Saving For Retirement: Make The Maximum Contribution To Your

Saving For Retirement: Make The Maximum Contribution To Your
Retirement Plan & Retire Secure
By James Lange

Many people—perhaps you—feel they cannot afford to save for
retirement. The truth is you may very well be able to afford to
save, but you don’t realize it. That’s right. I am going to
present a rationale to persuade you to contribute more than you
think you can afford.

First, I am operating on assumption that you are following the
cardinal rule of saving for retirement: If your employer offers
a matching contribution to your retirement plan you are
contributing whatever your employer is willing to match—even if
it is only a percentage of your contribution and not a dollar
for dollar match.

Now, let’s assume you have been contributing only the portion
that your employer is willing to match and yet you barely have
enough money to get by week to week. Does it still make sense to
make non-matched contributions or Roth IRA contributions
assuming you do not want to reduce your spending? Maybe. (This
article does not address Roth IRA contributions vs. non-matched
401(k) contributions and hereafter only refers to non-matched
401(k) contributions).  

If you have substantial savings and maximizing your retirement
plan contributions causes your net payroll check to be
insufficient to meet your expenses, you should maximize
retirement plan contributions. 

The shortfall for your living expenses from making increased
pre-tax retirement plan contributions should be withdrawn from
your savings (money that has already been taxed). Over time this
process, i.e., increasing contributions to your retirement plan
and funding the shortfall by making after-tax withdrawals from
an after-tax account, transfers money from the after-tax
environment to the pre-tax environment. Ultimately it results in
more money for you and your heirs. 

Another way to squeeze blood from a stone is to consider an
interest only mortgage. The reduced mortgage payment (in
contrast to what you would be paying on a 30-year fixed rate
mortgage) is deductible as a home interest expense. The
additional cash flow from the reduced payment could be used to
pay credit card debt or fund one or more tax favored
investments. You could open a Roth IRA, make additional
retirement contributions, and/or purchase a tax-favored life
insurance plan. In the long run, you could be better off, often
by hundreds of thousands of dollars. Of course there are risks
with this strategy.

Another opportunity to shift savings from the after-tax
environment to tax advantaged retirement savings might arise if
you are the beneficiary of an inheritance.

Take this “Changing Your IRA and Retirement Plan Strategy after
a Windfall or an Inheritance” mini case study for example:

Joe always

had trouble making ends meet. He did, however, know
enough to always contribute to his retirement plan the amount
his employer was willing to match. Because he was barely making
ends meet and had no savings in the after-tax environment, he
never made a non-matching retirement plan contribution. Tragedy
then struck Joe’s family. Joe’s mother died, leaving Joe with
$100,000. 

Should Joe change his retirement plan strategy? Yes. 

If his housing situation is reasonable, he should not use the
inherited money for a house—or even a down payment on a house.
Many planners and people will disagree. Of course it depends on
individual circumstances. 

Instead, Joe should increase his retirement plan contribution
to the maximum. In addition, he should start making Roth IRA
contributions. Many of you who live in areas that have seen huge
real estate appreciation think he should use the money to invest
in real estate. You may have been right yesterday. You might
even be right today. It is, however, a risky strategy,
unsuitable for many if not most investors. 

Assuming he maintains his pre-inheritance lifestyle, between
his Roth IRA contribution and the increase in his retirement
plan contribution, Joe will not have enough to make ends meet
without eating into his inheritance. That’s okay. He should then
cover the shortfall by making withdrawals from the inherited
money. True, if that pattern continues long enough, Joe will
eventually deplete his inheritance in its current form. But his
retirement plan and Roth IRA will be so much better financed
that in the long run, the tax-deferred and tax-free growth of
these accounts will make Joe better off by thousands, possibly
hundreds of thousands, of dollars. 

The only time this strategy would not make sense is if Joe
needed the liquidity of the inherited money, or he preferred to
use the inherited funds to improve his housing.

Now, do you think you can afford to make the maximum
contribution to your retirement plan? The truth of the matter is
you cannot afford to ignore my advice and not make the maximum
contribution to your retirement plan.

About the Author: As one of the country’s top IRA experts and
author of Retire Secure!, James Lange, can keep you from
jeopardizing your family’s security. He has developed tax-savvy
retirement and estate plans for over 800 U.S. citizens with
appreciable assets in their IRAs and 401(k) plans. Your family’s
future depends on you signing up now for his monthly Retire
Secure newsletter at http://www.paytaxeslater.com

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