After a job change around 6 months ago, Mrs. AE FINALLY got access to her new companies 401K! Some people look forward to Christmas or vacations, I was looking forward to that magic date where we could start contributing more cash to a pre-tax bucket. It was seriously stressing me out and I’m sure that Mrs. AE and her HR rep were sick of my questions.
Obviously, the first paycheck we were eligible to contribute we transferred the same percentage over from her previous employer and BAM! Back to deferred taxes and tax-free growth bliss.
When her next paycheck hit our account I was confused……I knew what her check was for the last 6 months, I knew what 14% of that check would be. To my surprise, a completely different number posted to our account. What the Hell happened? Surely I didn’t screw up subtracting one number from another.
I underestimated the beauty of 401K Math
Thankfully it was in a good way. We contributed $420, but her paycheck only dropped $330!
I literally asked if she got a raise and didn’t tell me because I underestimated the short-term tax benefits. The really sad part as I have written extensively about the benefits of 401Ks and it still blew me away.
Proof of my prior 401K love:
Why didn’t I connect the dots? The only thing I can think of is how gradual we increased our 401k contributions to get them to the levels they are at. I didn’t notice the small tax implications on a 1% increase every quarter spread over few years.
But I will notice the $90 twice a month
You can’t beat this math!
For every $100 we saved, it only cost us $79 in our take-home pay. It’s like a 21% off sale but for contributing cash to yourself!
Over the course of the year, we will contribute $10,080 to her 401k and it will only “Cost” us $7,920 due to the tax savings this year. I say “Cost” because all the money is still ours, we just can’t get to it for about 30 more years.
That is a net savings of $2160/year*
Seeing the immediate benefits makes it hard for me to consider slowing down our retirement contributions and starting to focus on funding the EARLY part of our retirement (but it still may be necessary).
*Numbers may fluctuate slightly come tax time, but this money comes off the part of our income that is taxed at the highest percentage and Minnesota has above average income tax
For the doubters that think they can’t do this
I realize that we may be in a unique position to be able to withstand an $8,000 hit to our take-home pay throughout the year.
BUT. BUT. BUT.
We did not wake up one day and randomly decide to throw a huge chunk of money at her 401K. We were already contributing close to this amount at Mrs. AE’s previous job. It just all happened to hit at one time with the new 401K plan.
Getting to this level was a VERY iterative process that took us many years to accomplish. Literally increasing our 401K contributions by 1% a quarter and a few bigger bonus bumps when we got raises (seriously folks, increase that income! It opens so many doors).
You can see the proof of our slowly increasing contributions in this 401K post I did last year. The idea that we would be contributing over $29,000/year to our 401ks 5 years ago did not even seem possible (As of this year my 401K is maxed out – Boom!).
Quick Summary of all the Benefits that come along with a 401K
- Investment Gains – Often overlooked, the gains from simply investing dwarf everything that follows
- Tax Savings – Immediate and beautiful
- Investment Gains on Tax-Free Money – That money that would have gone to the government grows until you start withdrawing for retirement
- Employer Match – If this is available, take it. Free Tax-deferred cash
- Gains on Employer Match – Your employers $ grows right along with yours until you start withdrawing
Head over to my 401K Sundae Post to see the in-depth breakdowns with examples of how much money this can actually be!
Are you taking advantage of this awesome 401K Math?