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Thursday, February 4, 2010 |

401(k) Contributions and Your Raise

I recently got my annual merit increase – a modest one this year. Modest or no, I did what I have done every year I’ve gotten a raise since I started working. I logged in to my 401(k) account and increased my contribution percentage by one point.

When I first started working (almost six years ago now – I feel old!), I immediately began contributing to my 401 (k). I’d learned enough about personal finance to know the power of compounding, and what it would mean for me in the long term if I started investing just a little bit today. So, I contributed… but I did the absolute minimum I could in order to get my company match. That was 3% of my pre-tax salary. At the time, I wasn’t making much, so that was all I could afford to do.

However, I wasn’t without a plan. I determined that every time I got a raise, I would increase my contribution by one percentage point. That has brought me to 9% today, almost the 10% that is recommended by financial advisors. I never had to sacrifice my match, and I never really missed any of the money because I did it when I got a raise, which meant my salary was more than it was before even with the increase. (My raises were always more than 1%, usually between 4% and 7%, depending on the situation.)

Some people don’t recommend committing so much to your 401 (k). They say that instead you should only contribute the minimum to get the match from your employer (3% in this case) and then you should contribute the difference to a Roth IRA (7%), which you can withdraw from tax-free down the road. I see the value in that, but the thing I like so much about contributing directly to a 401 (k) is the hands-off approach. You set it up, it comes straight out of your paycheck, and you never have to think about it or physically deal with depositing the money.

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