Author Topic: Keep Contributing to 401k for match?  (Read 6414 times)

bevathome

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Keep Contributing to 401k for match?
« on: May 03, 2013, 12:56:23 PM »
If you are debt-free (except for a low-rate mortgage), when does it make sense to stop contributing to a 401k when you are getting a company match?

My family's situation is very similar to the case study in the link below, except we have somewhat higher income and expenses.
http://www.mrmoneymustache.com/2011/05/16/mmm-reader-case-study-the-man-who-didnt-realize-he-was-already-rich/

MMM tells the reader to stop contributing to his retirement accounts.

My husband gets a 4% match if he contributes 5% to his 401k.  Does it make sense to give this up if we already have enough in retirement accounts (assuming 7% growth) for age 60 on?  What do we need to consider?  Thanks!
« Last Edit: May 03, 2013, 01:05:32 PM by bevathome »

Dynasty

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Re: Keep Contributing to 401k for match?
« Reply #1 on: May 03, 2013, 01:06:27 PM »
Assuming 7% growth is pretty optimistic to put it nicely.

It may happen, it may not. Past performance does not guarantee future results.  Since I started investing in 1998, I recently calculated between 1998 and April of 2013 my  portfolio has given real returns of right around 2% once inflation was subtracted.

Why would you want to throw away a guaranteed employer match, plus the tax benefits?

EDIT: I only calculated my Roth IRA. It is a low cost Vanguard fund that has beat the S&P 500 index during this time period.
« Last Edit: May 03, 2013, 01:19:46 PM by Dynasty »

bevathome

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Re: Keep Contributing to 401k for match?
« Reply #2 on: May 03, 2013, 01:24:53 PM »
Thanks for the reply, Dynasty.

Let's just assume we have enough for retirement from 60 on (including inflation and taxes).  Similar to the case study, we have 375k in retirement accounts and my husband is 38.

Is continuing to contribute to the 401k (for the tax benefits and the match) affecting the time to FI?  Would the money be better (for accessibility) in a taxable account or paying off our mortgage (as recommended by MMM in the case study)?  FYI - we owe 175k on a recently refinanced 15-year mortgage at 2.5%.

unpolloloco

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Re: Keep Contributing to 401k for match?
« Reply #3 on: May 03, 2013, 01:46:56 PM »
Don't stop contributing!  72(t) distributions mean you can access 401k money before retirement (penalty free!), so do some research on the rules and run the math with accessing 401k money when you retire instead of at typical retirement age.

Dynasty

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Re: Keep Contributing to 401k for match?
« Reply #4 on: May 03, 2013, 01:47:52 PM »
I'm having a hard time assuming 375K compounded at an unknown interest rate between now and the next 22 years is going to be enough.

If we use 3% real return after inflation, that is around 725K in 2013 dollars. 7% is 1.7M. 

You asked, "Is continuing to contribute to the 401k (for the tax benefits and the match) affecting the time to FI? "

Yes.

Any money you have socked aside is going to lower your time to FI. Why not match dollar for dollar up to 4% of your husbands base pay if he contributes 5%?  If your husband is paid 100K, takes 5k and puts in his 401K, and the employer gives an additional 4k that is an immediate 80% return on investment. Plus, an immediate savings of whatever your tax rate is on the 5K.  If you were in the 28% tax bracket, that is $1400.  I'd have a hard time turning down taking 5K of my money, and turning into $10,400.

Paying extra on your mortgage is not going to equal those returns in the paragraph above.  However, paying your mortgage off early in addition to the 401K contribution is a good idea.

What I would do is contribute the min to the 401K to get a full match, fully fund a Roth IRA, then split the difference between remaining funds to pay off the mortgage early, and investing into a taxable account.  As well as having more money set aside somewhere for when your house needs a new roof in 15 years, or any other unknown event that is going to require lots of money to remedy.

« Last Edit: May 03, 2013, 01:51:28 PM by Dynasty »

Jamesqf

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Re: Keep Contributing to 401k for match?
« Reply #5 on: May 03, 2013, 02:16:22 PM »
I'm having a hard time assuming 375K compounded at an unknown interest rate between now and the next 22 years is going to be enough.

I suppose it depends on your definition of "enough".  Bump it up to an even $400K, that's $16K/yr at a 4% SWR, no?  Assuming that in the time before retirement reaching the age where they can normally make withdrawals from a 401k they have paid off their mortgage & all other debts, how is that not enough to live on?  I don't spend a whole lot more myself, including ~$1000/month mortgage.

But I do say they should keep contributing to the 401k.  Including tax benefits & company match, it's about doubling their money...

bevathome

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Re: Keep Contributing to 401k for match?
« Reply #6 on: May 03, 2013, 02:28:47 PM »
Okay, Dynasty.  I get your point.  Your suggested plan is very similar to what we have been doing, plus we have been contributing to 529 plans for our children.  I've had the same opinion that not taking the match is throwing away money, even if you don't technically need it.

I guess I'm a little confused why MMM would tell Sam in the case study to stop contributing to retirement accounts.

I'll also look into 72(t) distributions.

