Author Topic: How best to create budget when maxing 401k/Roth IRA early?  (Read 5511 times)

ender

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How best to create budget when maxing 401k/Roth IRA early?
« on: December 24, 2013, 10:11:01 AM »
I am planning on increasing contributions and maxing out my 401k next year (woo!) as well as my Roth IRA.

In 2013, I basically have budgeted on a month/month basis and put percentages which hit my total yearly goals. But in 2014 I rather want to max both out as soon as possible (my company continues matches after I hit IRS limits, so I don't lose it). I can only put 401k contributions at 50% but have plenty of cash right now - I've been saving for a house downpayment and I am very unlikely to even consider buying in 2014. So I can use this as a "loan" to max the 401k earlier.

The problem is, this sort of destroys the concept of a monthly budget. I would be dipping into house savings for the initial Roth IRA $5,500 and my monthly take-home is going to be completely wacked for all of 2014 due to either 50% or 0% 401k contributions. The balance of leftover cash will go towards refilling my house downpayment fund either way. It just makes my budget impossible. I'll also have a fair bit of overtime pay for the next few months, too, so it's even more screwed up.

What do other people do in this situation? I'm thinking I might just make a monthly budget based exclusively on expenses (since that'll be about the same as this year) and not even care what my income vs expenses looks like and if I need to, "borrow" from my house savings account. But this just feels... super weird.

Rural

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Re: How best to create budget when maxing 401k/Roth IRA early?
« Reply #1 on: December 24, 2013, 10:19:46 AM »
It sounds to me like you're moving past the need for a budget.

jonchappelle

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Re: How best to create budget when maxing 401k/Roth IRA early?
« Reply #2 on: December 24, 2013, 01:31:16 PM »
I get your question for the IRA contribution. I keep a small cash buffer that grows by the end of the year, so it's easier to throw it all in at the beginning of the year and be done with it. It isn't enough impact on your portfolio to worry about spreading out over the year.

But I don't understand, why would you want to max your 401k at the beginning of the year? If you can manage to live off 50% of your income to max out your 401k early, why wouldn't you live like that for the whole year? Then it really doesn't matter if 25% goes to 401k and 25% goes to taxable accounts over 12 months.

Khan

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Re: How best to create budget when maxing 401k/Roth IRA early?
« Reply #3 on: December 24, 2013, 01:50:03 PM »
I get your question for the IRA contribution. I keep a small cash buffer that grows by the end of the year, so it's easier to throw it all in at the beginning of the year and be done with it. It isn't enough impact on your portfolio to worry about spreading out over the year.

But I don't understand, why would you want to max your 401k at the beginning of the year? If you can manage to live off 50% of your income to max out your 401k early, why wouldn't you live like that for the whole year? Then it really doesn't matter if 25% goes to 401k and 25% goes to taxable accounts over 12 months.

Because there's a sense of accomplishment in doing it. And then there's the sense of freedom as your personal income rockets from barely covering/not covering month to month, to SUPER SPEED MONEY FOUNTAIN.

I'd rather feel deprived in order to shoot money into the 401k, and then feel the money fountain, then live every month monotonously... look... I only received $xxx over spending.... oh look after a couple months, it's a couple thousand dollars... hurray...

Or SUPER SPEED MONEY FOUNTAIN YAHOO!

I plan on getting >70% into my 401k during a handful of months, and then only dock myself ~5-10% per paycheck instead of 25%. I'm not that worried about the loss of dollar cost averaging.

I totally understand where you're coming from Enderland. I did the same thing after I bought my house. I had several thousand dollars in cash in my bank account, an unknown amount of $$$ to spend on house stuff, so I decided I'd rather get a shot of adrenaline straight into the heart of my 401k then keep staring at that money which was already earmarked for -general housing- stuff.

chasesfish

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Re: How best to create budget when maxing 401k/Roth IRA early?
« Reply #4 on: December 24, 2013, 05:25:53 PM »
Enderland...

