Should I bother with a 401k at present?

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geologist20
Posts: 12
Joined: Fri Mar 11, 2016 11:57 am

Should I bother with a 401k at present?

Postby geologist20 » Wed Apr 19, 2017 9:22 am

Considering my current financial situation, does it make sense to put money into a 401k now? I am a 31 year old male with a wife and 2 year old and newborn due in November this year. I currently work as a geologist in an environmental consulting company. Current salary is around 55,000. I live in Florida, so I don't pay state income tax.

My current goals are to build a nine month emergency fund and to pay down a significant portion of debt over the next year.
Current savings: $4889 ($8654 including health savings account)
Current debt total: $38,000, consisting of a personal loan, credit cards, and student loans. I don't have any debt above 14% interest, I balance transfer credit cards to avoid paying the high interest rates.

The savings focus is so I have funds available for potential emergencies (e.g. replacing an old car which is 9 years old/repairs to car, medical emergencies, loss of job, stuff for new baby due later this year).

I think the debt goal is self-explanatory. I'm aiming to save at least $600 per month and total debt payments are around $700 per month. The highest debt currently is a 13.99% loan. Student loans are 6% or less. Credit cards are low interest, I use balance transfers to avoid paying 25% interest.

Considering my current financial situation, it doesn't really make sense to worry about a 401k. It doesn't help me if my wife or myself become unemployed, it doesn't help purchase items for the new baby due in November and I'll save more over the long term paying down debt vs the return on a 401k. Is there any reason to put money into a 401k at present?

The 401k is offered through my company (with Fidelity) and pays 50 cents per dollar deposited to the account. It currently has around $7000, but I am not actively contributing to it at the moment. The ceiling on the 50% match is $1000 per year.

Net Income: $5,417.00 (including my wife). 401k and health savings account are taken out pre-tax and are thus not included.
Bills
rent $1,600.00
car lease $306.24
marcus GS loan $255.89
Credit cards $229.00
car insurance $100.00
gas $130.00
groceries $650.00
dining $200.00
necesities/baby/misc $135.00
life insurance $35.51
student loan $107.15
cathy's bills $400.00
Gym $38.51
Daycare $780.00
Cable $100.16
Laundry (in apt) $22.00
FPL/electricity $100.00

Total amount of bills $5,189.46

Remaining $227.54
Last edited by geologist20 on Wed Apr 19, 2017 2:48 pm, edited 4 times in total.

BHUser27
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Re: Should I bother with a 401k at present?

Postby BHUser27 » Wed Apr 19, 2017 9:32 am

In general, if your 401(k) has a company match, it is a great place to start your retirement savings.
Have you read the Wiki Getting Started page and the pages on financial and investment planning and kits?
If not, start here:
https://www.bogleheads.org/wiki/Getting_started
Last edited by BHUser27 on Wed Apr 19, 2017 10:55 am, edited 1 time in total.

hammockman
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Re: Should I bother with a 401k at present?

Postby hammockman » Wed Apr 19, 2017 9:33 am

It's hard to beat a 50% return on your invested funds. You don't say what the ceiling is on the match. You should consider contributing at least to the matched ceiling if you can swing it IMO. Your debt doesn't seem extraordinary unless the interest on it is extremely high.....

aristotelian
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Re: Should I bother with a 401k at present?

Postby aristotelian » Wed Apr 19, 2017 9:36 am

Yes, you need to cover your day to day expenses, build up your emergency fund, and cut down on debt. However, saving in a 401K with a company match is one of the very best things you can do for your family's financial future. You get an instant return of 50% on the company match, plus you get a tax deduction on any income you contribute. Even if you are in a low tax bracket, that is an instant 65% return.

What caused you to get into debt? Are you living within your means?

jlcnuke
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Re: Should I bother with a 401k at present?

Postby jlcnuke » Wed Apr 19, 2017 9:45 am

Assuming you can afford it (i.e. will not cause more debt by diverting the money there), I'd recommend putting enough in the 401k to at least get the full employer match at 50 cents on the dollar.

cjcerny
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Re: Should I bother with a 401k at present?

Postby cjcerny » Wed Apr 19, 2017 9:52 am

Always contribute enough to get the match, even if the expenses on the investment choices you have available to you are lousy.

dbltrbl
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Re: Should I bother with a 401k at present?

