Maxing out 401K/IRA vs cash for emergencies?

[everyfrog]

Hi all,

I've finally gotten to a point that I can't believe - I could possibly max out BOTH my Roth IRA AND 401K AND still have money at the end of the month! (not a ton but still!)

The IRA is taken care of; the 401K is bigger beast.

However, to do this, it would mean putting all my House/Travel savings cash that I squirrel away monthly toward the 401K.

(I already have the 6 months of living expenses stashed.)

My fear is limiting my access to cash that I don't access often anyway but it's super handy for when I have a sudden house repair (plus I rent out part of my house to tenants and have to do a rare fix for them) or the occasional small CC debit. Guess I'm just in fear of losing my safety net (and rebuilding my savings cash quickly like I can today).

Thoughts? Maybe only put in for half my 401K for now, revisit in a year? Right now, I'm only putting in $50 a month. Monthly contribution max is $1,458.

[MonkeyMama]

I personally wouldn't max out retirement funds to the detriment of other financial goals and basic financial security.

How much percentage of income would you be putting to retirement if you maxed 401k/IRA? Are you ahead or behind on retirement savings? I guess it's hard to answer without knowing these pieces of the puzzle. Your age would be helpful too.

[bjl584]

I too would caution against locking up too much money into accounts that you can't access for decades, especially if it might mean that you won't be able to fund an emergency or even fund a regular purchase in the here and now.

[everyfrog]

Good questions!

I'm 38, single, no partner in the foreseeable future but I've always planned for being financially independent, partner or not.

That said, I feel I'm pretty behind on the retirement savings thing. It was only in the past few years I really started putting money in to the 401K and IRA.

Percentage of retirement savings out of monthly income?

(doing calculations)

About 50%. OUCH.

[MonkeyMama]

I think you are on the right track. So I am guessing what you feel comfortable with is in the 30% range of retirement contributions? (30% of income to retirement?) That's really a good place to start, even if making up for lost time.

You can always make it a goal to earmark future raises to retirement, to work on maxing out. But... except for making up for not saving earlier, tying up 50% of your income into retirement funds is mostly overkill. I am not sure how much I'd really even care about maxing out.

[snafu]

It is important to contribute the sum required to capture any matching retirement contributions from your employer. Retirement funds rely on compounding over the long term so it's important to continue regular contributions and to
know the amount actually contributed and how much it grows in value each year.

What had you been spending on maintenance and repair costs in the past 12 months? Consider adding any 'snowflakes'[unanticipated savings, discounts, selling stuff no longer used or needed etc] and round up to $25. each pay to grow Emergency Fund, until it reaches $ 2,000. 'targeted' for repairs. Alternatively, you can use sums paid into ROTH without penalty.

It's important to allocate income to categories that are important to you like vacation and events. I find it helpful to note every dollar spent in a month. It's shocking how much 'leakage' that project identifies. I find small, impulse purchases, barely noticed, add up to significant dollars in 30 days. I try to give every dollar a 'job.'

[everyfrog]

Those are all excellent points.

Costs on repairs? That's a good question. Honestly, with these tenants, not much. In fact, a lot of big house maintenance items have been somewhat aesthetic but also preventative (roof repair, gutter clean out, fence replacement).

I'm maxed out with my employer's contributions to my 401K - 5% of my salary after 5 years (and I've been there 11 years).

My current budgeting "system" is using an Excel spreadsheet to track every single purchase that is entered in manually but it's not really working, as I've gotten out of the habit of updating it regularly. Plus I didn't have specific categories spec'd out until recently but again, the whole updating thing has been a problem.

I'm currently reading "Your Money or Your Life" and want to revisit Dave Ramsey's Financial Makeover book for tips on how to manage and save money more efficiently. Big goals of mine are remodeling my kitchen and just having cash in reserves to be able to buy plane tickets for trips (annual trip home, plus a trip or two a year for vacation).

Recently, after I got all my bills and finances nicely organized and on auto pay out of one single account, plus savings building nicely and debits paid off, I decided to try the Credit Card Points route to get points for airline miles. Struggling with that, again it comes back to the tracking every purchase and now i'm in little bit of CC debt again (just a couple $1,000 but I HATE that). Figured it'd take a month or so to get system figured out.

Part of me wonders if it's really worth it though. I wasn't able to transfer over as many of my bills as I thought to the CC to earn points quickly. Ideally, i'd like to earn 3,000+ points a month ... I'd gladly take any thoughts on the credit card points/airline miles system too ...

[disneysteve]

i'm in little bit of CC debt again

I'd gladly take any thoughts on the credit card points/airline miles system too ...

You should NEVER use a credit card to make a purchase that you can't afford to pay for in full when the bill comes. The value of any reward points is instantly wiped out by any interest charges you incur carrying a balance.

[FLA]

the money you put in a Roth IRA can be taken back out without penalty after you've had it for 5 yrs (check that part). I used the principal in my Roth IRA as an emergency fund when I was raising my kids, luckily I never had to touch it

[everyfrog]

You should NEVER use a credit card to make a purchase that you can't afford to pay for in full when the bill comes. The value of any reward points is instantly wiped out by any interest charges you incur carrying a balance.

You're absolutely right and that was (and still is somewhat) my rule of thumb when I first started using credit cards in my 20s and was making much less. I think my excuse now is that since I know I stash away a significant amount of cash monthly, I can pay it off easily. Bottomline though - I'm not keeping track of my expenses like I should.

For this most recent card, it's been just small everyday purchases and bills (food, gas, eating out, misc) to try and rack up points, but clearly, I'm not doing well with it, so today I decided to restrict use of the CC to bills only (on auto pay and pay in full each month) and resort to the Cash In Envelopes method for groceries and eating out and misc - which will VERY much force me to see where my excess cash goes, in addition to watching cash savings and flow in other accounts.

I've also thought about ditching the Excel sheet system and buying an old fashioned ledger book from the office supply store. After spending all day at work on the computer, the last thing I want to do is come home for more computer time. I'm a former old school journalist who takes notes on paper like it's a bad habit, so I think it could work. Gotta try something.

[Jluke]

I've finally gotten to a point that I can't believe - I could possibly max out BOTH my Roth IRA AND 401K AND still have money at the end of the month! (not a ton but still!)

The IRA is taken care of; the 401K is bigger beast.

Thoughts? Maybe only put in for half my 401K for now, revisit in a year? Right now, I'm only putting in $50 a month. Monthly contribution max is $1,458.

that would be quite a shock to your finances to go from $50/month in 401k to maxing it out.

I'd need to see your budget to understand the numbers you are mentioning.

But if you're only putting $600 in the 401k, that is a ways off of 18k.

what would be more realistic here?