Letting go & maximizing the 401k

[WillPen]

I started following this blog shortly before I got married, about a year and a half ago. Luckily my wife is very frugal as well, so we've been able to cut no-nonsense costs and make smarter decisions with how we spend our money. As a result, we can save about 40% of our take home pay without having an impact on our quality of life. That extra money saved (and accessible) is a very reassuring thing to me. I love knowing that we can handle whatever the future throws at us, both planned and unplanned.

Recently I've been really struggling with the notion of changing my payroll deductions to maximize my 401k contributions. Right now I put 11% of my pretax money to the traditional 401k, and 8% of my after tax pay to my company's ESPP. My company has a 401k Roth option that I really need to take advantage of. If switch that money from the ESPP to the Roth and bump up my contributions by a few percentage points I will be able to max out the company retirement account.

I think this afternoon I realized being Mustachian to put some extra dollars in your account is one thing.. That's easy -- If you want to splurge then you have a big cushion to work with. It's another to do something like maxing out the 401k which might actually force me to be a little more deliberate with my lifestyle at times.

I'm going to try to jump in and do it. We don't have kids, we have an emergency fund built up, and extra cash that is accessible in the market. If something happens I can always bump it back down.

Has anyone else out there decided to take the plunge and maximize the old 401k even if it means having a smaller margin of safety for the unknown? If so, what have your experiences been like?

[sly]

remember that the 401k isn't really that illiquid anyway. In emergency you could liquidate it, it's just very inefficient taxwise.

The only reason not to max out your 401k is if you don't plan on living past 60, or if you already have a big enough 401k balance to last 40 years+ (covering the 60-100 years old period of your life)

[frugalecon]

I am turning 50 next year and will need to decide whether to do my "catch up" contributions. As long as you have sufficient emergency reserves, it seems like a no-brainer. But my marginal tax rate is 36.5%, due to high state taxes. I hope to move to a lower tax jurisdiction in retirement.

I am curious about the ESPP. I have never thought they were a good idea, because they concentrate part of your investment risk with your paycheck risk. Are the terms favorable?

[teen persuasion]

I convinced DH to bump up his 401k contributions in stages, usually tied to lowered expenses.  He had been contributing only 5% (to get the match).  When they did away with the match, he wanted to stop contributing, but I had him switch his health insurance option to a cheaper one, and double the 401k to 10%.  Very little change in net pay.  When we paid off the mortgage, doubled 401k again to 20%.  I began working part-time, doubled again to 40%.  Lowering our AGI so much meant that our tax refunds increased (refundable credits), so we put that money towards Roths.  Pay raises and more hours for me, increased 401k to hit the max.

I'm a math nut, I like to figure out our taxes and such, so I would work it all out beforehand and know exactly how much it would affect his net paycheck.  Thus I knew whether we could swing it before I suggested it to DH.  I also like to try to squeak out just a little more, so I'd stretch just a bit more each time.  I knew that DH could always change his 401k deductions in a pinch, and we have a healthy EF to float us for a period.

[WillPen]

Frugalecon -- It's not bad. We can put 30% of our paycheck towards the plan. We buy at the end of each quarter and get a 15% discount on whatever the cost of the stock is that day. After that there is a 6 month holding period before we can sell.

I don't think I'd bother too much if all I could count on was the 15% discount (which gets taxed as ordinary income) and a stagnant stock price. It just so happens that my company is performing exceptionally well. I have some lots that have over 100% return.

[tyler1215]

Best advice I heard was increase your contributions by 1% every month until it hurts.

Seems logical and not like such a big shock to your lifestyle and budget.