Most people look at their 401k and examine how much they have contributed during year end. We know this because most people talk about it during November and December when everything is set and done. Some think a little further ahead and try to plan for the next 12 months during year end but unfortunately most don’t. Therefore, I suggestion today that we all log into our 401k account to increase our contribution rate.
The beginning of the year is a great time to increase our contribution rate because the change will be reflected the entire year. Unless you are already at the contribution maximum, I suggest contributing an additional 2% this year. 2% won’t be much off each paycheck, especially since taxes won’t be charged immediately on the 2%. Furthermore, 2% is a lot of money if you keep on contributing your career earnings into it, especially since compound interest will work in our favor through the years.
Speaking of 401k contribution rates, many plans offer a way to automatically increase the contribution rate each year. This is a great feature for those that always put things off as it will automatically increase our savings each year. Remember, automatic savings is always good.
I know that it’s always hard to decide to invest more money into our retirement when the stock market is down. Trust me on this one though, because everyone will thank me years down the road when we are wealthy.
Editor's Note: I've begun tracking my assets through Personal Capital. I'm only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it's much easier to figure out when I need to rebalance or where I stand on the path to financial independence.
They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.
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If you have an optimistic outlook on the market, your best bet is to max out your annual401k contribution in the first month or two of the year. This gives you the longest possible time for earning a return. It is a shame that the maximum legal contribution pre-tax is so insanely low, but go with what you are given and max it out early then switch to a Roth.
Given a choice, pay the tax now and contribute to a Roth 401k or IRA. Demographic changes mean in the years ahead we have to do some combination of 67% tax increase to fund SS, or a 40% cut in benefits. More than likely it will be something in between. The 40% is an average, that will surely be subject to means testing. Hence a good monthly IRA distribution may mean a 60% (or more) cut in SS, so that those of lessor means can keep a higher percentage of theirs.
I would only ask wil SS be available at all post 2040. I doubt it. Roth is a great idea by the gentleman above.
Agree — even making the minimum increase possible will add up over time.
Arohan: It is something that is hard to do but definitely timeless advice 🙂
Teaspoon: This is definitely something we should all do. I’m sure that as long as you keep at working on increase your contributions and saving more money, you will maxing out your employer match in no time. Good luck.
Great Post. I’ve included as one of my favorites from the Carnival of PF. I like the concept of squeezing the 401k tournip a little at the beginning of the year. Like you say at 2% you’ll hardly notice (especially as it’s often pre-tax contribution). Goes along with my 2008 resolution to max my ESPP to get all of it’s free money out and try and max my 401k (which isn’t an easy task.).
Teaspoon
That is something we should all look at at least once a year.
Best Wishes,
D4L
I just wrote an article on my blog about “taking control of your 401(k)”. There have been many recent articles lately detailing the excessive fees in these employer-sponsored plans. You may find it interesting that there is a “way out” for participants to take full control of their plan assets into an IRA and seriously minimize their ongoing expenses through index funds or direct holdings.
Interesting post, I’ll keep this in mind.
-Mike
When the market is down is precisely the time to invest more
Randall: That is a very good tool for most people. Unfortunately I can’t really take advantage of this since my income is a variable but I will definitely let people know about this feature in Quicken.
I found a couple of years ago after I did my year-end stuff that Quicken had a little trick that was helpful. It re-calculate my W-4 withholdings so I could contribute more to my 401k, and still end up seeing the same amount of take-home. I’d always gotten some back from taxes, so this was a neat change. (no return=no free loan to the govt). I’m sure there are on-line calculators to do the same thing nowadays.