Well I have only had 2 months worth of paycheck deductions at the new higher deduction level due to my switching over to the Roth 401K from a traditional IRA (see my posts here and here), but I am pretty sure I am not going to run out of money losing the extra $67 out of each paycheck. In fact I am even contemplating bumping it up a few percentage points more starting next quarter(earliest I can adjust the percentage).
There are a couple reasons for this
1) I really want to know how far I can push our budget, before it really starts affecting our money reserves. I’ve been amazed to see that every time I have increased the amount that gets put away out of each paycheck either through 401K deductions or automatic ING Direct withdrawals, we never seem to run out of money and so far we really haven’t had to adjust our lifestyle to reflect our increased savings percentage. So I figure why not keep bumping it up if I never end up noticing it anyway.
2) Starting in 2008 the maximum amount you can contribute to an IRA gets increased from $4,000 to $5,000. Right now I am maxing out both my wife’s and my Roth IRA so its costing us $8,000 and I am currently contributing roughly $8,000 to my 401k. Now granted that’s 2 years from now, but I figure if I can slowly get my 401k contributions up to $10,000 then it won’t be as much of a shock in 2 years. Also if I find out that we just can’t swing the extra $2k a year to fully max out our Roth IRAs I will know far enough ahead of time where I will have a chance to try to adjust things financially for us to make sure we stick with our regimen of always maxing out our Roth 401ks.
3) It will be really good for our retirement accounts. Any extra money I can squeeze into them now will help us tremendously; basically if we can afford it we should do it now, because who knows what the future holds for us. I could lose my job, the kid(s) could start leeching more money out of us, or maybe some other cost we don’t anticipate will shoot through the roof. By saving every penny we can now we won’t have to worry about jeopardizing our retirement accounts down the road if for whatever reason we are not able to contribute as much as planned.
So basically I’m thinking about bumping our contribution up from 14% to 17%, which won’t quite get us to $10,000 per year but will get us a fair amount closer. I figure the worst thing that happens is that I find out that is too much and we won’t have enough money left in our checking account to pay the bills, but I ‘m only locked in at that rate for 3 months and while I am currently moving all our emergency reserves from our ING savings account to pay off a chunk of our HELOC, I can still write checks from my HELOC in case of an emergency so I don’t see it causing me to bounce checks or miss mortgage payments or worse yet leave a balance on my credit card.
As a side note: My 401k did extremely well for me last year, I ended up having 22% annualized returns for 2005. This certainly can’t be expected going forward, but it sure helps me get an added boost!!