Author Topic: Dump more into 401k by living off savings for a bit?  (Read 4667 times)

Pug Lover

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Dump more into 401k by living off savings for a bit?
« on: November 17, 2016, 02:15:27 PM »
Hello Mustachians! I have been following MMM for a few years now and delve into the forums and posts for help. I have an idea that I wanted to be sure was sound before I actually proceed.

I currently contribute 15% of my pre-tax income to my employer's 401k plan. Usually each month, I end up with $300-$1000 that I dump into a savings account at a local bank (paltry 0.15% interest rate) that serves as my quick-access emergency fund. Well, the emergency fund has grown a bit over the past year and now contains about $5000 more that I want to have sitting in there at such a low rate. I have no debt or loans that need repayment.

In a previous year, I took that extra $5000 and dumped it into a CD because it had a higher rate of 1.24% but that is still pretty crappy.

Because of the fluctuations each month, I don't think it's feasible to permanently set my 401k contribution percentage higher, but I was thinking about doing the following:
1. Set 401k contribution much higher (e.g. 50% -- EDIT: Found out my employer allows 90% max so I will set contribution to 90%)
2. Use the $5000 surplus from my savings to cover the loss of take-home pay.
3. Once the $5000 is gone, set my contribution rate back to 15%
4. Perhaps rinse and repeat this process periodically

This seems to me a logical way to essentially transfer that $5000 into my 401k.

Does this make sense? Anything I'm not thinking through properly?

Thank you in advance!
« Last Edit: November 18, 2016, 09:11:01 AM by Pug Lover »

Gin1984

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Re: Dump more into 401k by living off savings for a bit?
« Reply #1 on: November 17, 2016, 02:18:15 PM »
Why not set it to increase by the $300 as a standard?  The EF question is harder, because you need to take into account your spending amounts and how likely you are to lose your job and how easily you could find another.  For me, with a child, $5000 with two incomes would be fine, but on one, I'd be too nervous.

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myrrh

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Re: Dump more into 401k by living off savings for a bit?
« Reply #2 on: November 17, 2016, 02:24:04 PM »
If you are worried about not having access till age 59.5 or would like a "second tier" e-fund, why not dump it in a Roth IRA? Contributions can be taken out tax free if it's ever needed, otherwise it can grow tax free forever more. But if  you are comfortable with the 5k efund, go for it. I'm doing something similar as I think my e-fund is too big as well.

Pug Lover

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Re: Dump more into 401k by living off savings for a bit?
« Reply #3 on: November 17, 2016, 02:26:52 PM »
Thank you myrrh. I'm sorry that I didn't mention, I already have a personal Roth IRA that I max out every year.

Slee_stack

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Re: Dump more into 401k by living off savings for a bit?
« Reply #4 on: November 17, 2016, 02:31:50 PM »
Minimize the Emergency Fund.  The tiniest amount you are comfortable with is the right choice.  I personally stick to a $1k - $2k max EF balance.  Every dollar above that gets moved out and invested inside the week.

If you have a CC, chances are you can use that in most emergencies.  It is very rare to need cash instantly. 

If for some odd reason I needed $10k RIGHT NOW, I'd charge it and pay the bill off selling aftertax mutual funds inside 72 hours.

Pug Lover

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Re: Dump more into 401k by living off savings for a bit?
« Reply #5 on: November 17, 2016, 02:33:02 PM »
Thank you, Gin1984. I'm sorry if I wasn't clear but the $5000 is basically surplus. I already have an adequate amount in my EF (It's just me and my pug, no kids or mortgage or anything).

Gin1984

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Re: Dump more into 401k by living off savings for a bit?
« Reply #6 on: November 17, 2016, 02:35:26 PM »
Thank you, Gin1984. I'm sorry if I wasn't clear but the $5000 is basically surplus. I already have an adequate amount in my EF (It's just me and my pug, no kids or mortgage or anything).
Then I stand by what I said.  Up by the minimum of $300, but yes if you can max it out and live on excess, why not?  Well unless you drop down low enough that you lose the tax savings.

