I mentioned in my 2009 Review that I had come close to maxing out my 401K this year. I plan to try to do the same next year.
But a recent post at Punch Debt In The Face (it is worth clicking through just to see the picture at the top of the post) made me stop and consider why I wanted to max it out. It just.. has always been something I wanted to do, and I don’t know if I ever honestly believed I’d get there.
PDITF cut back his 401K contributions, with the reasoning that he wanted more money to plan for the short term & midterm future. After all, you can’t touch that money until you turn 59.5 so once it’s gone, it’s gone. He’s also maxing out his Roth IRA, which means he’s still contributing the recommended amount to retirement (about 15%).
It’s not like he’s going to be spending the money, either – his plan is to invest/save that extra money for the short term.
Quite frankly, it sounds like he has thought out his plan. And for a minute, it threw me for a loop. After all, didn’t I whine about how much lower my cash savings rate would be next year? Maybe I’ve been so fixated on this goal of maxing out all of my retirement funds that I never bothered to ponder the alternatives.
So I did. And I’m going to stick with my plan to max out my 401K next year, because…
1. I will be saving enough cash next year.
It’s going to come out to about 25% of my take-home pay. That’s double the suggested savings rate. It just doesn’t seem like “enough” to me because I’m used to saving so much more than that.
2. I’m saving for two.
Chad can’t contribute to a retirement account if he’s not working. (Although this is misleading, since if he was working, I’d probably have him max out his as well.)
3. I’m going to have to scale back contributions anyway.
If I keep contributions at 20%, I will put in too much money in 2010. So I’m still going to get a cash bump next year, and that’s not taking into account any raise I might earn.
4. That money is not locked up forever.
I can take a loan out of my 401K if I really need money. I know they preach against this. It’s borrowing from your future! If I’m overcontributing, though, I’m just evening things out. The other argument is that losing your job means you have to pay back the loan balance immediatly or face tax penalties. Because my company is awesome, they do not require you to pay back the loan right away if you’re fired – you continue on your normal schedule.
5. I could use the tax break.
Especially if Chad does find a job, lowering our taxable income could keep us within Roth IRA limits for a year or two extra.
6. I don’t know what I’ll want to do in my 30s, my 40s, my 50s.
That 15% contribution usually assumes you’ll be working right up until retirement. What if I decide to retire early at 45? I’d miss those last few catch up years. I sometimes toy with moving to a small town and becoming a teacher, but I could only handle that big of a pay cut if I’ve planned ahead. Or, if I do need more cash when I’m 40, I can scale back contributions then. Contributing now, while I can afford it, gives me more flexibility later.
(The most interesting part of #6 is that this is one of the same reasons PDITF decided to scale back. We forsee the same issues – what if I want/need more money before retirement? – but have chosen completely opposing strategies to handle it.)
7. You don’t get to make it up.
When I’m 30 and am positively rolling in it (a girl can dream!), I won’t be able to tell the IRS, “Look, I gave $10,000 less than the max when I was 25. Let me just sneak that in there now!”
8. Contributing now gives me the biggest bang for my compound interest bucks.
There was a blog post a year or two ago where someone did the math and said that a 26-year-old who maxed out his/her retirement accounts just that year would have a million dollars at age 65. Now, I might want to retire earlier than that, and I think the annualize growth on that was a bit high (12%), but the principal stands. To combat the uncertainties (will the market really return 12%? What if I want to retire at 55?), I’ll keep my contributions high for as long as I can.
9. No one ever regrets saving too much for retirement.
As long as I’m enjoying my life, I won’t be on my death bed thinking about how I should have spent more money. (Although, come to think of it, a 1% contribution reduction could get me a Coach purse or something. WAIT I NEED TO START OVER!)
Ramit had a survey where 62% of people in their 40s wished they’d saved more for retirement. I don’t want to be one of them.
10. If I die before I turn 60, I can leave that money to my loved ones.
Here again, the fact that I’m still enjoying my life means that even if I die before getting to use any of this money, I won’t regret it. And I’ll be able to leave it to my (hypothetical) children, to my sisters, to Chad, to my parents, my cousins. And that might be a better use than me finally buying some Marc Jacobs when I retire.
What do you think? Are you changing your contributions? Why?
Also, is it just me, or have I been doing a lot of list-based posts lately?