Contributing to my 401K was still a good idea.

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?

9 Responses

  1. I haven’t dug into the numbers, but I’ve generally only contributed enough for the match, meaning I’d need to be down 47% or so. At my last job I may have done more than the match for awhile. I’m sure I’m still ahead due to the match though. Of course, they still would have matched each dollar invested in the stable value funds..

  2. I don’t understand why anyone would even consider not contributing the maximum that their budget allows – especially if they are nowhere near retirement. Think about it: Would you give me 75 cents if I put a dollar in your investment account? That is the way the math works in your 401k account.

    Right now the financial gods are giving us the buying opportunity of a lifetime so don’t switch over to a money market account or stop contributing to your plan. Diversify across equity mutual funds, cross your arms, and you will be fine. Every bear market in history has been followed by a bull market.

  3. Hm, I think I’ve contributed roughly $27,000 total (including employer match, starting this July) over the last two and a half years, and I’ve lost about 25% of that. It’s mostly my money, I didn’t get a match until recently.

  4. @SP: Yeah, I guess had I put everything into the Stable Fund I’d be sitting pretty on top of $40K + the 5% interest. Oh, hindsight.

    @Don: I’ve realized that, thankfully! It’s hard to see my money crashing around me, but all evidence indicates the market will recover… someday!

    @ Revanche: It’s tough & can be frustrating, I know. With my net worth falling every month, I feel like I can’t spend a penny. The more I try to save (rationally I know it would be a mistake to pull out of funding my retirement account), the more I feel squeezed and like it’s not even worth it!

  5. I totally agree with Don. I look at my 401k spreadsheet and see that other than 2001-2002, my 401k was going up and up meaning that I’ve been investing as prices were increasing for 5 years during an unprecedented bull run. Even if the market remains stagnant or dips for the next 5-10 years, it just means that I’ll be dollar cost averaging on the cheap.

  6. Good points, and I think the company match is one of the reasons why I haven’t felt as bad about my 401(k)’s performance. I’m still making 50% returns, (or something like that….you get what I mean. For ever $1 I put in, I actually get $1.50). So it just about evens out.

    As much as I keep thinking that “this doesn’t matter, I don’t need the money for another 30 years, and neither do you…..get over it” I realize that money is money….and people have their emotions tied up with their money (myself included). We can’t help it, but we also need to be rational and remember WHY we are investing, and then invest accordingly.

  7. I halted all retirement funding to clear debt like a mofo. That was 2 years ago.

    Now that I’m almost done (will be done in Jan 2009 to avoid heavy taxation on my hard earned moolah), I will be contributing regularly again…


    I am moving to the States, so I need to be careful to not put too much there and not have enough to live on while finding a job in the States, etc etc…

    Tricky balance, but I think I’ll work out the numbers later this month when it gets less busy at work and show a plan of my spending/saving/retirement.

    I’d still like to do a debt chart at the end of this year to show how far I’ve come and I am feeling VERY impatient right now because I want to just withdraw all my money from the corporation and clear my debt *sigh*

  8. Oh and yes. I ended up with more money than if I had foregone saving, so even losing $5k or more, (I haven’t run the final #s), I am still ahead.

  9. […] wanted to, with no money down and my small entry-level salary. I didn’t. I saved, and now my 401K has fallen even further, my ING account isn’t even competing with inflation, and my company may go through another […]

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