Drum Roll Please…What Was The Paycheck Like?

Last week I wrote about how I was curious what the first paycheck of the year would look like in light of the fact that things changed, primarily on the health care cost (unfortunately, there was no salary increase involved *sigh*).

To recap, we changed the plan option and also reduced our FSA contribution level, both as a result of the fact that we are not planning on having a baby, which was why costs were higher in 2011, and hopefully not having any other unplanned major medical expenses.  I wanted to see what the net effect would be on the paycheck and the results are in.

It basically resulted in around a 2% net increase in pay.

Which is sort of what I was expecting.

Not very exciting.

Unfortunately, what we’re spending it on is as equally un-exciting.  We’re really not spending it.

I haven’t bumped up my retirement contribution level in over three years, since we haven’t had any raises in that long.  This doubly hurts because the company used to match, but cut that out at the same time they froze salaries.  Especially in light of Sam’s recent article on where people should be in terms of retirement savings (note: we’re not close to Sam’s numbers), I wanted to increase our contribution.

So I did.  From ten to eleven percent.  This eats up about 70% of the ‘extra’ money.

The rest I want to use as a backup savings to our FSA card, in the event we go over for any reason, that we have money to back this up if we run out of dollars before the end of the year.

So, while I was excited to see what the paycheck would be, in the end it turned out pretty much on spot what I had expected, and the results are kind of a yawner, unless you are excited by extra savings and retirement contributions.

Which I guess I am and hopefully a few readers are too 🙂

What changes have you seen in your first paychecks of the year?

With 401(k) Rollovers, It’s Not The Amount That Matters

When I started my first job out of college, it didn’t pay a lot of money.  I kept expenses low by splitting an apartment, driving my five year old car, and generally living the cheap, bachelor lifestyle.  As such, I was still able to contribute a few bucks to my 401(k) plan.

When I say ‘a few bucks’, I literally mean a few bucks.

Not only was retirement the last thing on my mind, but I wasn’t making enough to really be able to contribute a great deal.  The little bit I did contribute grew to a couple of hundred dollars.

I stayed at that first job for almost two years, at which point I realized it was time to start making more money.  So, I took a job that offered an almost 50% increase.

After a few months, I got a check in the mail from my old employer.  I guess I had received a letter or two telling me that I could roll my 401(k) over into my new employers plan or an IRA, but I didn’t do anything about it, so they sent me a check.

I had already started contributing to my new employer’s 401(k) plan, and it was actually a decent amount given the raise.  But, at the end of the year, the person that does our families taxes called and asked what had happened to the balance of the original 401(k).  I told him I had just taken the money, but that it wasn’t a big deal because it was only a couple of hundred dollars.

He wrote me back advising that I never do that again.  The lesson became clear when I read that it wasn’t so much the amount, it was the practice.

By taking the cash, I potentially established a precedent in my mind of saying two things:

  1. That a small amount of money is OK to take off the table when it comes to retirement planning
  2. Saving for retirement can wait until later.

The problem, as it became clearer to me in the subsequent years was as follows:

  1. The definition of ‘a small amount of money’ will change over time.  When I left that first job for the higher paying job, I got a 50% bump in salary and I thought I was flying high.  Yet, that amount is still less than half of what I make today.  At any point, the salary and what we define as ‘a lot of money’ will change. Thus, in the end, the balance in our retirement fund doesn’t really matter.
  2. The earlier the better when it comes to saving for retirement.  I don’t feel that much different as a person than I did when I made that choice, yet fifteen years had passed.  If I had continued to kick the can down the line, I would always be promising myself to save later, but who knows when that would have started?

I learned my lesson and I’ve never failed to roll over my 401(k) since, even though it’s transferred nearly half a dozen times.

As a young 23 year old, I couldn’t understand what was ‘the big deal’ about a couple of hundred dollar retirement account.

As a 37 year old, I can now say:

I get it.

Does The Savings Rate Include Retirement Savings?

I’ve always been curious on what the personal savings rate actually includes.

The personal savings rate has been a newsmaker for the last couple of years.  Before the recession, we were actually saving in the negative territory, with the difference largely fueled by taking loans against (phantom) home equity.

Now, we’ve returned to a positive savings rate, which is good except for when economists complain that spending is necessary to fuel the economy (I’ll save that paradox for another day).

When I look at what our savings rate is, the short answer is:

I have no clue.

Usually answers to questions like that are pretty straightforward if you know how to search Google. When I did a Google search, some answers said yes, some said no, some said it all depends.

If our 401(k) contributions are to be counted, we are well above double digit savings rate.  If not, then we’re well below that.  I’m personally comfortable with this, but as to whether the government statistics would say so, who knows?

Does anybody have a definitive answer after wading through all the rhetoric on whether retirement savings are considered part of the savings rate?  Does it even matter?

How Do You Switch From Saving To Spending?

Sometimes a commercial catches my eye as one that really delivers on the message it’s trying to get across.

One group that I’ve seen lately is the Fidelity ‘green line’ commercials, where there is a ‘green line’ guiding someone down the path to their financial goals, and of course that green line is the input and help that Fidelity offers.  They seem to be focusing on the ‘end of the green line’ leading towards retirement.

I don’t know why but the commercials work for me.  I don’t use Fidelity for anything and have no immediate plans to use the type of services that they’re offering, but I can see how they would be appealing to those who would.

It made me think.  I wonder if they offer, not only the best way to save and get to the goal of retirement (though I won’t be able to retire by 40 *sigh* but one can dream), but how to make the transition once you get there.

Since I’ve started working, I’ve been focused on saving.  The goal is to build wealth, save money, and work so that you can accomplish big things along the way but also eventually have a retirement.

That seems like it would be a very big switch.  You have been tooling along for decades trying to save and save, and now suddenly your goal is no longer to save, but to spend.

You actually expect your net worth and savings/investment accounts to start going down in value.

That alone seems like a very scary prospect to change that mindset, but it’s all part of a personal finance plan that should be in place if you’re ready to retire.

I wonder, do these firms offer any guidance on the psychological, as well as the financial, aspects that go along with retirement?  If you’re retired, how did you make this switch?  If you’ve got retirement on the horizon, how do you prepare for this?

Raise or 401(k) Match?

A co-worker and I were talking the other day and we started discussing the pros and cons of getting a salary increase versus a 401(k) match.

Our company cut both in 2009 and there’s no shot that we’re getting both raises and reinstatement of the 401(k) match.  Frankly, I’m not convinced that we’ll get either.  We’ll probably find out in the next month or so if there is any benefit increase for 2011, though as I said, I’m not holding my breath.

I’m curious as to what the thoughts are as to which is better.  My co-worker was squarely in the corner of the 401(k) match, as the tax benefits and encouragement to save for retirement outweighed the benefit of having a larger paycheck.

I agree with him on these points, but he went so far as to say that a 1-2% 401(k) match would be more favorable than even a 3% raise.

This is where I’m not convinced.  I figure, even with the tax implications, I could get a 3% raise, dedicate 1% of that to increased contributions in the 401(k) and still end up with probably 1.5% more take home pay.

His argument (and again, it was hard to disagree with him) was that, while he and I would probably dedicate some or all of a raise to a 401(k) match, the majority of people probably wouldn’t, and would just take home the money (and spend it).

What do you think?