Postby dbltrbl » Wed Apr 19, 2017 9:57 am

Absolutely Yes. You are getting instant 50% return and it is yours even if you lose your job voluntarily or involuntary. As others have said put in full amount till the match. Just do it. Emergency fund can wait. If needed ask help from family or friends in case of emergency.

wolf359
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Re: Should I bother with a 401k at present?

Postby wolf359 » Wed Apr 19, 2017 10:12 am

The company match is part of your compensation. All you have to do to collect it is to save some money you should already be saving (and that will reduce your taxes.) We're talking $83/paycheck (if you get paid twice a month), and the actual reduction should be about $70/paycheck if it reduces your taxes by 15% (less depending on your tax bracket.)

In the old days, this would have been your pension. By skipping it, you're basically foregoing part of your paycheck (that is paid to your retirement fund.) If you feel financially pressed, why are you turning down pay?

Considering my current financial situation, it doesn't really make sense to worry about a 401k. It doesn't help me if my wife or myself become unemployed, it doesn't help purchase items for the new baby due in November and I'll save more over the long term paying down debt vs the return on a 401k. Is there any reason to put money into a 401k at present?


I'd suggest the Dave Ramsey approach of having a $1,000 emergency fund, doing enough of the 401k to get the match, and then throwing everything else at the debt, taking out the smallest loans first.

The emergency fund prevents you from derailed if something comes up. Taking out the smallest loans first gives you instant wins and snowballs the payments into an ever-increasing payoff stream.

geologist20
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Re: Should I bother with a 401k at present?

Postby geologist20 » Wed Apr 19, 2017 10:43 am

@BHUser27 I'll check it out thanks.
@hammockman I edited the original post with the ceiling, but my company matches up to $1000 per year
@aristotelian I use the YNAB app to track my budget and net worth, which has been improving this year.
I'll go ahead and lower my contribution to my health savings account, which is already receiving the max company contribution ($12.50 per paycheck), and start building up my 401k contribution (which I can do myself by logging into my account). I'll start with 2% and evaluate my budget from there.

thanks,

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randomizer
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Re: Should I bother with a 401k at present?

Postby randomizer » Wed Apr 19, 2017 10:47 am

Get emergency fund up to at least a couple of months, ideally more, then get the $1000 match, then pay down the debt.

bubbadog
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Re: Should I bother with a 401k at present?

Postby bubbadog » Wed Apr 19, 2017 10:50 am

Should I bother with a 401K at the present?

Absolutely! (50% match seems like a no brainer)

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FelixTheCat
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Re: Should I bother with a 401k at present?

Postby FelixTheCat » Wed Apr 19, 2017 11:07 am

The one thing I wish I listened to when I was younger was "Pay yourself first." At a minimum, invest in the 401K to get the match.
Felix is a wonderful, wonderful cat.

pkcrafter
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Re: Should I bother with a 401k at present?

Postby pkcrafter » Wed Apr 19, 2017 11:10 am

geologist, yes, your plate is definitely full. You do need an emergency fund, that's #1 You need it protect against job loss or other unexpected emergencies. If your wife isn't employed at the same place where you work, you probably can do fine on 5-6 months of EF.
The savings focus is so I have funds available for potential emergencies (e.g. replacing an old car which is 9 years old/repairs to car, medical emergencies, loss of job, stuff for new baby due later this year). I think the debt goal is self-explanatory. I'm aiming to save at least $600 per month and total debt payments are around.

You will have to distinguish between an emergency fund and a goal saving fund, neither of which are tied to investments. Replacing an old car in not an emergency, nor is stuff for new baby. Medical emergency, loss of job, car repair are. So you need an emergency fund. You also need an account to reach certain short term goals. And just as important is building income for retirement. You cannot afford to miss out on the long term compounding effect, so you have to commit to investing a certain % of your income for the future. As everyone has said, getting a company match is almost like getting free money and you should not put that off. People who want to hold off never seem to get started until it's too late. Most recommendations here are to put a min. of 10% of total income into long term retirement savings, but that might be more than you can handle right now. OK, but at least get that match and the power of compounding over time.

Consider Roth IRAs for both of you too. While I wouldn't recommend you put money in those accounts with a plan to take out contributions, you can do that (you can't take earnings without penalty), so it's a long term investment account with an emergency option of removing contributions if absolutely needed as a last resort.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

Nate79
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Re: Should I bother with a 401k at present?

