Retirement: Fund the 401(k) to the max – or not?
Retirement strategy says get your employer's 401(k) match, then a Roth. Retirement question is No. 1 in the reader mailbag.
What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries.Skip to next paragraph
The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two. Our busy lives are crazy enough without having to compare five hundred mutual funds – we just want simple ways to manage our finances and save a little money.
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1. Splitting up retirement contributions
2. Surveys at retail shops
3. Investment or debt?
4. Gum as impulse buy
5. Outsized medical bill
6. Breadmaking tip
7. Avoiding Christmas
8. Savings bonds and student loans
9. Mortgage ballon payment difficulty
10. Investing in class
I get what I call “winter hands” when the temperatures during the day drop into the thirties or below. Basically, my fingertips and palms get a bit puffy and raw simply because of the weather. I know I’m not alone in this.
If I don’t nip this in the bud, my hands are in bad shape by February or so, so I splurge on something each December: hand cream. I’ve tried tons of different things, but this is the only thing that does anything to stop my “winter hands.”
Just thought I’d share for the sake of others who find their hands getting raw in the winter.
Q1: Splitting up retirement contributions
Let me start by saying I started at an engineering job coming right out of school 3 years ago, I was used to living on almost nothing as I did in college so I kept it that way when I started my job and put a large chuck of my salary towards retirement. I recently received a promotion and put it all towards my retirement so now I am to the limit of what the government allows you to contribute to a 401k (I put it all towards a Roth 401k if that makes a difference). Also, because of some other circumstances I cannot currently contribute to a Roth IRA.
So my question: Is it smart to put all $16,500 in my company 401k plan or would I be better off only putting only part of it in my company plan and investing part of it myself where I could pick individual stocks etc. My company matches 75 cents of each dollar up to 6% (basically 4%). I am 25 years old and don’t have any future need for the money (until retirement) that i know of and have a good emergency fund already. Thanks for your help!!
You should put enough into the 401(k) to get the match, then after that you should contribute to a Roth IRA up to the contribution limit.
Why? Having money in both a 401(k) and a Roth IRA hedges your bets when it comes to taxes in retirement, plus a Roth gives you far more investment freedom (as you get to choose your investment house and your specific investments).
If you still have money to save, go back and contribute more to your 401(k). It should be noted, though, that you’re almost assuredly in splendid shape for retirement, so if you have other life priorities that come up in the future, don’t be afraid to cut back a little on the retirement savings.
Q2: Surveys at retail shops
I have noticed that many of the fast-food restaurants, office supply stores, and other businesses are urging the consumer to go to their website and fill out surveys. Some of them promise the customer a rebate or a coupon or an entry into a drawing for some cash as a reward for doing the survey. What do you think about these surveys? Are they just a means to getting your email address or do they really ever award those cash prizes? Are they worth bothering about? Have you ever heard about anyone actually benefitting from completing these surveys?
They’re probably not worth the time invested in filling out the survey. Let’s say that the company is giving out one $5,000 gift card a month. During that month, 50,000 people fill out that survey that takes 5 minutes to fill out. You’re essentially burning 5 minutes in exchange for a 1 in 50,000 shot at a $5,000 gift card. There really are better uses of your time.
If you read the fine print of those offers, they usually have a method by which you can contact the company and receive a list of the winners of the survey contest. Such contests are pretty heavily regulated and it would not be worth it for the company to commit fraud.
In the end, I think they’re legit, but they’re just not a good use of one’s time.
Q3: Investment or debt?
A little over a year ago I got married (we’re in our mid-20s) with my wife’s graduate school student loans just coming out of deferment. We have been making the full payments for the past year, and have thrown several thousand extra when we’ve had the chance, like my annual bonus and our tax return. She had been working full-time though quit her job 4 months ago due to the terrible working conditions…14-16 hour days, spending additional time working on the weekends from home, etc. She has since been seeking out new employment, but with obvious obstacles at this time.
