Investing, Retirement 

Saving Beyond 401k and Roth IRA

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Norm in Dumfries, Virginia writes in this week to Walter Updegrave’s retirement column asking for advice on how he should direct his retirement savings once he’s maximized his contributions to his 401k and his Roth IRA. Walter does the responsible thing of telling Norm that he’s doing great for someone in his thirties, saving so much to ensure a comfortable retirement, but the one question I have for Norm is whether or not he’s enjoying life.

If you are eligible to fully fund your Roth IRA and single, then your adjusted gross income has to be under $95,000. At $95,000, a maximum contribution of $15,500 to your 401(k) and $4,000 to your Roth IRA, you might think that you’re “just” (I say that in quotes because that’s still some serious money) contributing $19,500 of your annual income towards your retirement but it’s actually more than that. Your $15,500 401k contribution is all pretax, but your $4,000 is after taxes so, assuming you are in the 28% tax bracket (if you make $95k), your contribution is really $5,555.56. That puts your total pre-tax contribution (since we always think of our salary in pre-tax terms) at $21,055.56, 22.16% of your pre-tax income (if you make $95k). Okay… 22% is very high but not ridiculous. In fact, if that’s all he was doing it wouldn’t really be worth mentioning… except it’s not.

Norm wants to put in another $1,200 each month ($1,666.67 pre-tax) away for retirement as well, or $20,000 pre-tax each year. That puts his total contribution towards retirement at $41,055.56, or 43.22% of his pre-tax income towards retirement.

Norm… get out of the bar, enjoy life! There’s something to be said about ensuring you have a balance of enjoy life now and enjoy life later.

(If you want a quick recap of Updegrave’s advice, I wrote a post called Retirement Saving After 401k and IRA that summarizes his three suggestions)

{ 22 comments, please add your thoughts now! }

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22 Responses to “Saving Beyond 401k and Roth IRA”

  1. kurt says:

    “That puts his total contribution towards retirement at $41,055.56, or 43.22% of his pre-tax income towards retirement.”

    He’s so rich because he works for the department of redundancy department.

    • Minimum Wage says:

      He’s so rich because he works for the department of redundancy department.

      Not only that, he’s double-dipping working for the Natural Guard – they’re gonna surround us!

  2. I don’t know anything about Norm, but perhaps he is just earning a lot more than his lifestyle requires? I live a very happy life at far less than $95k per year; anything extra that I earn goes towards savings. Maybe Norm is able to live on a lower income and still enjoy life, and if he is single than chances are good that that is the case.

  3. samerwriter says:

    According to wikipedia:

    The MAGI for contributing to a Roth is $99K. Further,

    The MAGI does not include 401k contributions. So from my reading, young Norm could be making nearly $115,000. Using your calculations for pre-tax income, that puts his savings at at about 35%, which seems pretty reasonable for someone making that much money.

    Put another way, let’s say he makes $115,000 and saves $41,000. His federal income tax liability is somewhere around $22K. That leaves him with nealry $52000, or $4300 per month to live on.

    That’s more than enough to splurge with. He could lease half a dozen cars, and still have enough left over for food, rent, and entertainment.

    It sounds to me like Norm is doing the right thing. He hasn’t permitted his lifestyle to balloon as fast as his income.

    • jim says:

      Ahhh you got me… you’re right, my math was terrible (as usual).

      I just wanted to point out that one must balance out enjoyment now and enjoyment later, without too much emphasis on either.

  4. Samerwriter, $99k is the 2007 limit. We’re still talking 2006 contributions here (I think). But your point is well taken. As is Blaine’s. Just because someone saves a high percentage of their income doesn’t mean that they’re not having fun. The higher your income the more you can save percentage-wise without feeling the pinch.

  5. Doogan says:

    norm must sleep in a van down by the river and eat ramen noodles 3x per day. you simply can’t sock away that much coin on that salary and have an ounce of fun in your life.

  6. Dong says:

    We don’t know what Walt actually earns but I think it’s well within reason to max out the 401k, Roth, and contribute 1200 after tax and still have fun on 95,000 I’m on a similar budget, and still have plenty of fun. The critical factors are car, and housing. It’s really how much you save by never buying new car both in terms of purchase price, and auto insurance. The 2nd thing I’ve always lived in relatively modest place with roommates. By cutting those two things to manageable size, I’ve been able to vacation, and have fun the way I want to.

    That said, I do think sometimes financial advisors shouldn’t focus so much on more savings for people who are already good savers, but focus them on thinking about what they are saving for. There are other goals other than retirment.

  7. Golbguru says:

    I don’t know Norm’s age, but I have a question for him: Why does he want to save *so much* for retirement? Does he feel he is not contributing enough? or is he going to cash out with *early* (as early as permissible) retirement? or going to do something else with the money?

    Student life has taught me how to live in $400 a month…and I could possibly extend that lifestyle for ever (inflation adjusted) even after I get a good-paying job….and sock the rest of my salary towards savings and retirement funds. That way I could have $10 million when I retire. But I have no idea what I will do with that kind of money when 2/3rd of my life is over.

    On the other hand, I could save sensibly, and retire with just $5 million and use the *excess* cash (when I am young and when it matters the most) to buy a better house, in a better neighborhood, a better car, better education for my kids (and ensure that they are free of debt) and stuff like that.

