401(k)s & Super Bowl Sunday

Can you believe football season is over already? I swear months fly by now that I’m working.

Last week I had a few people ask if I could write about 401(k)s. Here goes. A 401(k) is a defined contribution plan. You (the employee) can put a set amount of money from your paycheck into that 401(k) monthly. Most of the times your employer will have a few investment choices within the 401(k) and you have to choose which one is right for you. Simple enough, right?

Let’s go a little deeper into this simplified definition. You can make contributions to your 401(k) before or after tax. Which one should you do, you ask?

Before tax.

Let me tell you why. Let’s say your annual salary is $36,000. In taxes, you pay 15% Federal, 5.75% State (VA), 1.45% Medicare, and 6.2% Social Security. If you make $3,000 a month before tax, you take home $2,148.

Let’s say that you have a 401(k). You decide to contribute $250 a month.

If you choose to put the money in before it has been taxed, you are not being taxed at the federal or state level. You do have to pay Social Security and Medicare tax. Subtracting Social Security and Medicare tax, $230.87 would go into your 401(k).

If you allowed that same $250 to be taxed, you would have $179 after tax. By avoiding Federal and State tax, on day 1, you have already had a 20.75% return. Without the money even being invested! Where else can you get a return like that?

Let’s look at post tax. To compare the two, let’s say you want $230.87 in your 401(k) after taxes. In order to put $230.87 in after tax, you would have to earn $291.32 in pretax money.

What would you rather do? Would you rather put $250 or $291.32 in your 401(k) to get the same ending value of $230.87?

So you pick pretax. You’re getting a phenomenal return and now you have to choose which fund or funds to put this money into.

Funds vary from plan to plan so it is very important that you choose the correct choice for your life stage and what’s going on in the market. Choosing different funds and the percentage in each fund can help reduce overall risk and help your 401(k) grow even more.

Ideally, you want to rebalance your account every eight weeks to stay with the cycle of the market. When you rebalance remember to sell high and buy low. This is the exact opposite of what most everyone does. Most people sell when the market is down, hoping to get out of what seems like a horrible situation, and they buy when the market is high, hoping to get in on the action. They’ve got it all backwards!

Super Bowl Sunday gave me a great excuse to bake. My friends had a bunch of people over for a Super Bowl/Chinese New Year party. There was an interesting mix of food there- I wish I would have taken pictures to share!

I knew I wanted to make something for the Super Bowl half of the party, but I had no clue what to make. I ended up baking chocolate cupcakes with a buttercream field on top.

For the past two months, I’ve been dying to use the grass decorating tip my parents gave me for Christmas. What a great time to try it out!

Getting the grass to 1) stand up and 2) be the same length was tough. Piping the grass killed my wrist. I had to do a little at a time, pipe the lines, take a 10 second break, fix any mistakes, and then move onto the next cupcake.

Football Field

My system might have seemed pretty insignificant, but I ended up with 24 beautiful cupcakes. If you treat your 401(k) like I treated my cupcakes, doing a little at a time, checking for areas that need improvement, you will have retirement savings that you are proud of.

It takes time and maintenance for good 401(k)s and cupcakes. If you would like a complimentary second look at your fund choices, or assistance in selecting funds when you rebalance your portfolio, mention this blog post in an email and we can meet to discuss your options.

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