Postby Nate79 » Wed Apr 19, 2017 12:13 pm

What is the debt for and what is the interest rate? If it's a really low interest rate then I wouldn't worry too much about it. If it's credit card debt then I would be very aggressive to pay it off.

You may want to post a more thorough financial picture of your life and investments to the community for review. We don't know if your 401k has good low cost options or is only high fee. (regardless the match is free money so it will always make sense to get the match)

You are young so getting your financial house in order early is very important. Consistent and regular savings are key to a good financial health and sufficient retirement funds. But if your budget is very tight that you can't contribute even more than a few percent to your 401k how will you have enough for retirement. You may want to take a look at your budget and make sure you don't have a spending problem.

inbox788
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Re: Should I bother with a 401k at present?

Postby inbox788 » Wed Apr 19, 2017 12:48 pm

1) Yes, up to the match! I agree with those saying don't pass up free money.

2) As far as priority, emergency fund can wait IMO. Having so much debt is an emergency that has to be remedied, especially if the rate is high like credit cards. Pay down high rates, and refinance to lower manageable rates if possible.

3) HSA is a partial emergency fund with additional tax benefit vs. emergency fund in Roth. It's up to you to decide which is more desirable for you.

You've got your hands full for a while on the expense side. See if you can't do something on the income side.

teen persuasion
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Re: Should I bother with a 401k at present?

Postby teen persuasion » Wed Apr 19, 2017 12:59 pm

geologist20 wrote:Considering my current financial situation, does it make sense to put money into a 401k now? I am a 31 year old male with a wife and 2 year old and newborn due in November this year. I currently work as a geologist in an environmental consulting company.
My current goals are to build a nine month emergency fund and to pay down a significant portion of debt over the next year.
Current savings: $4889 ($8654 including health savings account)
Current debt total: $38,000
What kind of debt? What is the rate?
Current income?
Current expenses?


The savings focus is so I have funds available for potential emergencies (e.g. replacing an old car which is 9 years old/repairs to car, medical emergencies, loss of job, stuff for new baby due later this year). I think the debt goal is self-explanatory. I'm aiming to save at least $600 per month and total debt payments are around.?

Considering my current financial situation, it doesn't really make sense to worry about a 401k. It doesn't help me if my wife or myself become unemployed, it doesn't help purchase items for the new baby due in November and I'll save more over the long term paying down debt vs the return on a 401k. Is there any reason to put money into a 401k at present? Tax savings and credits

The 401k is offered through my company and pays 50 cents per dollar deposited to the account. It currently has around $7000, but I am not actively contributing to it at the moment. The ceiling on the 50% match is $1000 per year.


OP, we need more details.

Your change in family size will make a difference in your taxes owed: another child will immediately give you an extra $1k CTC, and ~$4k reduction in taxable income due to another exemption (worth $600 if your marginal rate is 15%), and you may be eligible for EITC (more for 2 kids). You could use that found money to fund your 401k.

If your AGI/wages are $50k, putting $1k in your 401k gets you the 50% match of $500, $150 in fed tax reduction, $210 more in EITC (21% phaseout), and $100 in Retirement Saver's credit. That's $960! Any state tax savings? Does your state match EITC like mine does (30% match, or an additional $63)?

If you can drive your AGI/line 7 income lower, you can continue to lower taxes owed and increase EITC (it's refundable), and get into better Retirement Saver's credit brackets (up to 50% of the first $2k for each of you).
Last edited by teen persuasion on Wed Apr 19, 2017 8:27 pm, edited 1 time in total.

keystone
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Re: Should I bother with a 401k at present?

Postby keystone » Wed Apr 19, 2017 1:18 pm

Assuming the debt interest rate isn't so high, I would focus all of my extra funds on the 401K and/or an IRA. At 31 you have time on your side and now is the time to be putting money away in tax advantaged accounts to build for your future. You can only save so much each year in tax advantaged accounts, so opportunities to capitalize on that are precious.

https://www.bogleheads.org/wiki/Importa ... ving_early

blackcat86
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Re: Should I bother with a 401k at present?

Postby blackcat86 » Wed Apr 19, 2017 1:26 pm

Congrats on the growing family! Exciting stuff. As to your question, I believe it's always wise to contribute up to your match; a 50% return is greater than any interest rate you're currently paying. Plus, it's usually easy to live without that money each month, and you'll really appreciate it 10 years from now (trust me, I'm 10 years older than you :) )

imyeti2
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Re: Should I bother with a 401k at present?

