Tuesday, November 5, 2013


Jim Blankenship of GETTING YOUR FINANCIAL DUCKS IN A ROW has asked all “financially-oriented bloggers” to “sharpen up their electronic pencils and write a column to encourage folks to increase their 401(k) savings by at least 1% more than last year” in his post “Call All Bloggers! 2nd Annual 1% More Blogging Project”.

Jim explains the idea behind the project -

I’m sure that I’m not alone in the financial planning world with my concern about the rate of saving toward retirement across this great land.  Recent figures have shown that we Americans are not doing as good this year as last, at a 4.6% rate versus 5% last year when we started this project. This is a dismal figure when you consider how most folks are coming up way short when they want to retire.  Just like last year in November, I thought maybe something could be done to encourage an increase in savings – if only by 1%, this can be a significant step for lots of folks.  November is the perfect time to do this, as most corporations are going through the annual benefit election cycle, so the 401(k) (or 403(b), 457, or other savings plan) is right at the forefront for many folks.”

One of the benefits of a “traditional” 401(k), 453(b) or 457 plan is that your contributions are considered to be “pre-tax” for federal, and often state, income tax purposes.

If your gross salary is $60,000, and you contribute $5,000 to a 401(k) plan, the “taxable wages” reported on your Form W-2 for the year is $55,000.  If you are in the 15% tax bracket this $5,000 savings has cost you only $4,250.  You are getting a 17.65% “match” for your actual out of pocket contribution from the government!  The cost is only $3,750 if you are in the 25% bracket.  Here the government “match” is 33.33%!  The actual costs may be even less when factoring in any state tax savings.

But the tax savings does not stop there.  Because they are considered to be “pre-tax your contributions reduce your Adjusted Gross Income (AGI).  This can increase a multitude of deductions and credits that are affected by AGI or Modified AGI, and further increase your tax refund or balance due. 

So contributing an additional 1% of your income to your employer retirement savings account will really cost you less than 1%.

Here is one way that I save.  Every Friday I put $10.00 from my weekly "take-home pay" in a “piggy bank”.  If at any point during the year I need to use any of this money for a cash-flow emergency I always put the money I have used back when cash flow allows.  At the end of the year I have $520.00 which I add to savings.

You can choose to put the weekly equivalent of 1% of your gross income into a piggy bank each Monday or Friday.  At the end of the year contribute the accumulation to a ROTH IRA account.  The contribution will not provide a current tax savings, but done year after year will grow to a substantial source of tax-free income at retirement.

The below chart from 360 FINANCIAL LITERACY shows how investing $200 per month in a ROTH IRA can grow over the years –

Contribute $200/month to age 65 at different hypothetical earnings rates:
Start at age 20
Start at age 30
Start at age 40
Start at age 50

An advantage of putting this money into a ROTH IRA instead of your 401(k) plan is that if you need money for an emergency at any point you can always withdraw your contributions to the ROTH tax and penalty free.

So, Jim, how did I do?