Easye418

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Re: Dump more into 401k by living off savings for a bit?
« Reply #7 on: November 17, 2016, 02:42:03 PM »
Minimize the Emergency Fund.  The tiniest amount you are comfortable with is the right choice.  I personally stick to a $1k - $2k max EF balance.  Every dollar above that gets moved out and invested inside the week.

If you have a CC, chances are you can use that in most emergencies.  It is very rare to need cash instantly. 

If for some odd reason I needed $10k RIGHT NOW, I'd charge it and pay the bill off selling aftertax mutual funds inside 72 hours.

Isn't this anti MMM?  I don't necessarily think it's wrong.

I keep $15k liquid.

mskyle

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Re: Dump more into 401k by living off savings for a bit?
« Reply #8 on: November 17, 2016, 02:45:17 PM »
I feel like I'm missing something... why do you need to live off the savings? Is it that your income/expenses fluctuate a lot monthly? If so, I wouldn't consider it so much "living off savings" as just "keeping a bigger float in my checking account." Couldn't you just increase your 401k contribution to something that's sustainable for you long-term?

newstache

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Re: Dump more into 401k by living off savings for a bit?
« Reply #9 on: November 17, 2016, 02:57:04 PM »
I get what you are saying.
And it would be a good idea to bump up your 401k contributions to get the most advantage out of the rest of the year I would suggest just putting it all in ... 100% for 2-4 checks depending on what you make and just use the extra 5K from your surplus emg fund. until its gone then set back to 15%.
Make sure you know what the time delay on adjustments to 401K are. might not take affect right away and could last a check longer then wanted...
Good luck.

robartsd

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Re: Dump more into 401k by living off savings for a bit?
« Reply #10 on: November 17, 2016, 03:18:26 PM »
Minimize the Emergency Fund.  The tiniest amount you are comfortable with is the right choice.  I personally stick to a $1k - $2k max EF balance.  Every dollar above that gets moved out and invested inside the week.

If you have a CC, chances are you can use that in most emergencies.  It is very rare to need cash instantly. 

If for some odd reason I needed $10k RIGHT NOW, I'd charge it and pay the bill off selling aftertax mutual funds inside 72 hours.

Isn't this anti MMM?  I don't necessarily think it's wrong.

I keep $15k liquid.
NO, MMM advocates springy debt instead of a cash emergency fund.

Catbert

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Re: Dump more into 401k by living off savings for a bit?
« Reply #11 on: November 17, 2016, 05:15:39 PM »
I like your plan with one tweak.  Try to get as much as possible done in 2016 to try and max 401k.  More than 50%if necessary.  Just be sure to leave enough in your check for health benefits, etc.

I'm sure your % is all done on line so you're not annoying payroll with frequent changes.

Dicey

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Re: Dump more into 401k by living off savings for a bit?
« Reply #12 on: November 17, 2016, 06:36:14 PM »
I've done this before with good results. Watch your taxes, too. If you have had as much withheld as you owed last year, you can change your tax status to "Exempt" for the rest of the year, which will improve your take-home pay. It's perfectly legal, but your HR may not know about it. Also, made sure they adjust state as well as fed, since you don't have too many pay periods left in 2016. If your company lets you make these changes on line (both withholdings and 401k) CALL to confirm your changes.

My former StupidCorp said it couldn't be done, then changed fed but not state withholdings, then the administrator didn't make my increased deposits because they were sure it was a mistake. Yeah, sure. Did anyone call me???

My CPA helped me create a boilerplate letter that I simply changed the date and re-submitted every year when I was ready to shut off the tax withholdings faucet. I still managed to get a refund every year, but since I have an EF, getting a smallish tax bill was never a big concern.

Every time I spoke with HR, I got an "Oh, it's you vibe". I guess I got the last laugh when I retired.

ETA: Totally forgot this: StupidCorp had some obscure provision that did not allow catch-up or leveling matching. They matched up to 6% per pay period, not per year, so big dumps did not get fully matched. It was still worth it to me.
« Last Edit: November 17, 2016, 06:43:10 PM by Diane C »

With This Herring

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Re: Dump more into 401k by living off savings for a bit?
« Reply #13 on: November 17, 2016, 08:19:11 PM »
*snip*
My former StupidCorp said it couldn't be done, then changed fed but not state withholdings, then the administrator didn't make my increased deposits because they were sure it was a mistake. Yeah, sure. Did anyone call me???
*snip*

Wait, so they took the money from your paycheck and then just held onto it?  Am I reading that correctly?  How long was this delay?  That is so illegal...