Joet

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Re: Keep Contributing to 401k for match?
« Reply #7 on: May 03, 2013, 02:33:07 PM »
Plus you could convert some of the excess (should there be any) 401k to a Roth, in a low income year. Free money is free money
Even if you were to pay the 10% penalty and income taxes on it  to withdraw it completely you'd still come out well ahead
« Last Edit: May 03, 2013, 02:38:30 PM by Joet »

Dynasty

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Re: Keep Contributing to 401k for match?
« Reply #8 on: May 03, 2013, 02:40:34 PM »
I'm having a hard time assuming 375K compounded at an unknown interest rate between now and the next 22 years is going to be enough.

I suppose it depends on your definition of "enough".  Bump it up to an even $400K, that's $16K/yr at a 4% SWR, no?  Assuming that in the time before retirement reaching the age where they can normally make withdrawals from a 401k they have paid off their mortgage & all other debts, how is that not enough to live on?  I don't spend a whole lot more myself, including ~$1000/month mortgage.

But I do say they should keep contributing to the 401k.  Including tax benefits & company match, it's about doubling their money...

Not enough for me.

Even when a 1000 dollar a month mortgage is paid off, you still have property tax, insurance, and utilities, and home maintenance.  And car insurance, and gas, and car maintenance/repair.

My mortgage is 1009/month. If that were paid off, I'd still be laying out over 400 dollars a month for property tax, insurance, and utilities. And variable amounts for maintenance/renovation. Some months zero, some months hundreds or thousands. Such as last summer when I re did the back porch, and a new back door. Or tomorrow when I'm getting a bunch of topsoil delivered..

Subtracting the basic fixed house overhead costs of 400 a month from that from 16k a year would leave me 1K a month. That's a pretty thin margin to be relying on. Such as if I needed a new roof on the house, or a new sewer line, or any number of calamities that could potentially happen. Can you prepare for them all? No.



bevathome

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Re: Keep Contributing to 401k for match?
« Reply #9 on: May 03, 2013, 02:48:21 PM »
I agree that 375k or even 400k is not enough for us now or even at age 60, but we're expecting it to grow to over 1M by then.  We'll definitely continue to save.  Just trying to decide if the 401k up to the match is the first place to put savings if we would need the money in about 10 years when we are predicting FI.  From the opinions so far, it sounds like a definite yes!

Dynasty

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Re: Keep Contributing to 401k for match?
« Reply #10 on: May 03, 2013, 02:56:00 PM »
1.25M for me at a 2 or 2.5% withdrawal rate.


twinge

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Re: Keep Contributing to 401k for match?
« Reply #11 on: May 03, 2013, 03:18:49 PM »
+1 for contributing up to the 401k match.  The tax advantage + company match are hard to beat and there are ways around the early withdrawal if you end up needing it.

After that point I'd probably go with the Roth IRA (if you qualify, that would mean 11K/yr) rather than a taxable account or paying off a low interest mortgage since you can take out contributions at any time and there's lots of loopholes for accessing gains without penalty too.  Personally I would drag out paying off your mortgage at such a low rate and invest the remaining additional savings in a taxable account (or in a rental property or other investment you think fits).


foobar

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Re: Keep Contributing to 401k for match?
« Reply #12 on: May 03, 2013, 03:24:21 PM »
 It is poor advice. I am guessing MMM doesn't know about SEPPs which allow access to the money before 59.5 so there is no reason not to accumulate the money in place where you can save an extra 15%+ per year and not have to pay taxes on dividends. If the guy in the article stops his 401(k)/IRA contributions, he will not have 28k to save. He will have 20k(rough guess) after paying the taxes. You want some non retirement funds for emergencies but that guys 80k should be more than enough with some more savings over the next 5 years. Paying of your mortgage early is a poor financial move with the current interest rates. It might help you sleep better at night though. I always find it funny though that people who push moderately aggressive stock returns don't have the faith in their convictions to load up on the cheap mortgages currently being offered.


You can debate how much you want in savings to retire. The guy is likely to pick up some type of health care cost (I am expecting Obamacare to eventually have assets tests. It isn't going to go over well when multimillionaires start collecting subsidies). Or maybe he hasn't factored in need to replace his car in 10 year into that budget. But he can probably also downsize his house when the kid leaves (or do a reverse mortgage) And obviously SS and medicare kick in at some point. In theory this guy would be fine with about 500-600k. However if he would have retired in 2007,he would have been in a world of hurt. On the other hand he would have retired in2009, life would have been grand.  I would tack on another 4 years of living expenses so you don't have to sell low for 700k in todays dollars.  If you can offset that risk by going back to work you can be more aggressive. However if you go from a 35/hr job to a 15/hr job, you have to work a lot more hours to make money.

If you are debt-free (except for a low-rate mortgage), when does it make sense to stop contributing to a 401k when you are getting a company match?

My family's situation is very similar to the case study in the link below, except we have somewhat higher income and expenses.
http://www.mrmoneymustache.com/2011/05/16/mmm-reader-case-study-the-man-who-didnt-realize-he-was-already-rich/

MMM tells the reader to stop contributing to his retirement accounts.

My husband gets a 4% match if he contributes 5% to his 401k.  Does it make sense to give this up if we already have enough in retirement accounts (assuming 7% growth) for age 60 on?  What do we need to consider?  Thanks!