Retirement contribution

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Topic Author
Stash
Posts: 19
Joined: Thu May 16, 2013 6:02 am

Retirement contribution

Post by Stash »

Admittedly, I'm very new to this topic. Also, this is my first post, so hello everyone! :-)

Here is my story:

Married - both 30 with good jobs
$90K income after taxes
$1500 per month for rent and utilities
$2500 for groceries, and other daily expenditures (this obviously needs to be cut down, but that's another story)
About $20K in checking/savings

This seems like it leaves a lot to be saved, but my question is how/where to you allocate it?

If both employer 401(k) accounts are maxed out, that only leaves $7000 for the year. This does not account for trips, vacations, large purchases, or replenishing from an emergency etc. This also does not allow for other investments such as Roth IRAs or mutual funds. If we could live with $7K cash after expenses and 401(K) contributions, would this be the best thing to do, or is there a better course of action?

Thanks in advance!
Last edited by Stash on Fri May 17, 2013 3:25 pm, edited 1 time in total.
kmok
Posts: 224
Joined: Thu Apr 25, 2013 10:17 pm

Re: Retirement distribution

Post by kmok »

First off all, you might want to rename the thread to retirement contribution.

On your question, the general contribution order is (1) contribute to 401k till you get the maximum employer match (2) contribute to ira or roth ira (3) max your 401k contribution (4) invest via taxable account.

Note that this is just a general rule, it still depends on your 401k plan and match and other factors. Usually IRA offers better investing options and lower fees, but it is also less protected in case of law suits.

The other big consideration is roth or traditional account, which a lot of factors will need to be considered.
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Peter Foley
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Location: Lake Wobegon

Re: Retirement distribution

Post by Peter Foley »

Stash
First, welcome. You are asking a good question, one that has some subtleties to be sure. In addition to the general contribution order provided by kmok, you might factor in your tax bracket. I would contribute to the 401k to the extent that you lower your taxable income to the point you are in the 15% tax bracket. The 25% bracket begins at $72,500. So your first objective should be to save as much as possible in your 401ks if they have good low cost investment options. (I believe the limits are either $17,000 or $17,500 per person in 2013.) After that I would contribute to a Roth, then taxable.

I would recommend the Roth before taxable because you are young and with two decent incomes there may be a time when, with raises, it will be more difficult for you to contribute to a Roth.

However, if you are planning on buying a house I would advise putting the money in taxable rather than Roth.

Your data item of 90k after taxes makes the calculation a little difficult. If you put money in a tax deferred account you will lower your income and pay less in taxes. So maybe you have 95k or 100k after taxes if you use your 401ks?
Topic Author
Stash
Posts: 19
Joined: Thu May 16, 2013 6:02 am

Re: Retirement distribution

Post by Stash »

Thank you both for your responses. It looks like I will have to possibly not max out my 401(k) and instead max out our Roth IRA's first, then put what we can into the 401(k). Once that hits max, then start a taxable account (my guess is a vanguard account). Thanks for mentioning tax brackets - I will definitely take that into consideration now.

We are not looking into purchasing a house just yet, but that does get me thinking about how we are going to fund that. I know that you are able to take $10,000 out of a Roth without penalty if you are a first time home buyer so that will hopefully be an option for us.

I'm curious as to what percentage of savings from income is typical for most people (I guess relatively that is since everyone has their own situations). Is there a number I should be shooting for?
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Peter Foley
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Location: Lake Wobegon

Re: Retirement contribution

Post by Peter Foley »

Saving 15% of income is the level often recommended.
Topic Author
Stash
Posts: 19
Joined: Thu May 16, 2013 6:02 am

Re: Retirement contribution

Post by Stash »

Peter Foley wrote:Saving 15% of income is the level often recommended.
Just to clarify, that would be 15% of Gross Income, correct?
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