I believe you're overthinking this, its really not a big deal.  You should budget to what you plan on spending in a month, not necessarily what you earn.  I've budgeted a number less than I earn for years.  If you're pulling a little money from savings to supplement it, that's fine.

I max my retirement plans early most years and I'll pull from my brokerage account if I need to supplement anything in the early months.  My thought in doing this is I'd rather get as much in the retirement accts as soon as possible because those earnings are tax free whereas I pay taxes on dividends/interest from savings and a taxable account.  My pay is also lumpy, the chunk of compensation that's not my base salary comes in during Q1 each year.

ender

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Re: How best to create budget when maxing 401k/Roth IRA early?
« Reply #5 on: December 24, 2013, 08:59:44 PM »
Thanks for the comments everyone!

Quote
It sounds to me like you're moving past the need for a budget.

This is simultaneously terrifying and awesome to me.

totally understand where you're coming from Enderland. I did the same thing after I bought my house. I had several thousand dollars in cash in my bank account, an unknown amount of $$$ to spend on house stuff, so I decided I'd rather get a shot of adrenaline straight into the heart of my 401k then keep staring at that money which was already earmarked for -general housing- stuff.

Pretty much everything you said applies to me, lol. It would... feel badass to max my 401k out by the end of June.

But I don't understand, why would you want to max your 401k at the beginning of the year? If you can manage to live off 50% of your income to max out your 401k early, why wouldn't you live like that for the whole year? Then it really doesn't matter if 25% goes to 401k and 25% goes to taxable accounts over 12 months.

[This is why](http://www.bogleheads.org/wiki/Dollar_cost_averaging#Dollar_cost_averaging_versus_lump_sum). The expected value means it is statistically better to invest 401k money earlier if possible since the remainder of my savings will go to savings for a downpayment, an account I've got plenty of money to survive on in already (if my company let me, I have enough I could put my contribution at 100% until it's maxed out, but my limit is 50%).

If I didn't have significant cash reserves currently in purgatory before a home purchase it'd be a different situation I guess. But I can very easily take a "loan" on that cash to front load my 401k contributions.

Enderland...

I believe you're overthinking this, its really not a big deal.  You should budget to what you plan on spending in a month, not necessarily what you earn.  I've budgeted a number less than I earn for years.  If you're pulling a little money from savings to supplement it, that's fine.

Hmm. This seems... too obvious. I guess my main hesitation is wanting to be able to better plan and set goals for cash savings. Which is considerably easier if I know I will have $X/month for 12 months :) Maybe I'll just let it be a mystery?

chasesfish

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Re: How best to create budget when maxing 401k/Roth IRA early?
« Reply #6 on: December 25, 2013, 05:56:35 AM »

Hmm. This seems... too obvious. I guess my main hesitation is wanting to be able to better plan and set goals for cash savings. Which is considerably easier if I know I will have $X/month for 12 months :) Maybe I'll just let it be a mystery?

I am confident you are good at math and can watch your expenses.  Set a the budget, then at the beginning of the first couple months when your income won't match your budget, make a transfer into your checking account for the difference. 

You should also be happy that you have a sophisticated employer/plan administrator who matches even if you max your plan early.  I would go nuts if I didn't have that as well.

ender

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Re: How best to create budget when maxing 401k/Roth IRA early?
« Reply #7 on: December 25, 2013, 07:03:26 AM »
I am confident you are good at math and can watch your expenses.  Set a the budget, then at the beginning of the first couple months when your income won't match your budget, make a transfer into your checking account for the difference. 

You should also be happy that you have a sophisticated employer/plan administrator who matches even if you max your plan early.  I would go nuts if I didn't have that as well.

I might just do this. It'll be a bit harder to fully predict what my 2014 cash saving total will be since adjusting 401k contributions early in the year and will also have some overtime pay affecting things, but I guess I can just guesstimate based on this year's savings.

