses got 401k contributions taken out of them just like regular pay does. So a 6% match works across the board.

If this is not the case for you, I'm not sure how you could get it to work. If you increase your contribution to 8%, that doesn't offer any additional match to your regular pay. And if bonus money is not used for matching, you won't get anything for that. I think we're missing something here.

[Spud]

The thing is that they do their contributions in $, not %. So I can't specify that I want 6% taken out -- I have to give a dollar amount that would equal about 6%. Figuring out what that dollar amount should be is my problem.

They take no 401(k) contributions out of the bonus checks at all.

[sweeps]

Ah I see. That is interesting. Ok, then I would figure out what you needed last year to max your match, and go with that. It sounds like you're allowed to catch up in December, so you won't miss out if it goes up again.

Consider putting some of your unexpected bonus money in a Roth IRA.

[anonymous_saver]

With that kind of income, I would just put in a straight dollar amount. I would put in the maximum allowed in 401(k)'s. That is, put in $15,500/year into your husbands 401(k) and with 26 paychecks that would be approx. $596.15/paycheck.

For those bonuses by the way!

[jIM_Ohio]

I would up the 401k slightly above 6%. Capture the full match, and put a little more in.

If you are not budgeting for the bonuses, make an attempt to send 10% of the net amount into a taxable account (mutual fund or other) to make sure you are setting enough of it aside.

Are your Roths fully funded?

[Spud]

Anonymous - I made that same clapping smiley face when I saw the checks.


Thanks for your advice, everyone. We decided to go a little above the 6% and put $625/month in the 401(k). We'll keep an eye on bonuses, and if it looks like they'll be bigger this year, we will readjust later in the year. Given that we put in $1,500 in January, we should really be covered.

We fully funded his Roth for 2007, and opened a Roth for me in 2007 as well. My Roth is probably being opened as I type this, and I sent them a check for $4,000 (2007 Max) with the paperwork to open it. We plan to fund my Roth for 2008 with monthly contributions, and fund his Roth later this year with some bonus money.

So for 2008 it will work out to:
Husband 401(k): $8,375
Husband Roth: $5,000
My Roth: $5,000

We do have a taxable account but most of our extra money has gone to home improvements lately.

[jIM_Ohio]

Saving 18k on an income of 78k is admirable (25% savings rate). Of course bonuses make 78k approach 110k, but either way you are saving well north of 15% in either case.

[Spud]

Well, we have other income besides husband's salary... but it is also variable, since it is farm income. I also make a small income from a very PT job. All the variable income makes it really hard to plan, for sure! I am thinking of how to frame a thread about budgeting with variable income but unsure how to ask the questions I want to ask without sounding dumb.

[jIM_Ohio]

Well, we have other income besides husband's salary... but it is also variable, since it is farm income. I also make a small income from a very PT job. All the variable income makes it really hard to plan, for sure! I am thinking of how to frame a thread about budgeting with variable income but unsure how to ask the questions I want to ask without sounding dumb.

With variable income the issues for budgeting (IMO) become the following:

What is fixed income?
What are fixed costs?
What are ranges of variable income?
What are costs and spending associated with variable income?

If the fixed income (of 78k in your case) covers your fixed costs (the bills you have every month) problem is not of critical financial sense. Most of variable income could be saved or spent without much consequence to day to day cash flow.

If variable income is needed to cover fixed expenses, then I would suggest having around 1 years salary in the bank in cash. This is important for people which work on commission (like realtors) which do not earn a salary, or for small business owners which might have a down year. Meaning most variable income should be banked, and investment profile might of less risk, because it's possible that money will be needed if 2-3 down years follow.

In my case I have high variable income from soccer. My soccer income varies from year to year, many years it approached 8% of gross pay for our house. I don't need the money (I would coach for free), but at same time my savings account and investment accounts do much better when I put money into them. We use some of it for vacations, the rest of it gets invested. Soccer does increase my costs (eat out more, more gas expense, have to attend meetings- so time expense is quite high too), but in the end the income far outweighs the costs- for now.

[zetta]

You might check out the software program YouNeedABudget at Personal Budget Software - Excel Budgeting Template, Free Personal Finance Spreadsheets. Its budgeting method is very good if your income is variable from month to month. Basically you want to be at least a month ahead -- so when you're making spending decisions in February, you know how much income was earned in January and spend accordingly. You also want to save up for needs like car insurance before spending on wants like eating out, and the software gives a systematic way to do that. The website gives a good tutorial on the budgeting philosophy.

[Spud]

Another bonus came in this month that reminded me that I never went back and responded to this thread. The bonus was big enough that now I'm second guessing the decision we made last week, and figuring we should probably max out my husband's 401(k) this year as anonymous_saver suggested. This is good, of course!, but now we probably need to go back to the HR department and amend things yet again, which will annoy them.


Zetta - I tried looking into the YNAB, but they want me to pay $20 to download their software. Is this correct?

With variable income the issues for budgeting (IMO) become the following:

What is fixed income?
What are fixed costs?
What are ranges of variable income?
What are costs and spending associated with variable income?

If the fixed income (of 78k in your case) covers your fixed costs (the bills you have every month) problem is not of critical financial sense. Most of variable income could be saved or spent without much consequence to day to day cash flow.

I think this is close to our scenario. Fixed Income is $98,400. Variable income (bonuses and farm income) could be anywhere from $30,000 - $100,000. Of course, these are all gross figures. The bonuses come quarterly, and the farm income comes in the fall, so over half of the variable income comes in the last quarter. What that means is that we have to plan in the last quarter of the year for the first three quarters of the next year.

Our expenses for 2007 were $70k. We had some major one-time expenses last year -- about $12k went to having a baby, for example. Although I think our spending will be less in 2008, part of me feels like in any given year we might have $12k of "one time expenses" (theoretically we will have more children, or want to re-landscape the yard, or take a nice vacation, and my husband's car will need to be replaced soon) and it should just be considered part of our general expenses for planning purposes. But I'm not sure if that's the way to look at it or not.

In any case, our fixed income is not enough to support our current spending habits and pay Uncle Sam, but it's looking like we'll be much closer in 2008 than we were in 2007.