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Saving Beyond 401k and Roth IRA

Norm in Dumfries, Virginia writes in this week to Walter Updegrave’s retirement column [3] 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 [4] that summarizes his three suggestions)