20% of pay into 401 K? Anyone else do this?
For whatever reason, I've started to put 20% of my pay into a 401K account, mostly small cap, medium cap, and international?
At 24, isn't that the best thing to do in order to reap the benefit of the compounding returns? Basically, giving a little sacrifice now to get a return in 35 years?
My question is whether anyone else recommends this, or whether they would themselves have a traditional savings or brokerage account???
How Much Should You Save in a 401(k)
When it comes to saving, it’s always a good idea to save as much and as early as you can. As this JP Morgan Asset Management chart shows, the power of compound interest can greatly affect your savings over the long-term:
In general, it’s a good idea to educate yourself on various IRS limits on different savings accounts such as 401(k)s and IRAs. WSO users share their tips on savings, especially given the high salaries of investment bankers:
- Take advantage of the power of compounding
- Contribute as much as possible to 401(k) to take advantage of company match
- Evaluate 401(k) investment options to see if you would benefit from outside investments
- Max out contributions to Roth IRA, if you qualify, or IRA
- Look into limits on 401(k) investments (usually increases every year)
- If you’ve maxed out other savings vehicles, and are planning on having kids or pursuing higher education, invest in a 529 plan
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Thanks in advance.
It is definitely a great idea to invest as much as possible at an early age to take advantage of the power of compounding.
You should probably contribute as much as possible to the 401K to take advantage of a company match.
After that it really depends on the options in the 401k. If the funds available aren't very good or don't meet your investment goals, you should probably set up an IRA or Roth IRA to contribute addition money.
If your investment options in the 401k are good then I don't see a problem with contributing 20% to the 401K.
Remember, you can only put $15,500 into your 401k per year. I'm sure your company matches a portion of this amount, but you need to talk to your HR department about how it is distributed. For example, it may not be beneficial to frontload and max our your 401k before the end of the year due to stipulations in your matching policy. Trust me, sit down with an benefits rep and make sure you have a handle on it.
Secondly, open an IRA (Roth if you qualify) and max that out, 4k/year (and an additional 4k if you are married).
Thirdly, if you plan on going back to school or have children, start packing back money into a 529 plan now. Up to $10k is tax deductible, at least that's what I think it is in OK. It varies by state.
Max out 401k, IRA, and start saving now for education, using all of the tax breaks available. Have fun with the rest, as long as you are not taking out loans on massively depreciating assets such as cars or spending it on drugs/whores.
One thing I would not do, and many may disagree with me, is spend much time trading your own money. I am in energy and tried this, but became way to emotionally involved.
Being 27, I socked away everything remaining (after the above steps were taken) into very aggressive mutual funds. It's a long time before you and I will retire and you want maximum growth/risk for the next 10 years. When you hit 35, you might consider readjusting your strategy.
This is just one man's opinion.
A lot of us here can't take advantage of an IRA (i.e. make too much money and our employeer has a 401K).
20% contribution seems steep. With IB-analyst bonus, one should max out with 7-9% contrib thru the entire yr.
I wasn't aware of any rules to contributing to a traditional IRA. Roth's, I understand that a dual household income has to be under $165k or so, but the traditional can be used by higher income employees.
Also, what does an employer offering a 401k have to do with not being able to open an IRA? I'm 200k+ and contribute the amounts listed in my above post, there has never been an impediment in any of my activities.
If you can max out your 401k while contributing 7% (a scenario totally plausible considering that is exactly what I do) there should be nothing stopping you from contributing to a traditional IRA.
I could be wrong, but my accountant and the woman who handles my investment accounts within the bank have never said anything.
I thought that you cannot contribute to a tradtional IRA if your employer offers a 401K. If I'm wrong, let me know! I don't want to spread incorrect info!
I agree with you on the Roth IRA part.
Great contributions, thanks.
The 20% match I referred to included the company match, definately have a handle on that aspect.
It gets me in just under 15K.
The funds are pretty varied, decent, morningstar 4 and 5's. I'm purposefully going 'aggressive' rather than bond allocation, s&p, etc. I would sleep better at night knowing I have an opportunity for a 20% per annum return via more risk. That may sound stupid but that's my mindset.
I believe with an IRA you can thrown down 10k of it on your first home purchase tax free no penalty.... that seems attractive.
That is only a Roth IRA.
I believe the income restrictions on Roth IRAs are going to be changed soon allowing people with higher income levels to open Roths.
And you can have both an IRA and a 401K.
I relayed this conversation to the chick downstairs and received the following:
The guy must be thinking of a Roth. You are eligible for a traditional - you are not eligible to "deduct" the contributions for tax purposes (because of your income level) but you are still eligible to make contributions (even as you grow older and make the big bucks)!
One thing you must also consider is how much you may be making down the road. For example, if you are making 100k this year and contribute 20k a year, you will be taking a significant hit to your disposable income. However, if you're making 7 figures 10 years from now, who really cares if you contributed 10k or 20k?
Another way of thinking about it is to think back to when you were 10 years old and got $50 for your birthday (omg wow!) You could have saved that money for 10 years and turned it into $150, but that $150 won't matter much to you now. Do you really want to contribute 20% of your salary now if the quantity saved will be meaningless to you down the road?
Note: I'm not saying it is a bad idea, but consider it.
"One thing you must also consider is how much you may be making down the road."
I completely disagree. Save early and often. If you save 2k from 20 to 30 and then never save again, you can wind up with more than someone who saved 2k starting at 30 and saved all the way to 60. (depending on rate of return obviously).
compound interest is the 8th wonder of the world.
I would add that if you plan on starting a business (like being a trader on your own capital), want to buy a house, or are worried about job security, it's nice to have money in the bank rather than having it stuck in a 401K. Best off, the money gets taxed at 15% capital gains tax if you manage it carefully.
what if you can only contribute 8% to your 401K because the lower tier people dont contribute alot. its a 401k testing thing.
my old man is over 50, so he wants to contribute the full 20G by law, but can only do 8K. is there a way he can contribute the extra 12k permited by law with the tax benefits, or is he just screwed?
It's generally a bad idea to fund a regular IRA if you don't get the deduction...the tax picture is awful if you do now there is a good shot IRAs will be convertable to roths in 2010 but that's a different kettle of fish.
Jimbo, I completely agree with your point that compound interest is amazing, however:
If I'm making 100k now and put away 10k, I may significantly cripple my ability to do things like pay for my MBA. However, if I only put away 2k, I can improve my life and it wouldn't come at a big cost because 20 years down the line I'm making $5mm / yr and don't really care that I missed out on a few years of compounding.
ok, if you want to live in the tails like that, sure. but that 5mm payday may never come.
Nevermind finding a logical end point to the argument: Why save $500k when you're making $5 mln, when you might be making $100 mln in 10 years?!?!?!!?!?
I used the numbers I did to represent the concept...
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