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Benefit Info Trickling in--Retirement

July 15th, 2018 at 10:11 pm

So information about the new job is slowly trickling in. I'll start with the retirement information. They have two choices: a traditional 401K and a Roth 401K. I have only recently even learned of the existence of a Roth 401K. With the traditional 401K they will match 100% up to 5% of your income and of course it is pre-tax dollars. With the Roth 401K you put in after tax dollars, and they will again match 100% of what you put in up to 5% of your income. Their portion will be taxed upon withdrawal, but what you put in won't be since you have used after tax dollars.

My gut says the 401K Roth is probably a better choice, but I have done some reading and some have said that it might be better to use pre-tax dollars now when we are earning more to lower our effective tax rate, because when we retire we won't be pulling out as much as DH is currently earning per year, so our tax rate then will be lower than what it is now. Could some of our accountant/tax people weigh in on this issue?

They also may contribute an additional sum to the 401K called a performance contribution, which is divided among employees in proportion to their wages and based on how well the company does each year. Basically an end of year bonus, but to the 401K. It varies from year to year.

They have an ESOP or Employee Stock Ownership Plan. The company contributes stock to employees at the end of the year based on wages and a pro rata basis. They will start doing this once you have worked 1000 hours. It is fully vested after six years, vesting 1/6 per year. DH said currently one share of company stock is worth $16,000. Stock must be sold back to the company on retirement or quitting.

I am debating whether or not we should start whichever 401K we choose immediately (match is immediate) or wait until the debt is paid off. If we do it immediately it works out to $90 a week. That is $360 a month that should be going to debt payoff and we are hoping the debt is gone in the early part of next year, but that depends on overtime. I hate giving up the free $360 a month, but I know it would be for a short time. It bothers me that our retirement is so low, but the whole point of the Dave Ramsey plan is you cannot split your focus.

As soon as the debt is paid off, we plan to get the EF to three months of expenses and then hit retirement at 10% while getting the EF up to six months of expenses. Then once the EF is at six months, start saving for a large house down payment. I don't know that we can do the recommended 15% to retirement and still save for a house, though once DH starts getting raises we might.

We figure anything MIL gives us will go towards either the EF build or the down payment. In later years, we could put any gift money towards Roth IRA's or towards paying off the house early once we buy one. I guess in those years we would hit 15% of retirement if MIL gives like she has said she plans to. We can't count on that money, though.

We will have to use some of the money MIL gave us already to get through the job transition period. DH officially starts working for the company direct on the 21st. His last paycheck from the contracting company is on June 27th. Then he won't get paid again until the 10th and we will move on to a 2 week paycheck. So we need to get through the time when we would have had a check on the 3rd, but now won't.

Also, his old company has said that we can pay the August insurance payment out of that paycheck on the 27th, which means that paycheck will be quite short, even with OT on it. So some of the money will also have to go to cover what is taken out for the insurance. But starting on the 10th we will switch to biweekly budgeting instead of weekly budgeting and everything will be fine. The new insurance starts on September 1st. That will make life easy and we won't have to worry about dealing with COBRA at all. So, yay! I am just very grateful it is all playing out like this and that we have the money in savings to smooth out the bumps.

3 Responses to “Benefit Info Trickling in--Retirement”

  1. Carol Says:

    Please read more about retirement money-- I don't think you should pass up the chance at putting as much as possible into the 401k and getting the match! (It is important to pay down debt, but this chance won't come again.) Moreover, it can lower your taxes. Once it's in there it grows, but it takes time to do its magic.

  2. Jane Says:

    Agree with Carol- leaving free company match money on the table does NOT make sense. I don't follow Dave Ramsay, but I can't believe his advice isn't to fund up to get the maximum company match, then pay debt, then up to your max allowed retirement savings when debt is paid off. The interest you save on paying off debt a couple months early doesn't equal leaving a 1:1 match on the table (up to 5%). There are also limits on how much you can contribute per person per year pre-tax, and you can't catch it up fully in future years if you leave it on the table.

    When I graduated from school they sat us down and showed us 30 year projections on paying off student loans vs saving for retirement plus paying off student loans more slowly. Even with the current insanely high interest rates on federal loans, with compound interest you do better saving for retirement.

  3. LuckyRobin Says:

    Jane--It is. First step is to get a $1000 emergency fund, 2nd step is to pay off all debt but your mortgage, 3rd step is to get an emergency fund of 3 to 6 months expenses, 4th step is to start saving 15% of your income to retirement. There are seven steps, but that is the order he says to go in, because if you focus on lots of different things at a time, you will not do well at any one thing. The retirement advice does bother me, but I've talked my husband into at least doing the 5%. I had to make up a spread sheet showing the results with an average 11% return (which over time is the return of the S&P index) and it was very clear how much we would be giving up if we don't start as soon as we can.

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