401K matching funding

[Russ]

The company I work for will match 75% of up to 5% that I contribute to my 401K but I am still torn about what to do.
Currently I contribute 3%, something I have always done, but I'm not sure if I should increase it to 5% or continue snowballing.

Or, go extreme and cancel the 3% and throw it all at debt.

FYI--
My mortgage is at 4.75% (8.5 years left) and I have a variable HELOC currently with a balance of ~$18K at 3.25%.

This is the actual text from the plan.

will match
75% of your before-tax (and/or roth 401(k))* contributions
up to 5% of your eligible compensation. This means that
we will make matching contributions in an
amount up to 3.75% of your eligible compensation.

[nuisance26]

~What's your rate of return this year so far on your account? Ours in the teens so we put in the max amount.~

[Russ]

~What's your rate of return this year so far on your account? Ours in the teens so we put in the max amount.~

Personal Rate of Return from 01/01/2010 to 04/29/2010 is 19.2%

no complaints.
Of course what does that mean?

Past performance is no guarantee of future results, and current performance may be lower or higher than the performance data quoted.

[Greebo]

~What's your rate of return this year so far on your account? Ours in the teens so we put in the max amount.~

So if it drops, you'll stop putting money in?
Chasing the return is not a sound investment strategy. You need investments which have good long long term results, and to consistently invest no matter what the immediate, recent rate of return was.

People who chased returns in 2009 and took their money out cause the market was falling are sadly disappointed now that we're back up to 2007 levels. (DOW 11,000)

[Greebo]

Dave Ramsey would tell you to cancel it and up the snowball.

Is the debt you listed the only debt you have left? And how much more would go into your snowball if you halted your contributions. How much would leave your snowball if you upped to 5%?

[Russ]

Dave Ramsey would tell you to cancel it and up the snowball.

I figured as much.

Is the debt you listed the only debt you have left?

No, I have my truck payment which is roughly $16K at 0%

And how much more would go into your snowball if you halted your contributions.

about $150/month

How much would leave your snowball if you upped to 5%?

$100/month

[mek42]

For your 5% contribution, you have a risk-free rate of return of 75% (assuming a money markey or T-bill fund is an option). Assuming that you are comfortable with your cashflow by contributing the 5%, I'd slow down the snowball to get that 75% risk-free rate of return. I would do this even if I was still snowballing some 20%+ store card debt.

I would stop contributing completely if my minimum debt payments were severely impacting my household cashflow. It doesn't sound like this is the case for you.

However, one piece of information we don't have is whether there is a required vesting time for the match to be yours. I think you're in MI, employed in metals - there's probably some dependence on the health of the domestic auto industry for your job. What happens to that 3.75% match if you get laid off in 3 months?

If you don't walk out the door with all of that matched money then maybe consider doing something else.

I think Greebo is right about what DR would counsel. I think I read something recently specifically mentioing 401K matching plans and debt reduction, but I don't remember the source.

One last question, using a fair market value of your house (meaning, what you could actually reasonably expect to sell it for), does the real asset value of the house exceed the total amount of your debts? If so, this, to me, is another reason to go with the 5% contribution.

[Russ]

For your 5% contribution, you have a risk-free rate of return of 75% (assuming a money markey or T-bill fund is an option). Assuming that you are comfortable with your cashflow by contributing the 5%, I'd slow down the snowball to get that 75% risk-free rate of return. I would do this even if I was still snowballing some 20%+ store card debt.

No outstanding CC debt.

I would stop contributing completely if my minimum debt payments were severely impacting my household cashflow. It doesn't sound like this is the case for you.

It is not.

However, one piece of information we don't have is whether there is a required vesting time for the match to be yours.

I am fully vested. I've been here for 21 years.

I think you're in MI, employed in metals - there's probably some dependence on the health of the domestic auto industry for your job. What happens to that 3.75% match if you get laid off in 3 months?

No job, no match. But the money will stay there.

If you don't walk out the door with all of that matched money then maybe consider doing something else.

I think Greebo is right about what DR would counsel. I think I read something recently specifically mentioing 401K matching plans and debt reduction, but I don't remember the source.

One last question, using a fair market value of your house (meaning, what you could actually reasonably expect to sell it for), does the real asset value of the house exceed the total amount of your debts? If so, this, to me, is another reason to go with the 5% contribution.

Yes, we have equity in our house.

[mek42]

Yes, we have equity in our house.

I wasn't clear. Does your house equity exceed the sum of HELOC, truck loan and any other debts other than the (first) mortgage?

[Russ]

Even considering the current home values, yes.

[mek42]

I would do the 5%. If slowing the snowball bothered me, I'd consider making up the 5% in a way that didn't interfere with primary job. I.e. pizza delivery, craft show sales, etc., etc. This is as my circumstances allowed. I have a medical condition that requires me to be very careful about shorting myself on sleep, so I'm certainly not going to tell anyone to do something that sacrifices their medical health for a couple extra dollars at the end of the day.

[Greebo]

Ok, doing some calculations here.

Status quo - change nothing. Keep paying 3%. Make no extra payments but what you told me in chat - 600 to heloc, 505 to truck.

Your cumulative interest on the HELOC paid in the next 32 months (time to pay off) will be about $800. Over 32 months you'll invest $150/month - so you'd put $4,800 into your 401k, and your instant match of 75% means you'll immediately gain a $3,600 return on that investment.

Without doing ANY forecasting, it's immediately obvious that paying $800 to get $3,600 is a GOOD DEAL.

Reducing your contribution to 0% reverses that - you cannot possibly save more than $3,600 (unless the heloc rate goes ridiculously high) by paying $150/more a month to the HELOC.

So - what happens if you go to 5%? You lower the HELOC payment by $100. You will take 38 months instead of 32 months. Your total interest paid will be about $964 instead of $800 - a $164 loss.

But you'll contribute $250/month instead of $150 a month. Using the original 32 months, that's $8,000, and 75% of that is $6,000. That's a $2,400 gain in 32 months vs. the $164 loss in 36 months.

So - I will disagree with Dave here and say UP to 5%, TODAY.

But I'll say why, too.

Because your household is changing. Your habits are changing. You're paying off debt, your wife is getting onto the same page with you - you're making good progress.

IF you were drowning in debt and just starting, I'd say stop the contribution, because it would be habits that need changing first. But you're winning that fight now - slowly but surely - so yeah, go to 5%.

[Russ]

Thanks all for the responses. I sorta knew the answer but my judgement was a bit clouded by the desire to get rid of debt. We are blessed enough to be in a good position financially to afford the 401K contributions.

I don't want to be this guy >> << Debt

[mek42]

That's why we're here, to ask questions and listen to each other. Thanks for enabling us to have this discussion.

[Greebo]

That's why we're here, to ask questions and listen to each other. Thanks for enabling us to have this discussion.

Stop it. This kind of respectful post is contagious. Pretty soon Russ will *EXPECT* us to be nice and polite to him!

I expected better of you! :smack: