How much am I hurting myself my reducing 401k contributions

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Lynx310650
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How much am I hurting myself my reducing 401k contributions

Post by Lynx310650 » Mon Mar 23, 2020 1:57 pm

My spouse and I work for the same employer (relatively safe jobs) with a combined income around $200k. If we contribute 5% of our incomes, our employer give us 10% (5% is "free", 5% is match) in our 401k. We've been maxing out the last couple of years, basically equal installments every paycheck.

Our AA is 60/40 (we are late 30s in age) and we haven't deviated or sold during the downturn. We have about 100k in our ROTH IRAs that's all in bank CDs. Not optimal but we've kind of considered this our backup emergency fund and a house downpayment savings fund in case we want to buy in our HCOL area. Works out for us in terms of balancing our goals.

We have about 6 months of expenses in a separate bank account as a true EF.

I've been considering reducing our 401k contributions to the minimum needed to get our full matches. This would free up an extra $2k/month to save (we save another $4k/month on top of that even if we max 401k). The reason being is twofold. I want to beef up our EF even more in case the economy really gets bad and our jobs are threatened. Another is opportunity. Our one big financial "goal" we have is buying a home, and if home prices drop it might give us an opportunity.

That being said, I do lose out the opportunity to buy some stock potentially on the cheap. OTOH, we are adding about $30k to our 401ks even without maxing it out.

Thoughts on this strategy? Thank you, hope everyone is staying safe and healthy.

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Re: How much am I hurting myself my reducing 401k contributions

Post by bloom2708 » Mon Mar 23, 2020 2:06 pm

I switched my 401k contributions (20% + match) to 100% stocks. From 60/40 new buys.

I would still fill up your pre-tax 401ks (match doesn't count) and Roth IRAs while you have the good incomes.

If your Emergency Fund is light, that might be a reason to save more cash.
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gr7070
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Re: How much am I hurting myself my reducing 401k contributions

Post by gr7070 » Mon Mar 23, 2020 5:18 pm

You already have 100k wasting away in CDs even though you have a proper EF. Stable jobs. High savings rates as it is. I presume no debt, as well. 30something age.

How many *years* of bare bones expenses do you have in your EF and CDs combined?

Your proposed change sounds like a giant waste to me. I would not want to lose the opportunity to shelter a nice chunk of money from taxes. I also want that money invested at my chosen AA.

I'm not sure there's anything one can post here that will make you feel like you have enough in safe assets even though you have way more than needed.

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Re: How much am I hurting myself my reducing 401k contributions

Post by srt7 » Mon Mar 23, 2020 5:45 pm

Why? You don't like fire sale prices? :D
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grabiner
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Re: How much am I hurting myself my reducing 401k contributions

Post by grabiner » Mon Mar 23, 2020 6:15 pm

What you are doing is reasonable. The 401(k) and Roth IRA are the best place to save money which you won't touch until retirement, but if you are planning to buy a home, you cannot use 401(k) money to do that. If you do this, leave the taxable money in savings accounts, bond funds, or CDs so that it will be available when you need it.

You can use Roth IRA contributions (and $10,000 of earnings if you have had the Roth IRA for five years) to make a home down payment, so you should continue to max out the Roth IRAs even while saving for a home.
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Re: How much am I hurting myself my reducing 401k contributions

Post by DSInvestor » Mon Mar 23, 2020 6:36 pm

If you're making Roth 401k contributions, change those to Traditional 401k before you reduce contributions. This would give you more take home pay with which to fund other priorities. Are you contributing to Roth IRA? If yes, Roth IRA contributions can be withdrawn at any time. I'm not sure what the deadline for 2019 IRA contributions are at this time given that the tax filing deadline for 2019 tax returns has been pushed back to JUL 15.

I'd hold off on 2020 IRA contributions for now and boost emergency fund.
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Re: How much am I hurting myself my reducing 401k contributions

Post by GMCZ71 » Mon Mar 23, 2020 6:56 pm

Lynx310650 wrote:
Mon Mar 23, 2020 1:57 pm
We have about 100k in our ROTH IRAs that's all in bank CDs.
We have about 6 months of expenses in a separate bank account as a true EF.


Thoughts on this strategy? Thank you, hope everyone is staying safe and healthy.
Are your Roths managed by the bank? Fees?
John

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Lynx310650
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Re: How much am I hurting myself my reducing 401k contributions

Post by Lynx310650 » Tue Mar 24, 2020 1:23 pm

GMCZ71 wrote:
Mon Mar 23, 2020 6:56 pm
Lynx310650 wrote:
Mon Mar 23, 2020 1:57 pm
We have about 100k in our ROTH IRAs that's all in bank CDs.
We have about 6 months of expenses in a separate bank account as a true EF.


Thoughts on this strategy? Thank you, hope everyone is staying safe and healthy.
Are your Roths managed by the bank? Fees?
No fees, just vanilla CDs

broconne
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Re: How much am I hurting myself my reducing 401k contributions

Post by broconne » Tue Mar 24, 2020 5:15 pm

Serious question... Why even have Roth IRA if you are using CDs in there?

Saving taxes on less than 2% interest?

It seems like an incredible waste of tax advantaged space and most people would consider me a conservative investor.

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Re: How much am I hurting myself my reducing 401k contributions

Post by grabiner » Tue Mar 24, 2020 5:19 pm

broconne wrote:
Tue Mar 24, 2020 5:15 pm
Serious question... Why even have Roth IRA if you are using CDs in there?

Saving taxes on less than 2% interest?

It seems like an incredible waste of tax advantaged space and most people would consider me a conservative investor.
Because the money might be used before retirement. The OP may withdraw from the Roth IRA for a down payment; if so, it is better to have the money in CDs in a Roth IRA than to have no Roth IRA at all and the CDs in a taxable account.

If that were not a concern, then for many investors, it would be better to have CDs (or Total Bond Market yielding 1.94%) in a taxable account and all stock in both the 401(k) and IRA. (This is contrary to the usual Boglehead preference for tax-deferring bonds, but the low rates on bonds reduce the tax cost.) But the OP has a specific reason to put CDs in the Roth and taxable account, and stocks in the 401(k).
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Re: How much am I hurting myself my reducing 401k contributions

Post by BrownEyedGirl_27 » Tue Mar 24, 2020 5:41 pm

broconne wrote:
Tue Mar 24, 2020 5:15 pm
Serious question... Why even have Roth IRA if you are using CDs in there?

Saving taxes on less than 2% interest?

It seems like an incredible waste of tax advantaged space and most people would consider me a conservative investor.
+1. What rate are you getting for keeping 100k locked in a Roth IRA CD? This makes no sense...If you're going to do Roth you might as well put that money in the market for tax-free future growth given you both make great money--much more than the average American household. You are missing out on the beauty of the the Roth IRA. 1) I would recommend waiting until the CD matures (you said "No fees" but aren't you penalized for taking money out like in a regular CD)? Then take that money and take advantage of your Roth accounts for 2019 and 2020 if your CD expires before April 15th. 2) Put the rest of your CD balance into a regular CD paying the highest rate possible and use that for house savings. 3) You could put some money into taxable to help save up for the house but if you are more conservative look into CD ladders.

Remember that time is on your side when it comes to investing and that a house is shelter, not an investment. You should give us a look at your entire financial picture and maybe we can help you free up some cash for more house savings. One other thing I thought of: could you live off one spouse's income or one and a half incomes? It struck me that you could get that house much sooner depending on how frugal you can afford to be. Good luck.

One of the best podcasts I've listened to recently: https://www.bigpictureretirement.com/ep ... -roth-ira/
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RomeoMustDie
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Re: How much am I hurting myself my reducing 401k contributions

Post by RomeoMustDie » Tue Mar 24, 2020 5:44 pm

Lynx310650 wrote:
Mon Mar 23, 2020 1:57 pm
My spouse and I work for the same employer (relatively safe jobs) with a combined income around $200k. If we contribute 5% of our incomes, our employer give us 10% (5% is "free", 5% is match) in our 401k. We've been maxing out the last couple of years, basically equal installments every paycheck.

Our AA is 60/40 (we are late 30s in age) and we haven't deviated or sold during the downturn. We have about 100k in our ROTH IRAs that's all in bank CDs. Not optimal but we've kind of considered this our backup emergency fund and a house downpayment savings fund in case we want to buy in our HCOL area. Works out for us in terms of balancing our goals.

We have about 6 months of expenses in a separate bank account as a true EF.