Dicey

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Re: Dump more into 401k by living off savings for a bit?
« Reply #14 on: November 18, 2016, 03:19:40 AM »
*snip*
My former StupidCorp said it couldn't be done, then changed fed but not state withholdings, then the administrator didn't make my increased deposits because they were sure it was a mistake. Yeah, sure. Did anyone call me???
*snip*

Wait, so they took the money from your paycheck and then just held onto it?  Am I reading that correctly?  How long was this delay?  That is so illegal...
Hell no! They didn't follow my instructions to pull the money because they assumed I'd made a mistake. No follow up, just a normal paycheck and a whole pay period lost at a crucial time of year. Not sure how you came to that conclusion after reading my post, but sorry if I was unclear.

To clarify, I'm referring to two different processes: increasing contributions to the 401k via the plan administrator (Fidelity in this case) AND adjusting state and federal tax withholdings via HR. Two different, but complementary things. Hope that helps.

FiguringItOut

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Re: Dump more into 401k by living off savings for a bit?
« Reply #15 on: November 18, 2016, 08:37:29 AM »
To OP, I posted a somewhat similar thread recently about increasing deductions to max out 401k before year end.  It was very helpful.  Here it is if you want to take a look.
http://forum.mrmoneymustache.com/ask-a-mustachian/spending-cash-savings-in-order-to-max-out-401k-for-savings-and-tax-purposes/msg1279337/#msg1279337


Hell no! They didn't follow my instructions to pull the money because they assumed I'd made a mistake. No follow up, just a normal paycheck and a whole pay period lost at a crucial time of year. Not sure how you came to that conclusion after reading my post, but sorry if I was unclear.

To clarify, I'm referring to two different processes: increasing contributions to the 401k via the plan administrator (Fidelity in this case) AND adjusting state and federal tax withholdings via HR. Two different, but complementary things. Hope that helps.

Diane, I got screwed up in the same way.  I was eligible to enroll and start contributing to 401k at my new company effective 10/15 paycheck.  I gave my paperwork to HR (everything here is manual and on paper).  Then two fuck ups happened.  One, when HR emailed my paper election to 401k admin, the admin didn't bother to look through the entire form and did not see the last page with my selections of fund to invest my money in.  So admin did nothing and when I asked them why my 401k wasn't set up, they said that they can't set it up without my initial selection of fund.  And two, HR forgot to put my deduction through to ADP for payroll withholdings. 

I found out about this when I got my 10/15 paycheck and there was no 401k deduction on it.  As a result I had to increase my per paycheck contribution even further to get close to maxing out 401k by 12/31.    And then bug both HR person and fund admin person daily until they both confirmed and showed me paper/email trail of actually setting up my 401k and deduction.

I didn't even  bother adjusting taxes.  I can't imagine the mess that would've created.  It's close enough to year end that I'll get my refund soon enough and I'll adjusted W-4 in January for the entire 2017.



Pug Lover

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Re: Dump more into 401k by living off savings for a bit?
« Reply #16 on: November 18, 2016, 08:56:05 AM »
Thank you all so much for your insight and advice. This is such a helpful and smart group of folks.

Just for clarification - I am paid hourly, and some months I can get overtime, so my income each month does fluctuate significantly enough to make it hard for me to commit to a higher 401k contribution percentage permanently (as some have suggested). However I will probably try going a bit higher than 15% once I go through with my plan. My employer allows a max 401k contribution of 90% so I just made the change today! Hoping all goes as planned!

There were some good points made about keeping the (low/no interest) liquid emergency fund from growing too big since those dollars aren't doing any work (as MMM says). But of course the dollar amount required for a comfortable emergency fund will certainly vary from person to person depending on their needs. I also consider my contributions to my separate Roth IRA as a second-tier emergency fund as I understand the contributions can be withdrawn at any time without penalty (learned that from MMM!). I wish I had learned that tip about 10 years ago when I opened the Roth IRA and neglected to max the contributions every year.