Yeah. It took some digging but my 401k payroll system definitely does that - I got a response back from some manager when I asked about it so hopefully he's not lying :)

jonchappelle

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Re: How best to create budget when maxing 401k/Roth IRA early?
« Reply #8 on: December 26, 2013, 08:57:57 AM »
[This is why](http://www.bogleheads.org/wiki/Dollar_cost_averaging#Dollar_cost_averaging_versus_lump_sum). The expected value means it is statistically better to invest 401k money earlier if possible since the remainder of my savings will go to savings for a downpayment, an account I've got plenty of money to survive on in already (if my company let me, I have enough I could put my contribution at 100% until it's maxed out, but my limit is 50%).

If I didn't have significant cash reserves currently in purgatory before a home purchase it'd be a different situation I guess. But I can very easily take a "loan" on that cash to front load my 401k contributions.

Yes, lump sum investing is better if you happen to find or inherit a large amount of money, but you are creating the lump sum.

I understand where you're at now. You saved cash for a down payment in 2013 and decided not to buy a house (losing potential income from interest). So, yes, the best option at this point in time is to invest that money as quickly as possible. Live off the cash and maximize 401k, makes sense.

But in 2014, you say you will rebuild your cash reserve after your 401k/IRA are maxed, losing potential interest again. Is this the best way to go about a down payment? Each year you postpone, you are losing interest on that cash... What about Roth principal withdrawals? yes there is some risk, but you can budget for a smaller cash reserve, diversifying down payment money. Lump sum 2013 and 2014 roth ira's, reduce your cash reserve by 11k, and use when the time is right. That is my current home down payment strategy. The risk is acceptable because I'm still unsure of when I want to buy a house. From what you wrote, you won't be buying a house in 2014, so you have the opportunity for a full year of investing that cash.

This is more big picture budget strategy rather than month-month budgeting. If you are set on keeping the whole down payment in cash, then reinvesting at the beginning of each year is probably the best way to do that until you make the purchase.






ender

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Re: How best to create budget when maxing 401k/Roth IRA early?
« Reply #9 on: December 30, 2013, 04:11:58 PM »
You know what?

After spending time reading these responses, I'm not sure I even want to buy a house in the next few years. Maybe I'll just put all the money I would save for it into a taxable account and worry about the question later...

rubybeth

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Re: How best to create budget when maxing 401k/Roth IRA early?
« Reply #10 on: December 31, 2013, 07:37:53 AM »
What do other people do in this situation? I'm thinking I might just make a monthly budget based exclusively on expenses (since that'll be about the same as this year) and not even care what my income vs expenses looks like and if I need to, "borrow" from my house savings account. But this just feels... super weird.

That's basically what I do, it's not exactly "budgeting" in the strictest sense, I guess, but it works for us. I basically put all of the monthly and yearly anticipated expenses into my spreadsheet and then figure out how much we can reasonably save each month, either pre-tax in our 401k-type funds or in our IRAs. Right before we file taxes, I'll probably max out our IRAs from our general savings, which sounds similar to your down payment fund. For us, it's not a down payment fund but we need to keep some cash pretty liquid to pay for grad school tuition costs for my DH each semester and we have a big trip planned in 2014, but it's the same idea.

BoulderTC

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Re: How best to create budget when maxing 401k/Roth IRA early?
« Reply #11 on: December 31, 2013, 01:37:21 PM »
I'm not sure if this answers the question, exactly, but I made a spreadsheet that basically tells me what to do and helps me visualize my contributions. I decide to invest 50% of my gross pay every paycheck, then I decide what I want to max out and when and make the spreadsheet tell me the rest. Note that I also am contributing $4495 to my IRA before April 15 to max out my 2013 contribution, then starting the $5500 for 2014 after that is maxed. Your own nuances and preferences could be built in just as easily. In short - I don't feel the need to "budget" because I am saving the exact same amount from every paycheck and the only thing that changes is where the money goes and my current elections. I just added calendar reminders on the day I need to change my elections. The spreadsheet is attached if you're interested.

By the way - maxing your 401k early is neat and all, but if you're missing out on a company match, I'd rather max all but the amount needed to match for the rest of the year so that you always get the match. Does your company do a match?