Archives For 401(k)

Okay, I know the NY Post is usually alarmist but I have heard about this idea before. The idea supposedly being kicked around is to limit the amount employees and employers can put towards the employee’s 401(k) to a maximum of $20,000 or 20% of income, whichever is smaller. The current amount is a maximum of $50,000. I hope this does not happen as it sounds like a dumb idea to me.


Shouldn’t we be ENCOURAGING people to save towards retirement? The new rule would affect my wife’s 401(k) drastically at a time when we really should be saving as much as we can.

It always makes me laugh when I hear “experts” talk about how much a certain action will bring in tax revenues. Things NEVER work the way politicians plan.

It’s not clear from the article what happens to the accounts at retirement as to whether or not the withdrawals would be taxed.


I just logged on to my wife’s 401(k) account. The balance is roughly $60,000 less than it was at the peak early this year (and this includes several thousand dollars of contributions). OUCH. Fidelity calculates a personal rate of return, which is the return adjusted for the timing of contributions. Our personal rate of return is -12.2%. If the trend continues through the 3rd quarter, it will mark the second year for a negative personal rate of return since 2005 (the first year we started getting personal rate of return information from Fidelity). Here is our allocation (aggressive) and history if you’re interested:

Bottom line: I’m not worried. We’re still in for the long haul.

Let’s say you make $75,000 per year and you are saving 10% in your 401(k). Now let’s say you get a 5% raise, which puts your new annual income at $78,750. Now, before you go make a budget based on your new income, I want you consider increasing your 401(k) contribution percentage by 1% to 11%. To see why, take a look at the graphic below, which shows three scenarios. The first column is the current income of $75,000 and a 10% contribution to the 401(k). The next two columns are at the new pay level. The second column shows what happens if the 401(k) contribution stays at 10% and the third column shows what happens if you raise it to 11%.

By raising the contribution percentage to 11%, you’ll accomplish:

1. Raising your contributions by $1,163 per year instead of just $375.

2. Your Federal income tax* will only go up $388 instead of $506.

3. You’ll still have a net income increase (after taxes AND 401(k) contributions of $2,200 over your previous income.

It’s amazing what a difference 1% makes. Sure, you could keep your contributions at the 10% level and still increase the dollar value of your contributions by $375 per year. But, by increasing the percentage amount by 1%, you’re taking advantage of the raise and bringing down your income tax liability and STILL bringing home close to $200 more per month. It’s a win-win situation.

That said, it’s VERY IMPORTANT that you make the changes to your 401(k) as soon as you find our about your raise. Otherwise, you run the risk of getting too comfortable (or dependent) with your new income and then it will be that much harder to increase your contribution percentage. That additional contribution amount could mean an additional $57,000 to your retirement plan in 25 years (assuming an 8% rate of return and not assuming future contribution increases).

This is how we build wealth.

* Based on 2010’s income tax brackets, standard deduction, exemptions, and the child tax credit (assuming a family of four).

Yesterday’s Wall Street Journal had a special retirement planning section. One of the articles was about using annuities during retirement to boost income and decrease volatility. One of the stable annuities for doing that is a fixed immediate annuity. I don’t have a problem with fixed immediate annuities because they are usually inexpensive, easy to understand and can offer retirees income stability while their other assets are invested more aggressively.

The article also mentions adding a variable annuity to the retirement income mix, adding a rider (for an additional .5% to 1% a year) that gives the annuity holder a set percentage of the original investment, and investing the subaccounts as aggressively as possible since the retiree has the rider. No where does the article is mention surrender periods. I’m skeptical of this idea.

Anyway, the article ends with this paragraph:

Variable annuities are beginning to make an appearance in some 401(k) plans, and Great-West says it has gotten a lot of interest in its 401(k) annuity offering, launched last year.

Great-West is an insurance company. I remember reading not too long ago that people were confused by their 401(k) plans because they offered too many choices. I can’t imagine that offering them a variable annuity is going to make the choices any easier. I also don’t like the fact that Great-West is most likely making a lot more money off the variable annuity than they are the other investment choices. Looks like it could be a conflict of interest.

Thoughts? Do you like variable annuities inside a 401(k)?

NOTE: As is typical whenever I post anything that is skeptical of variable annuities, I’m sure this post will draw the ire of insurance salesmen. I don’t have a problem with you leaving comments that are beneficial. That said, let’s keep it on the mature level.

$8.25 per hour…

That’s the number I get when I divide $16,500 (the 2011 maximum allowable employee 401(K) contribution) by 2000 hours (40-hour work week, 50 weeks per year).

It seems like a lot. Granted, it does not include the tax savings on contribution. The actual dollar amount would be lower after taxes. Still, the amount is pretty high. That’s why this information should be provided to high school and college students. They need to see this information when deciding what career path to take.

These numbers also do not include the company match, which I think you should look at as icing on the cake and shouldn’t be considered in figuring your contributions.

Next, I’ll look at how much the maximum contribution could grow to over a career. Interesting stuff.

As I was going over our finances at the end of 2010, I decided to increase our contributions to my wife’s 401(K) by two percentage points. We are now at 10%. We had done the maximum for a couple of years when she first started working but had to back off quite a bit after we had our second child and we bought a house. Now that our finances are starting to get provide for more than just the basics, we are working on increasing our savings. Our 10% combined with a company match of 4.75% (plus profit sharing and a contribution to an annuity), we are putting back a decent amount. I understand that a lot of companies don’t match so I feel very fortunate.

What about you? Did you increase your contribution percentage this year or are you already maxed out?

Cruising the ‘net this AM, I came across this article on Yahoo!: Annuities May Be Coming to 401(k)s.

It wasn’t too long ago that I read that most 401(k) plans were too complex and offered too many choices for employees, which made the decision-making process too difficult. So now they want to add annuities to the mix. Folks, you cannot find a more complex and difficult-to-understand product than annuities.

“One of the benefits of offering affordable, easy-to-understand annuities within a retirement plan is that it ensures plan participants receive a constant reminder that they are saving not just to accumulate wealth, but also to help workers approach retirement with peace of mind, knowing they will have income to last a lifetime,” Paul Van Heest, senior vice president, retirement plans of TIAA-CREF, said in his testimony.

What else would we expect to hear from Mr. Van Heest? His company stands to make a bundle if the rules are changed. What’s worse, is that Mr. Van Heest wants to make annuties the DEFAULT CHOICE for employees. I would also like to know Mr. Van Heest’s definitions of “affordable” and “easy-to-understand.” What kinds of annuities are we talking about? Fixed income annuities? Variable annuities?

I’m skeptical of this idea. But, then again, I’m ALWAYS skeptical of any change.