As some have helpfully pointed out, I did find out there is some delay as to when I change my contribution percentage and when it actually takes effect. I had incorrectly assumed that as long as I made the change before the pay period ended it would take effect on that period's check. It sounds like there may be a 1-2 pay period delay between when the contribution percentage is changed and when it takes effect. I guess that might make it difficult to get all this done before the end of year then. Worth checking this out if anyone is planning to do something similar.

Anyway, my new goal will be to max out my yearly 401k contributions. I don't make very much money compared to most of the folks I see in the forums, so 15% of it doesn't amount to that much - not nearly the $18,000 yearly max. I'm going to see how close I get to that max in 2017! :)

A final thought -- After hearing all your feedback, it sounds like doing the same thing with that money I have socked away in a CD (1.24 % interest) would be a good candidate for doing this same thing with. I want those dollars working, not sitting idle in a low-interest CD.

Thank you again for all your help and advice - I appreciate every suggestion and word of advice!

Dezrah

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Re: Dump more into 401k by living off savings for a bit?
« Reply #17 on: November 18, 2016, 09:57:53 AM »
My story:

Became eligible for 401k in September 2015.  I set my deferrals to something like 78% to max it out in time.  We did have to pull from our cash pile to make it through a few months but it wasn't as scary as I thought it'd be.

At the time, Safe Harbor matches were supposed to be without limit (hence the reason I REALLY wanted to max out).  This was a new system however, so the automated portions of the match were cutting off at 6% salary.  Two paychecks went out this way before HR got it corrected, but it did mean I was technically short.

HR assured me they do annual back checks and makeup contributions to the plan so the money would be put in eventually.  It is now November 2016 and I just got that makeup payment deposited.  HR claims this is kosher because of how their fiscal quarters play out or something like that.  The amount won't vest for another 8 months anyway, so it's not really my money yet.

My point is there are a lot more moving parts going on than we realize.  If you don't understand something, just ask your in house experts.

Good luck, Pug Lover!


10dollarsatatime

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Re: Dump more into 401k by living off savings for a bit?
« Reply #18 on: November 19, 2016, 10:51:54 AM »
I'm doing this exact thing.  I sitting on way too much cash right now, so I upped my 457 contribution to 80% of my paycheck for the last three payperiods of the year.  I'll also max out my IRA, HSA, and have 2% going to my 401k for the match.

Planning on setting my 457 to max next year, meaning I'll only be bringing home about $1300/month from the real job.  Enough to cover mortgage, utilities, gas and insurance, and probably groceries.  Anything extra will have to come from one of my side hustles.  Shouldn't be a problem, since that's the reason I have so much cash lying around right now anyway. :)

FiguringItOut

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Re: Dump more into 401k by living off savings for a bit?
« Reply #19 on: November 19, 2016, 11:20:17 AM »
I'm doing this exact thing.  I sitting on way too much cash right now, so I upped my 457 contribution to 80% of my paycheck for the last three payperiods of the year.  I'll also max out my IRA, HSA, and have 2% going to my 401k for the match.

Planning on setting my 457 to max next year, meaning I'll only be bringing home about $1300/month from the real job.  Enough to cover mortgage, utilities, gas and insurance, and probably groceries.  Anything extra will have to come from one of my side hustles.  Shouldn't be a problem, since that's the reason I have so much cash lying around right now anyway. :)

I envy people that can live on $1300.  My rent alone is almost  twice that. Reality of HCOL city.   

Malum Prohibitum

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Re: Dump more into 401k by living off savings for a bit?
« Reply #20 on: November 19, 2016, 11:31:42 AM »
I envy people that can live on $1300.  My rent alone is almost  twice that. Reality of HCOL city.
  The cheapest health insurance premium available to me in 2017 is higher than that.  Since my income has been down, I will be buying one more cheaply with premium tax credits off the exchange, but it will be just my luck that the first year I do that my income will shoot up and I will have to pay it all back with penalties . . .

