Figuring Out Your Retirement Contributions for 2010

Have you started thinking about your retirement contributions for 2010? We been swamped with homebuying details over the past month or two, but we closed on our condo on Friday, so we’re finally able to change our focus to planning our finances for the upcoming year.

Our plan for 2010 is getting serious with about saving for retirement, especially now that we’ve reduced our monthly expenses and automated our bill payments. I’m mailing in my paperwork to consolidate my student loans tomorrow and, if all goes well, my interest rate will drop to 2.5%. That’s low enough that we’re comfortable increasing our retirement contributions while paying down our debt.

Setting contribution amounts for his 401(k)

My husband’s job offers a 401(k) with a match of up to 5%. The matching funds are immediately vested which means that even if he left for another company, he can take all of the money in his 401(k) with him. We’re already contributing enough to get the entire company match, but we’re looking to do more.

My husband wants to keep his investments simple and just focus on a few funds. The problem for us is finding the right mix of funds to invest in. In the end, we went with a couple of growth funds for the majority of his holding. We would have preferred to put his contributions into low cost index funds, but there aren’t any offered in his plan.

While a 1% or so difference in expense ratios between a typical index fund and the funds offered in my husband’s 401(k) might not seem like much, it adds up to some significant money down the line. I ran the numbers, and if you invest $100, 000 over 20 years in an index fund with a 0.75% expense ratio vs. a fund with a 1.9% expense ratio, there’s a difference of $216, 700!

Thus, we’re going to focus on funding his Roth IRA instead of putting extra money (beyond the company match) into his 401(k).

Setting contributions amounts for our IRAs

My husband now has to decide how he wants to invest his Roth IRA contributions. When he started a new job here in North Carolina, he started investing with Vanguard because of their low fees and the fact that he had enough money stashed away to meet their minimum investment requirements.

I have my retirement funds with Sharebuilder, and I’ve set up an automatic monthly deduction for my Roth IRA for 2010. Back in 2009, I decreased, and then paused, my Roth IRA contributions so I could devote more money to paying off my car loan and building up our house down payment.

In terms of investments, I’ve been focusing on mutual funds instead of individual stocks since I don’t have a lot of money, and I want good diversification. I actually started setting aside money for retirement through an employer plan when I was 21. I wish I could say that I continued my contributions uninterrupted, but I ended up cashing it out when I left that job.

Not only did I have to pay taxes on the distribution, but there was a penalty on top of that, decimating what little savings I had. I learned my lesson and now I don’t touch my accounts unless I’m contributing more money or rebalancing my portfolio.

Focusing on the future

Since we’re now making regular contributions, and we’re still quite young, we have the powerful effects of compounding on our side. We’ve also learned a valuable lesson about cashing in our retirement accounts, and won’t be taking any early withdrawals. Instead, we’ll be focusing on increasing our contributions each and every year.

I know people who think you need to have a huge amount of money to invest effectively, but that’s simply not true. Even small amount add up — at least you’re doing something. You can always increase your contributions as your earning power increases.

As things stand, we intend to adjust our contributions every January and then automate things for the rest of the year. That way our investment program will be both convenient and sustainable.

Your thoughts

So… What do you have planned for this year? Are you increasing, decreasing, or holding steady with your retirement contributions for 2010?

13 Responses to “Figuring Out Your Retirement Contributions for 2010”

  1. Anonymous

    Laura, I have a friend that has worked for Walmart for thirteen years. And she just call and wanted me to find out if she can retire from walmart and will she still get to keep her discount card. I believe she is 62. She work at williamson wv.

  2. Anonymous

    I am glad to see people who have jobs putting money away. Where I live I think unemployment is really at 30%. When I go to Walmart and find a robotics engineer with 30 years exp. and a welder machine repairman with 10 years stocking shelves things are hard.

  3. Anonymous

    My take on Roth IRA: As long as you are investing money taxed at 15%, Roth is the only way to go. If you are in the 25% bracket it’s not quite as clear-cut.

    My brother is now the sole income for himself, his wife, and 2 kids. He is investing 100% of his retirement savings in Roth because he is in a low tax bracket.

    I am single and I am borderline between 15 and 25% brackets. I am maxing out my company match and that is all for the first half of this year. I am in debt repayment mode right now. In 8-10 months I will know far more about my tax situation and will have all of my critical debts paid. Then I will have some flexibility in allocating funds to a Roth or traditional IRA.

  4. Anonymous

    Laura,

    Does your income exceed the limits for a deductible IRA? I’ve run some numbers of my own, and I’m no longer convinced that the Roth is the savior that those in the PF blogosphere think it is.

  5. Anonymous

    I’m impressed with how much many of you are putting in towards your retirement. I’m also happy many of you are increasing your contribution which I hope is an indication of solid financial circumstances.

  6. Anonymous

    I rebalanced our holdings a few months ago and now we’re holding steady. We are maxing out both ROTH IRAs again and 9% of my salary is contributed to a pension plan by my employer (a defined contribution, not defined benefit – I am fully vested and control it much like a 401K or IRA). I may have to start funding a portion of that defined contribution pension myself come July, as there is talk about the state (my employer) cutting back on its contributions to the pension plans – bummer. I hope I am as lucky as keanie beanie and get all benefits reinstated when the economy is in full force again…but I doubt it 🙁 Ah well, we are still on track to retire very comfortably at 55 (just a *short* 22 years away! ugh….)

  7. Anonymous

    I’m surprised to read that your husband’s 401k has no low cost index options. Have you considered taking this issue to company 401k manager? I’m also curious what closest-to-index funds are available.

  8. Anonymous

    In Jan 2009, my employer suspended our 401K match and cut my salary by 10%, so I squeezed the budget for all it was worth and came up with 3% more into the 401K to make up for the lost match. In January 2010, my salary was restored (but not the 401K match). I’ve set the goal of topping out my 401K contribution at $16,500 for the year, since the 10% “raise”, after a year of doing without, leaves me feeling flush. The 401K investment percentage has been revised to meet that goal and I will continue to fund the max into my Roth. There is a risk I might lose or leave my job this summer due to a merger, so even if I don’t hit that goal, I will have front-loaded the contributions for the year.

  9. Anonymous

    In 2010, I will contribute $1800 to my employer’s plan and will receive $1350 in matching. Additionally, I will contribute 5k between my Roth and traditional IRAs. Currently I am considering exactly how I want to split that up, and welcome any opinions.

    I make 45k, receive another 6k in child support. (Single mom with 1 minor child left in the nest.) I would love to contribute more, but it is a stretch for me to contribute $6800.

    Excluding my employer’s plan, I invest primarily via index funds at Vanguard. I also have a bit in Vanguard’s TIPs fund, which is not an index.

  10. Anonymous

    @ BG – Having a job does not preclude you from being self-employed. In our case, DH has a business (sole proprietorship and licensed in our county) that he does in addition to his full-time job. That income is reported on Schedule C. As such, he is self-employed.

  11. Anonymous

    How can you have both a 401k and a SEP-IRA? Doesn’t a job through an employer that offers a 401k, preclude you from claiming to be “self-employed” to qualify for the SEP IRA…?

  12. Laura: We’re aggressively funding my employer plans (including a SEP-IRA for my side income), and will also be maxing a non-deductible, traditional IRA for my wife and then immediately converting it to a Roth (we’re beyond the income limits for Roth contributions). Still trying to figure out the best IRA strategy for me. I’d like to do the same as my wife, but that SEP-IRA is full of non-deductible contributions, which makes the tax consequences a bit more complex. I may wind up rolling that into a Solo 401(k) to facilitate the Roth conversions.

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