With the recent drops in the stock market, I’ve been sort of mentally slapping myself for having contributed so much to my retirement accounts. I pondered cutting back on my contributions and saving more in a bank account, but I haven’t yet because I know it’s just reactionary. (When the market rebounds, I’ll have more money that’s poised for growth and less that’s hoping to get back to a break-even point.)
I started wondering, had I never put any money into my 401K, would I be better or worse off than I am today?
Over the past 3-ish years, I’ve contributed $26,800 to my 401K. My employer matches up to 6% of my salary, and that totals roughly $12,100. My retirement account – as of the market close yesterday – was worth $30, 100, which means I’ve lost nearly $9000 on paper.
Clearly, this was a bad idea. Or was it?
I’ve only put in $26,800 of my money in. Technically, I’m still up $3,300. Not a great rate of return, but roughly equivalent to what my ING account is getting.
It gets better.
The following calculations are from a webpage that my company’s 401K program put together. The numbers are generally accurate, although I find that it underestimates how much taxes I’ll pay.
The total amount of taxes I would have paid on 401K money (assuming I had never contributed anything) in the past 3 years is $10,200. So I’d have an extra $16,600 sitting in my savings right now. I already max out a Roth IRA (and I’m not looking at the balance for that- I don’t have a match to offset market losses!).
So on paper, I’ve got $13,500 more than I’d have if I didn’t contribute to my 401K. Yes, it’s all on paper and I’ll have to pay taxes on that $13,500 eventually, but ultimately, that number looks OK.
Taxes make everything a bit fuzzy, of course. I’ll eventually pay taxes on my 401K, but taxes on growth will be deferred. If I’m smart & balance 401K withdrawals with Roth withdrawals, I could pay less tax on the money when I’m retired.
Obviously things could have been better. If I’d only contributed up to what my employer matches, I’d probably be in an even better position right now. If I’m still saving over half my take-home pay, does it even matter?
Mostly I’m saved by my employer’s generous match and my own somewhat high tax bracket.
How about my readers? Are you below the level you’ve been putting in, or has your account balance just fallen really far since January? Find something wrong with my numbers (I should note that taxes is total taxes, not just federal)? Or do you just wish people would stop complaining about retirement accounts they won’t be touching for another 30 years anyway?