Postby imyeti2 » Wed Apr 19, 2017 1:35 pm

Fast forward 10 years and imagine having not contributed. Your financial situation may get better in those 10 years, but you will never be able to go back & fund/match that 401k. You will be sitting on a boatload of retirement savings after those 10 years !

geologist20
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Re: Should I bother with a 401k at present?

Postby geologist20 » Wed Apr 19, 2017 2:41 pm

Lots of good ideas here. The roth IRA is an interesting idea, but with pre-tax 401k and health savings account contributions, paying debt and put some money in an emergency savings account, I doubt I'll be able to fund another account. I'll start contributing to my companies 401k because as someone mentioned, it is free money.

geologist20
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Re: Should I bother with a 401k at present?

Postby geologist20 » Wed Apr 19, 2017 2:48 pm

imyeti2 wrote:Fast forward 10 years and imagine having not contributed. Your financial situation may get better in those 10 years, but you will never be able to go back & fund/match that 401k. You will be sitting on a boatload of retirement savings after those 10 years !

Yea, as I'm going through this topic I realize that I need to be more forward thinking. I've updated the original post with additional detail.

harvestbook
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Re: Should I bother with a 401k at present?

Postby harvestbook » Wed Apr 19, 2017 3:08 pm

$2000 to 401(k) and then pay off that 13.99 percent debt and slowly build up emergency savings--ideally you can chip away at all of them at the same time, with baby steps. I wouldn't do a Roth because the tax savings now are more impactful on your life (to pay down debt) than the tax breaks in 35 years when hopefully some of these challenges have been resolved--for example, kids tend to grow up and most people get raises. Bouncing from credit card to credit card sounds like tossing around live financial hand grenades--I'd try to get that down no matter what kind of sacrifices I had to make--like giving up eating out, vacations, etc. Good luck.

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grabiner
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Re: Should I bother with a 401k at present?

Postby grabiner » Wed Apr 19, 2017 8:28 pm

Paying down that 13.99% debt is a risk-free 13.99% return. Therefore, it is worth contributing enough to the 401(k) to get the 50% return, but everything after that should go to paying down the high-rate debts.

And spend that HSA for your medical costs, which you will probably have given the baby.
David Grabiner

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BL
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Re: Should I bother with a 401k at present?

Postby BL » Thu Apr 20, 2017 2:10 am

It might pay for each of you to save $2000 to get the max Saver's Credit.
Spouse could save in an IRA/Roth IRA at Vanguard in a Target Date fund and you in 401k to get the match. It does not give you anything if you are down to 0% tax liability.

The Saver's Tax Credit is a non-refundable income tax credit that could reduce your federal income tax liability to $0.

Your eligibility depends on two things: your filing status and your modified adjusted gross income.

These charts help you find out if you are qualify for the Saver's Tax Credit.


Filing Status/Adjusted Gross Income for 2017
Amount of Credit------------- Joint
50% of first $2,000 $0 to $37,000
20% of first $2,000 $37,001 to $40,000
10% of first $2,000 $40,001 to $62,000

cresive
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Re: Should I bother with a 401k at present?

Postby cresive » Thu Apr 20, 2017 7:24 am

geologist20 wrote:Considering my current financial situation, does it make sense to put money into a 401k now? I am a 31 year old male with a wife and 2 year old and newborn due in November this year. I currently work as a geologist in an environmental consulting company. Current salary is around 55,000. I live in Florida, so I don't pay state income tax.

My current goals are to build a nine month emergency fund and to pay down a significant portion of debt over the next year.
Current savings: $4889 ($8654 including health savings account)
Current debt total: $38,000, consisting of a personal loan, credit cards, and student loans. I don't have any debt above 14% interest, I balance transfer credit cards to avoid paying the high interest rates.

The savings focus is so I have funds available for potential emergencies (e.g. replacing an old car which is 9 years old/repairs to car, medical emergencies, loss of job, stuff for new baby due later this year).

I think the debt goal is self-explanatory. I'm aiming to save at least $600 per month and total debt payments are around $700 per month. The highest debt currently is a 13.99% loan. Student loans are 6% or less. Credit cards are low interest, I use balance transfers to avoid paying 25% interest.

