Maxing Out the 401k

Two years ago I started a new job that came with a small bump in pay. In the past, I had always let my raises trickle into my checking account without thinking about them much. But, after a year of reading other personal finance blogs, I decided it was finally time to take action and I bumped my 401k contribution up two percentage points. This isn’t the end of the story, though; this simple action led me down a long winding road which lead up to where I am now: contributing over a quarter of my pre-tax income to my 401k.

First, some background: my company matches 401k contributions, but in a needlessly complicated way. They match 100% of the first 3%, 50% of the next 3%, 25% of the final 1%, and nothing for anything above 7%. What it boils down to for me is that if I contribute 7% of my salary, my company match is 4.75%. So it had been sitting there for years while I contributed the “minimum” 7% of my salary.

When I changed jobs though (internally, I still work for the same company) I decided that I would bump that amount up to 9%. For me, that was an increase of about $56 a month, but remember that this is pre-tax dollars so it’s really only about $42 from my actual take-home pay. I still had a nagging PF guru in my head though who was telling me I could do more. I’m lucky enough to live below my means and won’t miss another $100 or so a month, so after a few weeks of back-and-forth I raised my contribution anouther 3% to 12%.

From there, though, I realized how easy it could be to put my nose to the grindstone and try and get up to the maximum contribution of $18000 per year. I made it a sort of game: anytime that I could save myself 1% of my after-tax salary per month, I would raise my 401k contribution by 1%. (Expert personal financiers will note that this nets me a significant tax savings.) The first of my bill cutting measures was to switch from the family cell phone plan that I had been on for years over to a company cell phone that I only have to pay $10 for. (For that low rate I have to accept work emails and calls on my phone, but most of that gets funneled through Google Voice and not my actual cell phone number.) This saved me $40 a month, so I raised my contribution another percentage point.

After that, I realized I had an index fund that was just about the same amount as one of my student loans. At the time the market was stagnant so I decided a better choice of action was to sell it off and pay off the loan. That saved me $60 so I raised my contribution 2% (how you choose to round is up to you).

I chugged along at 15-16% for a few months before I saved up enough to pay off another loan, and raised my contribution accordingly. I had another moment where I decided I wouldn’t miss another $40 and raised it again. I also made some lifestyle changes, like realizing that grass is a complete waste of money and that I could raise my contribution a little more if I let it go brown and put native, drought-tolerant plants in its place. As a bonus, sweet potatoes grow extremely well in my front yard and the greens are edible, too!

Anyway, I finally paid my student loans off in full about a year ago with a bonus, and made a few other lifestyle adjustments that saved me enough money to finally max out my 401k contribution. For example, I bike to work full-time now, which means no fuel costs (even though my car is electric, it still saves some money) and a nice fitness bonus to boot. I work on the side as a freelance writer which doesn’t bring in much money but it helps. I also don’t have cable, and I don’t have Internet access at the house outside of my phone (which I fully realize isn’t everyone’s cup of tea, but it works for me.)

I didn’t quite make it to the maximum contribution amount of $18000 last year (it was around $14,500) but this year I am on track to get to that magical number. Early in the year I didn’t think I would make it because I had to lower my 401k contribution amount temporarily to funnel money into my HSA for laser vision surgery. (Side note: totally worth the expense! Contacts and glasses are terrible.) Luckily there was enough time left in the year for me to catch up and as long as I keep my job I’ll make my goal. Also, don’t forget that the 401k is pre-tax money, and my additional contributions have saved me thousands in taxes in these two years. I’ll have to pay taxes eventually, but this is a pretty good perk for now.

I still have a little ways to go, though. I have a payment on my car (which is mostly covered by the fact that I don’t have to pay for fuel, for anyone worried why I contribute so much to retirement when I still have debt) and I still have mortgage insurance that I should be kicking to the curb in less than a year. But now that I’ve maxed out my 401k, all of that extra money will go right into my pocket! (read: right into a Roth IRA until I max that out too!)

While a lot of my circumstances are very fortunate, like being able to pay off debts and funnel that money into my retirement, or having access to a company cell phone, or getting bonuses, most of these steps are something that anyone else could do as long as they believe in themselves, and aren’t living paycheck to paycheck. As proof, my take-home pay is actually slightly less than what it was when I first started working for this company five years ago even though my net pay is much higher. My mortgage now is more than my rent was then, and I am still able to put a little extra towards principal every month, but I am on a better footing financially than I was back then. This is what has enabled me to keep raising my contribution, all while maintaining the same lifestyle I had when I started this adventure.

If my story has any meaning, though, it’s that you don’t have to go from your company match contribution to the maximum contribution overnight; this whole change took place for me over the course of two years. Additionally, you don’t have to get to the maximum at all but think about at least raising that contribution a little bit if you can. The more you save now, the faster you’ll be free.

Photo: I recently started an Instagram like all the cool kids are doing. I do some photography on the side as a hobby, so I’ll pull images from there from time to time. This is one of my favorites that I took at a ruined jetty on Palm Beach.