    I am not advocating a lavish lifestyle here, but some kind of a sensible balance. Personally, I feel that there are intangible costs associated with not using your money at the right time.

    Bottomline: I agree with you Jim :).. Norm needs a break if he is young and building his life. Of course, if he is deciding to retire very early with that kind of fund …then I support him. 🙂

    • wanzman says:

      I agree. If I spend why whole life saving for retirement and being a tightwad, then when I get to retirement, will I really be able to start spending like crazy and enjoying what I have saved?? Not a chance. Both of my grandmothers have saved their whole lives, and are quite well off. But you would never know it by being around them. To their dying day, they will WORRY about every single penny that something costs.

      It is all about striking a balance…

  8. MossySF says:

    You “enjoy life” people are completely brainwashed by Madison Avenue if you think money has anything to do it. Beyond basic needs, what makes people happy is family, social connections, meaningful work/goals/activities. I will submit that someone who spends their time in free/lowcost activities — example: volunteering for local charities/arts/environment/activism/etc, participating/building communities around common interests — will enjoy life far more than someone getting a phony high from buying a 50″ plasma.

    • eROCK says:

      Quite the generalizations!

      People enjoy a plethora of different activities and items. While you might enjoy volunteer work, others might enjoy exploring the World. Some people enjoy spending a day blowing a wad down on Madison Ave, while some might prefer helping the poor by serving them meals or repairing homes for the less fortunate.

      No one is in a position to judge anyone else. Money is merely a tool and what you do with that tool is up to you.

      Has nothing to do with brainwashing.

      • MossySF says:

        If the glove fits…

        95% of the comments here immediately said Norm needs to worry less about saving (e.g. spend more money) to enjoy life more. Huh, who do they know Norm isn’t enjoying life already? Basically, they immediately made a judgement that if Norm isn’t spending money, he must not be happy. If that’s not brainwashing from Madison Avenue, I don’t know what is.

  9. plonkee says:

    I agree that you need to look at the whole picture rather than just the savings totals. There is no point in saving a lot of money if you don’t know what you are going to do with it.

    I don’t know whether Norm has considered his goals and aspirations or not, but there’s certainly something to be said for working out what you want to do in the next so many years before you are even allowed to take your retirement fund, and how you would like to pay for that.

  10. pf101 says:

    I agree. There has to be balance in your savings. Knowing the cost of living in Dumfries, his housing is probably pretty cheap (because it’s the middle of no where!) and being so far from DC he probably doesn’t go out in the city a lot. I would think it’s likely that he could save that much and still live a decent life, particularly if he purchased his house 5 or more years ago.

  11. Tim says:

    The biggest thing missing in this article and on everyone’s post is Norm’s retirement goal. You simply cannot give any advice on how much Norm ought to save or not save without it. What percentage of current standard of living does he want for retirement? remember that current standard of living includes saving x%, which presumably he will not be doing during retirement.

    i agree balance. you budget and save in order to spend. if Norm can do everything that he wants to do in life saving 43%, then good for him. again, though, the important thing that is missing is his retirement goal.

  12. Star Money Articles for the Week of April 2

    Here are interesting posts and news this week from the MoneyBlogNetwork members and beyond: MightyBargainHunter tells of a man who bought a house by selling coins with errors. Five Cent Nickel lists the Roth IRA income limits for 2007. Blueprint

  13. Sonya says:

    I read the Upgrave column and it seems he just assumes the young man wants to save for retirement. The puropse of his savings needs to be clarified. Does he want to retire at a very young age ? Save to purchace a home ? Save like mad now so if he marries in the future he can back off saving ? It is also never clear that he is single . Not enough information to tell.

  14. Teri says:

    I think certainly a lot of assumptions are being made. I grew up in the most expenive area of the country and out of school on 2-incomes we saved about 1/2 of a $95k salary and had plenty to enjoy. These days with 4 kids and insane health insurance I find it harder to stretch a dollar. But all the same time at $95k today I could certainly save $20k/year easy. Living in the middle of nowhere would just make it 10 times easier.

    But I digress. A big thing missing from this discussion is the fact that being single on $95k is a huge tax burden. Has to be in the 25% tax rate (from knowledge gleamed) which means a $15k 401k contribution is saving him at least $3,750 in income taxes. Maybe more if there are state taxes. So he plops that money in a ROTH. If he is making $95k it means he really isn’t saving much more than 15% at face value, and just investing his tax savings to boot. More power to him.

    I just have to say being very aggressive savers we have more assets (fun ones too), and work far less than our average 20-something comrades.

  15. Maybe he is supper happy. I feel the same way that we’re not saving enough, but it’s because we got a late start. Maybe this guy feels the same. Also by saving a lot now that we’ve started it’s easier to grow into our income. My learning how to save the maximum now we’re not getting use to the extra income.

  16. YMYL says:

    Ouch! Lots of readers dissing someone for saving too much, the assumption being if you’re saving a certain percentage of your income you must be shorting your day-to-day life. I sense sour grapes in that assumption. Would that we could all save so well. A better assumption — though not necessarily true either — is that it’s saving too little that ultimately shorts your day-to-day life because of the money stress it ultimately brings.

  17. jesus ma cantu says:

    i want to know my retrment status

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