I've been considering reducing our 401k contributions to the minimum needed to get our full matches. This would free up an extra $2k/month to save (we save another $4k/month on top of that even if we max 401k). The reason being is twofold. I want to beef up our EF even more in case the economy really gets bad and our jobs are threatened. Another is opportunity. Our one big financial "goal" we have is buying a home, and if home prices drop it might give us an opportunity.

That being said, I do lose out the opportunity to buy some stock potentially on the cheap. OTOH, we are adding about $30k to our 401ks even without maxing it out.

Thoughts on this strategy? Thank you, hope everyone is staying safe and healthy.
If you don't max out roth's I don't see this being an issue because you can always just place the cash into the roth accounts later.

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Re: How much am I hurting myself my reducing 401k contributions

Post by TropikThunder » Tue Mar 24, 2020 7:07 pm

Lynx310650 wrote:
Mon Mar 23, 2020 1:57 pm
This would free up an extra $2k/month to save (we save another $4k/month on top of that even if we max 401k). The reason being is twofold. I want to beef up our EF even more in case the economy really gets bad and our jobs are threatened. Another is opportunity. Our one big financial "goal" we have is buying a home, and if home prices drop it might give us an opportunity.
You already have a six-month EF, how much more are you aiming for? And where is the $4,000/mo in current savings going, taxable account? CD's also? And is that your downpayment fund, or just another "OMG we need to save money" stash? I think it's horribly shortsighted to reduce your 401k contributions just to bump that "$4,000/mo" to "$6,000/mo" when you already have a 6-month EF plus a $100k in CD's that could be used as a downpayment.

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Re: How much am I hurting myself my reducing 401k contributions

Post by watchnerd » Tue Mar 24, 2020 7:34 pm

Lynx310650 wrote:
Mon Mar 23, 2020 1:57 pm

Thoughts on this strategy? Thank you, hope everyone is staying safe and healthy.
You really need to do both:

1. Max out your 401k in down markets
2. Have an EF bigger than 6 months

Eat rice and beans for 6 months if you have to. If you get in lockdown, it will be easier to save.

FWIW, our emergency plan provides us with about 5-6 years of living expenses, which allows us to max out 401k contribs during bear markets, one gets the most shares for the money.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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Re: How much am I hurting myself my reducing 401k contributions

Post by watchnerd » Tue Mar 24, 2020 7:36 pm

TropikThunder wrote:
Tue Mar 24, 2020 7:07 pm

You already have a six-month EF
I think 6 months is the bare minimum in normal times.

In markets like these....I'd want more.
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Re: How much am I hurting myself my reducing 401k contributions

Post by gr7070 » Tue Mar 24, 2020 7:53 pm

They have $100,000 on top of a fully funded EF!!!!

Absurd.

They should probably build a bomb shelter. That's the perfect analogy. If things got so bad that a bomb shelter was actually needed they'd be screwed anyway as a bomb shelter would not do anything - 5' of dirt in the backyard is laughable vs a couple megatons.

The sky will never fall. Will there be bumps in the road? Absolutely! The bumps will never be big enough to hit your head on the sky!

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Re: How much am I hurting myself my reducing 401k contributions

Post by watchnerd » Tue Mar 24, 2020 7:56 pm

gr7070 wrote:
Tue Mar 24, 2020 7:53 pm
They have $100,000 on top of a fully funded EF!!!!

Absurd.
That depends on what their cost of living is.

We have a paid off house and keep $300k cash equivalent handy.

It's all relative.
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Re: How much am I hurting myself my reducing 401k contributions

Post by gr7070 » Tue Mar 24, 2020 8:28 pm

watchnerd wrote:
Tue Mar 24, 2020 7:56 pm
It's all relative.
Not really.

There is no reasonable cost of living that $300k isn't considered way, way more than enough for an EF. Your bomb shelter has room for more. We can ignore the extremes for *reasonable* discussion.

For far too many that $300k is FI!

Additionally, we have more than enough facts about the OP to make a very reasonable assessment with these exact facts at hand. Relativity has no affect here; we have the particulars to make reasonable assessments!

That reasonable assessment includes a fully funded EF *plus* an added 100k plus, 4k added savings into who knows what, plus an incredible amount of irrational fear, plus...