Considering my current financial situation, it doesn't really make sense to worry about a 401k. It doesn't help me if my wife or myself become unemployed, it doesn't help purchase items for the new baby due in November and I'll save more over the long term paying down debt vs the return on a 401k. Is there any reason to put money into a 401k at present?

The 401k is offered through my company (with Fidelity) and pays 50 cents per dollar deposited to the account. It currently has around $7000, but I am not actively contributing to it at the moment. The ceiling on the 50% match is $1000 per year.

Net Income: $5,417.00 (including my wife). 401k and health savings account are taken out pre-tax and are thus not included.
Bills
rent $1,600.00
car lease $306.24
marcus GS loan $255.89
Credit cards $229.00
car insurance $100.00
gas $130.00
groceries $650.00
dining $200.00
necesities/baby/misc $135.00
life insurance $35.51
student loan $107.15
cathy's bills $400.00
Gym $38.51
Daycare $780.00
Cable $100.16
Laundry (in apt) $22.00
FPL/electricity $100.00

Total amount of bills $5,189.46

Remaining $227.54


I have read many of the responses you have received and agree with most of what I have read. Since the previous responses have covered the basics--i.e. invest to get the match, etc.--I thought I would just add one more personal observation. I am 55 and a few years ago I started to really get my estate and retirement information organized. I realized that I haven't increased my 401 contribution in a while so I thought I would figure out how much an increase of $300/month would benefit me in retirement. I was amazed to see that if I increased my contribution in my mid 50's by $300, that I would be an extra $10-20/month returned to me in retirement. Incredulous, I recalculated several times!! As a check, I did the same increase in my 401 contribution, but this time, I pretended I as your age. That wound up with a rather large payment in retirement.

What the above example made me realize is that I am basically retiring on the money I stocked away in my 30's, not really on what I am putting away today. When I was your age, I was on just as tight a budget. However, I was so afraid that I would NEVER save enough to retire, made me put away as much as I could afford. I skipped a lot of things my colleagues did, but I am approaching retirement age with a decent 401 balance and they are bemoaning the fact that they are having to really put a LOT away just to try to catch up.

If you can put away anything--especially if you get a match--please do it. The magic of compounding really does work and the earlier you start, the stronger the magic. I didn't see a lot of wiggle room in your budget, but even $100/month which would equal $125/month since it is pretax and then $200/month with your employer match can really add up.

Using a simple compound interest calculator with an initial investment of $7000, with $200/month contribution at %6 interest would give you approximately $230,000 when you are age 62. That is without any increased contributions after you pay off your credit cards, get a raise, etc.


Good luck,
Ben

geologist20
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Re: Should I bother with a 401k at present?

Postby geologist20 » Thu Apr 20, 2017 8:10 pm

cresive wrote:
I have read many of the responses you have received and agree with most of what I have read. Since the previous responses have covered the basics--i.e. invest to get the match, etc.--I thought I would just add one more personal observation. I am 55 and a few years ago I started to really get my estate and retirement information organized. I realized that I haven't increased my 401 contribution in a while so I thought I would figure out how much an increase of $300/month would benefit me in retirement. I was amazed to see that if I increased my contribution in my mid 50's by $300, that I would be an extra $10-20/month returned to me in retirement. Incredulous, I recalculated several times!! As a check, I did the same increase in my 401 contribution, but this time, I pretended I as your age. That wound up with a rather large payment in retirement.

What the above example made me realize is that I am basically retiring on the money I stocked away in my 30's, not really on what I am putting away today. When I was your age, I was on just as tight a budget. However, I was so afraid that I would NEVER save enough to retire, made me put away as much as I could afford. I skipped a lot of things my colleagues did, but I am approaching retirement age with a decent 401 balance and they are bemoaning the fact that they are having to really put a LOT away just to try to catch up.

If you can put away anything--especially if you get a match--please do it. The magic of compounding really does work and the earlier you start, the stronger the magic. I didn't see a lot of wiggle room in your budget, but even $100/month which would equal $125/month since it is pretax and then $200/month with your employer match can really add up.

Using a simple compound interest calculator with an initial investment of $7000, with $200/month contribution at %6 interest would give you approximately $230,000 when you are age 62. That is without any increased contributions after you pay off your credit cards, get a raise, etc.


Good luck,
Ben


I punched the numbers into a 401k calculator and it's amazing the difference 10 years makes. I will slowly build up my contribution as I pay down debt, but I'd also like to keep around $6000 in cash for back up.


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