Our balances on the 10-year plan are: Stafford $20,470 @ 6.05% ($245 per month) / Stafford $19,804 @ 6.55% ($245 per month) / PLUS $34,800 @ 7.75% ($446 per month) / PLUS $30,900 @ 8.25% ($457 per month)…for a grand total of $1,393 per month. I make $70,000 per year, we completely own our apartment and our monthly expenses for maintenance, utilites and the like are around $1,000. We have $85,000 in cash/savings in the bank and my wife also has $35,000 in stock that she inherited from a relative. I currently contribute 7% – my company matches a full 6% – to my 401k which is worth around $30,000; I also have a small pension worth around $20,000.
I want to use the $35,000 in stock to knock off one of the large PLUS loans. We’re paying over $200 a month in interest per PLUS loan, so at 12 months x 9 more years, it seems like there is a significant amount of real savings to be had by doing this. My wife strongly believes that we’re better off having that stock available in case we ever have a serious need for it, but with how much we already have in the bank, it seems ridiculous to me that we also need the stocks at this time in our life. Is there really any good reason not to use the stock money and get rid of a big chunk of loan? I think we’re better off putting that money towards retirement, starting a 529 for a future child, and getting to enjoy ourselves more (we haven’t taken a real vacation besides visiting family in over 2 years). If you don’t recommend using that stock money, is there anything else you would suggest to help make our loan payment more bearable?
I think that your savings (both stock and cash) are outsized when compared to the debts you’re holding.
If I were in your shoes, I would calculate your shared cost of living for four months, keep that much in savings, and put the rest – both saved cash and stocks – toward getting rid of as much of that debt as possible. I’d hit the highest interest debts first (the one above 8%, for starters).
There are almost no emergencies in life that will be helped by having more than four months of living expenses in an emergency fund. If one of those extremely unlikely emergencies did come along, the cost would likely be far more than what you have in the fund right now anyway. You’re better off putting that money to better use. Remember, you’re getting an 8.25% return paying off that largest debt early versus a 1% return in your savings account.
Q4: Gum as impulse buy
I like to keep gum in my car as a breath freshener, as I’m often worried that my breath smells badly. Thus, whenever I’m in the checkout, I tend to pick up a pack of gum. I’m trying to figure out how much this adds up to and whether there’s a cheaper way to go about it.
If you chew gum on a daily basis, a bulk purchase is probably the best option for you.
I would figure out which brand you like the best, then buy it at a warehouse club in bulk (or have a friend buy it for you there). That’s probably the least expensive way to get the gum in significant quantities.
Then, just leave a few packs in your car at all times. If you know the gum is in your car, you won’t need to buy it at the checkout. You’ll save money just from the cheaper gum, but don’t be surprised if you’re actually chewingless, too.
Q5: Outsized medical bill
For the past 3 years, my husband and I have been working very hard to be financially responsible. We have paid off 39k in student loan debt (12k to go), put a good down payment on a modest house, drive paid-for cars, taken extra jobs and never incurred any other debt.
Last month my husband ended up in the ER with a partially collapsed lung. A month later it relapsed, and he had to have surgery. We went to our in-network hospital which was supposed to be covered 100% by insurance (except for our 75$ deductible). We tried to asked if the surgeon was in-network and found out he wasn’t, but the doctors assured us that in emergencies our insurance pays 100% of usual and customary. It turns out that there is a very large difference between what our insurance deems usual and customary and what the surgeon billed.
We now owe the surgeon $14,000. There were a few charges the insurance denied that we are appealing, but even if those are approved our bill will still be over $10,000. I was tempted to be mad at the insurance company, but when I looked up the procedure codes on the American Medical Association’s web site, it turns out they have already paid 4-5x the medicare reimbursement rate for these procedures. I feel like we are being extorted by the surgeon. Basically, he could bill ANY amount he wanted!
What kind of recourse do I have? Should I go to the insurance company? The provider? The state health insurance regulator? My employer (self-insured large company)? Do you think I could settle this with the provider for a couple thousand dollars (we have our first child on the way, so we can’t afford to empty our emergency fund)?
Your best bet is probably to negotiate with the provider for a settlement.
You can try to appeal through other means, but you’ve likely hit a limit on what your insurance will provide for this. If the insurance is going far above and beyond Medicare, your state health insurance regulator probably won’t be much help, either.
I would suggest trying to negotiate yourself. If you find that you make no headway, you can attempt to use a lawyer to help, but you’ll likely end up with legal fees that exceed the cost.