10dollarsatatime

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Re: Dump more into 401k by living off savings for a bit?
« Reply #21 on: November 19, 2016, 11:40:39 AM »
I'm doing this exact thing.  I sitting on way too much cash right now, so I upped my 457 contribution to 80% of my paycheck for the last three payperiods of the year.  I'll also max out my IRA, HSA, and have 2% going to my 401k for the match.

Planning on setting my 457 to max next year, meaning I'll only be bringing home about $1300/month from the real job.  Enough to cover mortgage, utilities, gas and insurance, and probably groceries.  Anything extra will have to come from one of my side hustles.  Shouldn't be a problem, since that's the reason I have so much cash lying around right now anyway. :)

I envy people that can live on $1300.  My rent alone is almost  twice that. Reality of HCOL city.

And on the reverse, it amazes me how high some people's expenses are on this forum.

But.  LCOL.  My mortgage costs me $650/month, plus the extra $100 I add, and that includes taxes and insurance.  Utilities around $150 on average, $75 or so for all vehicle expenses.  Work reimburses me for my cell phone.  Groceries vary a lot, because I don't track it well, but can be as low as $80 and as high as $200 if I was stocking up that month.  I have no other set expenses.

So I guess it's OK that I don't bring home more. But it still wows me when I see others' numbers.

Paul der Krake

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Re: Dump more into 401k by living off savings for a bit?
« Reply #22 on: November 19, 2016, 12:10:37 PM »
You are on the right track with your thinking.

It sounds like you have a modest income. You should entertain the thought of using all avenues to reduce your taxable income as much as possible, by maxing out your 401k (or coming as close to maxing it out as possible), and contributing to a Traditional IRA instead.

Malum Prohibitum

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Re: Dump more into 401k by living off savings for a bit?
« Reply #23 on: November 19, 2016, 12:51:18 PM »
I'm doing this exact thing.  I sitting on way too much cash right now, so I upped my 457 contribution to 80% of my paycheck for the last three payperiods of the year.  I'll also max out my IRA, HSA, and have 2% going to my 401k for the match.

Planning on setting my 457 to max next year, meaning I'll only be bringing home about $1300/month from the real job.  Enough to cover mortgage, utilities, gas and insurance, and probably groceries.  Anything extra will have to come from one of my side hustles.  Shouldn't be a problem, since that's the reason I have so much cash lying around right now anyway. :)

I envy people that can live on $1300.  My rent alone is almost  twice that. Reality of HCOL city.

And on the reverse, it amazes me how high some people's expenses are on this forum.

But.  LCOL.  My mortgage costs me $650/month, plus the extra $100 I add, and that includes taxes and insurance.  Utilities around $150 on average, $75 or so for all vehicle expenses.  Work reimburses me for my cell phone.  Groceries vary a lot, because I don't track it well, but can be as low as $80 and as high as $200 if I was stocking up that month.  I have no other set expenses.

So I guess it's OK that I don't bring home more. But it still wows me when I see others' numbers.

I just read your journal.  Your income would bankrupt me within a month, but you make headway.  You're pretty hardcore.

With This Herring

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Re: Dump more into 401k by living off savings for a bit?
« Reply #24 on: November 21, 2016, 02:20:12 PM »
*snip*
My former StupidCorp said it couldn't be done, then changed fed but not state withholdings, then the administrator didn't make my increased deposits because they were sure it was a mistake. Yeah, sure. Did anyone call me???
*snip*

Wait, so they took the money from your paycheck and then just held onto it?  Am I reading that correctly?  How long was this delay?  That is so illegal...
Hell no! They didn't follow my instructions to pull the money because they assumed I'd made a mistake. No follow up, just a normal paycheck and a whole pay period lost at a crucial time of year. Not sure how you came to that conclusion after reading my post, but sorry if I was unclear.

To clarify, I'm referring to two different processes: increasing contributions to the 401k via the plan administrator (Fidelity in this case) AND adjusting state and federal tax withholdings via HR. Two different, but complementary things. Hope that helps.

Whoops, my mistake!  That does help.