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Re: How much am I hurting myself my reducing 401k contributions

Post by watchnerd » Tue Mar 24, 2020 8:32 pm

gr7070 wrote:
Tue Mar 24, 2020 8:28 pm
watchnerd wrote:
Tue Mar 24, 2020 7:56 pm
It's all relative.
Not really.

There is no reasonable cost of living that $300k isn't considered way, way more than enough for an EF.
We like to have 5 years.

It allows us to invest free cashflow 100% in equities during bear markets when stock prices are cheapest.

It renders job loss irrelevant, allows us to have a much higher equity allocation for our age.
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Re: How much am I hurting myself my reducing 401k contributions

Post by unclescrooge » Tue Mar 24, 2020 8:36 pm

gr7070 wrote:
Tue Mar 24, 2020 7:53 pm
They have $100,000 on top of a fully funded EF!!!!

Absurd.

They should probably build a bomb shelter. That's the perfect analogy. If things got so bad that a bomb shelter was actually needed they'd be screwed anyway as a bomb shelter would not do anything - 5' of dirt in the backyard is laughable vs a couple megatons.

The sky will never fall. Will there be bumps in the road? Absolutely! The bumps will never be big enough to hit your head on the sky!
Do you remember the movie 'blast from the past' where someone actually built a bomb shelter?

The only lesson I took to heart was 'marry a girl from Pasadena'. :mrgreen:

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Re: How much am I hurting myself my reducing 401k contributions

Post by gr7070 » Tue Mar 24, 2020 8:54 pm

I remember the waste it was to actually practice nuclear drills in school. $100,000 and $300,000 *extra* EFs is a laughably bigger waste.

Fortunately the former cost me nothing, including a shot at Alicia Silverstone. ; )

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Re: How much am I hurting myself my reducing 401k contributions

Post by watchnerd » Tue Mar 24, 2020 9:44 pm

gr7070 wrote:
Tue Mar 24, 2020 8:54 pm
I remember the waste it was to actually practice nuclear drills in school. $100,000 and $300,000 *extra* EFs is a laughably bigger waste.
Perhaps you misunderstand.

Once a portfolio gets to a certain size, a separate EF is no longer necessary. It's just part of one's fixed income.

Instead of an Emergency Fund, one has an Emergency Strategy.

In our case, it's held in taxable. The Emergency Strategy would be tapping into that portion of our fixed-income that is in risk-free assets.

There have been a lot of threads about this.

So...back to Alicia Silverstone

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Re: How much am I hurting myself my reducing 401k contributions

Post by aristotelian » Wed Mar 25, 2020 6:58 am

To answer your question, you are giving up the benefit of your marginal tax bracket times the amount of the contribution. Back of napkin, you might be looking at $10k in the 401k vs. $7600 in savings. I would do the 401k personally. In emergency, you could do hardship withdrawal.

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Re: How much am I hurting myself my reducing 401k contributions

Post by tvubpwcisla » Wed Mar 25, 2020 7:10 am

I would aggressively max out your 401K first and then save in accounts outside of that as much as you can.
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Re: How much am I hurting myself my reducing 401k contributions

Post by ddurrett896 » Wed Mar 25, 2020 8:28 am

I would stay the course.

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Re: How much am I hurting myself my reducing 401k contributions

Post by grabiner » Wed Mar 25, 2020 8:34 am

aristotelian wrote:
Wed Mar 25, 2020 6:58 am
To answer your question, you are giving up the benefit of your marginal tax bracket times the amount of the contribution. Back of napkin, you might be looking at $10k in the 401k vs. $7600 in savings.
This is not correct, because you will pay tax on the full withdrawal from a 401(k). The cost of using a Roth rather than a traditional account is not your full marginal tax rate, but the difference between your marginal tax rate at the time of contribution and at the time of withdrawal. And the cost of using a taxable account rather than a Roth account is the tax you pay on gains, compounded every year.

Conversely, the benefit of saving in a taxable account is the ability to withdraw the money penalty-free. If you contribute to a 401(k) in a 24% tax bracket, and then withdraw the money before turning 59-1/2 while still in the same bracket, you pay 34% tax. A Roth 401(k) can be even worse, because partial withdrawals are prorated between contributions and gains, and you pay 34% tax on the gains which could have been tax-free. (If you have left the employer, you can roll the Roth 401(k) into a Roth IRA, and then withdraw only the contributions tax-free.)
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