Author Topic: I Got a Raise - Now What Do I Do With It?  (Read 1639 times)

E in DC

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I Got a Raise - Now What Do I Do With It?
« on: April 04, 2017, 09:49:18 AM »
Hello Out There-

I was lucky enough to have just received a raise (8%), and since my needs were more than accounted for pre-raise, I'm thinking I should just funnel it all to my investments - in this case, my 401K, until that bucket is filled.  My question is, should I just up the allocation with my 401K provider by an even 8%?  It's currently at 27%, so it would be getting bumped to 35%.  I'm so deep in the numbers right now, I feel like I need a second opinion.  The math seems ok, but I want to make sure I'm not missing something wonky (i.e. 8% should really only be 6& because of taxes, or something along those lines). 


Thanks in advance for any help!

-E in DC 

TheAnonOne

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Re: I Got a Raise - Now What Do I Do With It?
« Reply #1 on: April 04, 2017, 09:56:06 AM »
Putting it in your 401k avoids the taxes.

Find the investment order sheet floating around here/Bogleheads

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RichMoose

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Re: I Got a Raise - Now What Do I Do With It?
« Reply #2 on: April 04, 2017, 10:10:39 AM »
Assuming you want to keep your net paycheque the same as before your raise, you will need to increase your 401k contribution by more than 8%. This is because the contribution is always less than your full salary, but your wage increase was based on your salary.

For example:

You earn $80,000 a year. +8% wage bump gets you to $86,400 - a wage bump of $6,400. Your 401k contribution at 27% was $21,600. Add 8% gets you to $23,328 - a bump of just $1,728. As a result, your paycheque would be much higher.

You don't get taxed on 401k/Traditional IRA/HSA contributions, so taxes are not an issue here. To get a close number for your new 401k contribution, just add the expected wage bump to your existing 401k contributions, then divide by your original 401k and deduct 1. That's roughly how much you can increase the percentage.

(Wage Increase + Existing 401k contribution)/Existing 401k contribution - 1 = Percentage point increase of 401k.
($6,400 + $21,600)/$21,600 = 1.296 - 1 = 0.296. You can increase your 401k contribution by 29% of your current contribution in this case and your net paycheque will be the same.

DavidAnnArbor

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Re: I Got a Raise - Now What Do I Do With It?
« Reply #3 on: April 04, 2017, 10:46:26 AM »
I think it depends on what the % is in reference to. If 27% is in reference to gross pay, then 35% would make sense.

You should also check to make sure you aren't bumping up against your 401K employEE contribution limit of 18K if you're under 50 years old.

If you want to share what index fund options are in your 401K plan and the expense ratios of these funds, then we can give you some suggestions for that.

Car Jack

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Re: I Got a Raise - Now What Do I Do With It?
« Reply #4 on: April 04, 2017, 11:07:57 AM »
If you have the space in your 401k, then by all means.  I tend to start the year dividing the max ($24k for me) by 26 pay periods and that's the number I need.  I'll then fumble around figuring out what that is in percentage and there it is.

If you can contribute or contribute more to Roth, I'd consider that before the 401k, myself. 

E in DC

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Re: I Got a Raise - Now What Do I Do With It?
« Reply #5 on: April 04, 2017, 02:01:53 PM »
Thanks for the great feedback everyone!

My current 27% contribution is in reference to my gross salary, so I'll most likely just bump it up to 35%.  I'm a contractor, so averaging out how much I should contribute per paycheck can be tricky.  I'm currently just filling each bucket (401K, Trad IRA, taxable investments) as quickly as I can, in that order.  I plan to manually adjust my paycheck contribution as I approach the $18K limit, and set something up to contribute to the Traditional IRA (my wife and I are past the threshold for a Roth) as well. 

My 401K is currently invested in a fund that's set up to rebalance/reallocate based on me retiring at 65 (I'm 40, so in about 25 yrs).  I plan to retire much sooner than that, so I'll probably need to make some adjustments there.  I'll certainly take any suggestions on what to invest my 401K in with a 10-15 yr retirement horizon in mind.  If it's relevant (and I can pull it off) I'll probably utilize Roth IRA ladder to get access to my retirement funds that much sooner.  I definitely need to do some more research there.


DavidAnnArbor

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Re: I Got a Raise - Now What Do I Do With It?
« Reply #6 on: April 04, 2017, 03:37:02 PM »
Also do you have access to putting money in a Health Savings Account?  Are you in a high deductible health insurance plan that is compatible with a Health Savings Account (HSA) ?

talltexan

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Re: I Got a Raise - Now What Do I Do With It?
« Reply #7 on: April 06, 2017, 09:32:42 AM »
35% is not strange in this community, but I imagine there are family members who must think you're starving.

Props to you for banking this increase! I wouldn't face punch you even if you said something like "I'm getting an 8% raise and upping my retirement contributions by 6-percentage points".

Gin1984

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Re: I Got a Raise - Now What Do I Do With It?
« Reply #8 on: April 06, 2017, 09:35:21 AM »
Thanks for the great feedback everyone!

My current 27% contribution is in reference to my gross salary, so I'll most likely just bump it up to 35%.  I'm a contractor, so averaging out how much I should contribute per paycheck can be tricky.  I'm currently just filling each bucket (401K, Trad IRA, taxable investments) as quickly as I can, in that order.  I plan to manually adjust my paycheck contribution as I approach the $18K limit, and set something up to contribute to the Traditional IRA (my wife and I are past the threshold for a Roth) as well. 

My 401K is currently invested in a fund that's set up to rebalance/reallocate based on me retiring at 65 (I'm 40, so in about 25 yrs).  I plan to retire much sooner than that, so I'll probably need to make some adjustments there.  I'll certainly take any suggestions on what to invest my 401K in with a 10-15 yr retirement horizon in mind.  If it's relevant (and I can pull it off) I'll probably utilize Roth IRA ladder to get access to my retirement funds that much sooner.  I definitely need to do some more research there.
If you are over the amount to use a Roth IRA, you are above the amount for traditional as well, unless you are doing a backdoor Roth?

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JohnJohnson

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Re: I Got a Raise - Now What Do I Do With It?
« Reply #9 on: April 06, 2017, 12:21:16 PM »
The easiest answer is yes, increase your 401k contribution.  The how much is the tougher answer. Id say put the maximum amount you can with your bonus.