Starting next month, I will be undergoing some structural changes to the method in which I am compensated at work. On the surface, it seems like it will be a good thing, but only time will tell whether or not that impression is correct. One of the major changes is the retirement package that is being offered.
Now Getting a Match
It turns out that I will now be getting a match from my employer. Previously, that wasn’t the case and anything that I put into my 401(k) came out of my own pre-tax earnings. I still contributed the maximum and have for the past decade, but now my savings will be growing faster.
I am sure that most of you know what a 401(k) is, but for those who don’t, let me take just a few minutes to go over some of the basics.
The 401(k) developed as an alternative retirement savings vehicle to the traditional defined pension plan offered by companies prior to the 1980’s. It gets its name from the section of IRS Code that defines this particular type of retirement plan. It is employer-related, as opposed to an IRA or a SIPP pension in the UK.
Each employee younger than 50 can contribute up to $16,500 into the account which is invested according to the employee’s wishes within the constructs of that particular plan. Most plans offer a mix of stock and bond mutual funds and a money market fund as well. Each employee 50 years of age and older can contribute an additional $5,500 in a catch-up provision. (I guess this assumes that most people won’t have saved enough and need to make up for lost time.)
Essentially, this shifted the burden of retirement savings from the employer in the form of a pension plan onto the employee using earnings in the form of the 401(k). It really doesn’t sound like this has been a good thing since most American employees have not saved enough for retirement.
Pay Yourself First
One of the best ways to save money is to pay yourself first and make it automatic. Yesterday, I turned in the paper work to have the maximum taken out of each paycheck before I even see it. That way, it is impossible for me to miss it. I won’t even be planning on it in my spending.
Even though I really suck at budgeting and don’t like it, I am really good at paying myself first and planning for the future. I will not be falling into that trap of not having enough for retirement. I have contributed the maximum for the last 10 years and will be doing the same with this new arrangement. Plus, now I will be getting a match to boot. Free money and a guaranteed return will help that account grow that much faster.
My Fund Elections
The investment selections are a little different than what I have been used to, so I had to pick some new mutual funds. I considered my other holdings in real estate and my other retirement accounts and decided to add 20% to the PIMCO total return bond fund. I know that bonds are nearing the top since yields can’t get much lower, but Bill Gross is a smart guy and will know what to do. Plus I am not getting any younger and don’t have any fixed income in my portfolio.
I also decided to put 40% into a EurAsia fund since I don’t feel I have enough foreign market exposure. I am currently invested in individual U.S. stocks. Even though I am not getting any younger, I am still looking at almost 28 years before I have to start withdrawing. Since Asia is increasing wealth by a rapid clip, I want to benefit from that type of growth. There will be some hiccups along the way, but dollar cost averaging will help.
The last 40% was placed into a small company growth fund. Small companies tend to outperform their larger brethren. Small companies can get big and bought out which helps to more than balance out those that fail. Again, a longer investment horizon and dollar cost averaging should benefit me.
So, there you have it! My new and improved (due to a match) 401(k)!
Readers: Do you have a 401(k)? Are you contributing the max? Do you get a match? Will you have enough for retirement? What do you think of my elections? Please feel free to comment. I will probably match your comments.
I was hoping to write a post in the near future on how my next goal was to establish a real emergency fund in order to have cash set aside for car repairs, home appliance repairs, or medical emergencies. Having six kids means lots of potential emergencies so it would really pay to be prepared. Plus with the credit crunch, it really isn’t a good idea to depend on credit for an emergency fund.
Of course, I bet you can see exactly what is coming. It is just like any overworked plot on television. The air conditioning stopped working yesterday morning. I woke up, and it seemed awfully hot in the house. I checked the thermostat. It was reading 83 degrees at 5 am. Not good! The air coming out of the vent was lukewarm and my heart sank. I just knew what the writing on the wall said. It said, “Your air conditioner is 10 years old. Major appliances will only last about ten years. You will need a new one. (Evil laugh).”
Of course, the repairman that came out could read the same writing and suggested that I could get a new compressor for $2500 or a new unit for $4050. Well, it only made sense to spend a few extra dollars and replace the unit that will need replacing anyway. Why spend $2500 this summer only to need a new one in the next year or two because something else goes?
While I don’t have an emergency fund per se, I do like to keep a month ahead on my fixed bill checking account. I do this since I only get paid once per month on the 5th and have most bills due in the early part of the month. Without the cushion, the due dates and time it takes for funds to clear can be cutting it dangerously close. Well, the money has been transferred, and we will be getting a new air conditioner on Friday right as the weather starts to heat up a little more. In the meantime, fans and the basement are OK. Of course for me, being at work is COOL (literally)!
Despite this temporary and ill-timed set back, I still need to put together a true emergency fund. Initially, I was thinking about $5000 which seems just about right for a major household appliance like the furnace. I also know that having a transmission rebuilt on a minivan is about $2200, but I have already done that.
I have been reading lots of posts about emergency funds and Dave Ramsey’s $1000 start. While that might be good for a baby step, I really think it needs to be more. Squirrelers makes a great case for a bigger emergency fund, and I would have to wholeheartedly agree given my recent experience. So rather than be able to share that I accomplished my goal of creating an emergency fund, I will have to lament my lack thereof and save that post for another day. You can bet I will be working on it, though.
Any comments or sympathy would be appreciated (wimper).
As I am thinking about improving my cash flow by 1% monthly over the next 12 months with the goal of giving myself a 12% effective raise and developing an emergency cash cushion, this is one question that I need to be asking myself constantly in almost every situation.
The concept of using cheaper alternatives without sacrificing lifestyle too much is something that has hit me pretty hard over the last few weeks, and I would like to offer a few examples from my own life in order to stimulate some thought and discussion.
My brother-in-law and I enjoy golfing immensely. Unfortunately, I can’t get out as much as I would like since I am so busy. One of the things that I would like is a golf GPS that would tell me the distance to the hole so I don’t have to spend time looking for markers on the course. These devices can cost a few hundred dollars. But now, it is possible to get an app for your smart phone for free. Since I don’t get out all that often, why pay hundreds when I can get what I want for free?
Another golf example: It costs to play golf but it is possible to get that golf fix and save money by playing 9 holes instead of 18 or walking instead of using a cart. There are some golf courses near my house that are pretty easy to walk because the holes are not that far away from each other and the total distance isn’t that far. I could also spend less by going to the driving range. Sometimes just hitting a bucket of balls is enough to make me feel like I have been able to get in some golfing. Hitting a bucket a couple times per month and playing one round is a lot cheaper than playing 3 rounds in a month.
Here is another example: Recently the ice maker in our refrigerator/freezer stopped working. The rest of the appliance was working just fine so rather than purchase a new one or have a repairman come out, my wife purchased a new ice maker at Lowe’s for $55. I was able to unscrew the broken one, unhook the electric connection, and replace it last Sunday afternoon in 45 minutes. I didn’t have to mess with the water at all since the ice was freezing in the container but it just wouldn’t dump out. I figured there was something with the motor. So, rather than spend money for a new appliance or even a repairman, for $55 and 45 minutes of my time, we now have plenty of ice for summer.
I would love to hear your examples of how you have been able to save money, improve cash flow, and not give up an ounce of your lifestyle. Please share and comment below.