Right now we are taking an odd approach to savings. Odd to me at least. Ever since I sort of “woke up” to how important it is to save and invest now because time is one of the bigger factors into your total returns. So when I give you the numbers in a bit about exactly what we are saving, you will think we are living only on beans, rice, and the essence of calories by looking at sugary treats at the grocery store. This is not the case.
Let’s get right into it. When I learned we could put $18,000 away pre-tax (for both the 401k and the 457) and invest it in the fantastic index funds of VINIX and VBLTX, we were already 10 pay periods into the year. So I called our 401(k) administrator and asked them to calculate for me exactly what percentage of my salary pre-tax we could have to divert in order to hit $18,000. This was a moving number as we were about to have another paycheck, but I wanted to get as close as possible without going over. Going over, is not an option. Penalties and fees preclude this possibility, so I figured leaning on the experience of financial professionals would be helpful.
I was wrong. The number they gave me was 33% of my salary pre-tax. After the next paycheck, I realized I was on track to over contribute for the year. Their number would have put me well over the $18,000. So I opened up Excel and figured it out for myself. We are currently contributing 28% pre-tax to the 401(k). This will bring us just underneath the $18,000 ceiling.
But that was only half of the equation. I still had a zero balance in the 457 plan and even fewer paychecks for this calendar year with which to allocate deferrals. Troubling. Fortunately, the 457 plan lets you prescribe a dollar amount to defer as opposed to a percentage. This makes the calculation far easier for this liberal arts degree recipient. (Funny, WordPress just fixed my misspelling of the words recipient and misspelling as I was typing this. Maybe spelling just isn’t my game).
With 15 pay periods left, I divided $18,000 by 15 and got to $1,200. I then promptly updated the deferrals to $1,200 a paycheck in addition to the 28% of the 401(k).
This was a bit scary, as I did not know exactly how much money each paycheck would bring in. After all, we have to have money to live on. If we could invest every dollar earned, it would be easy to save for retirement. We have always been savers, and as a result of that, we had an extra savings account that could be used in one of two ways. Since this account was in addition to the emergency fund, we could put it into a taxable investment account, but it would be better to invest long-term with pre-tax dollars. They clobber taxable investments over the long-run.
To this end, we decided to live off of the greatly reduced paycheck and this savings account until the end of the year. Then we will re-work the contributions to allow for Roth IRA contributions, taking advantage of the 3% match through my employer, and maxing out the 457 plan. Having 26 pay periods to meet these goals will make it easier than starting nearly halfway through the year.
After getting all of this put into place, I wished I had learned about the fantastic opportunities to take advantage of both for 401(k) and 457 years earlier. I hope you will see if you can take advantage of these arrangements to your long-term benefit. Thanks for reading!