Wow 2016 has been quite a year! I gave birth to a beautiful baby boy and took 5 months of maternity leave to bond with him and my 2 1/2-year-old. It was a year of transitions, going from one to two children and the year I decided to start this blog. It was also the year that I set my retire by 40 goal which meant I had to get laser focused and specific on what it would take to get there. I set some lofty financial and savings goals for our family in 2016 and I am pleased to say that we nearly met them all.
Goal 1 – Max out my retirement plan 401k ($18,000)
For the first time since I started working full-time, I maxed out my 401k plan contributions. The maximum you can contribute to a pre-tax retirement plan is $18,000 not including your employer match. At the beginning of the year, I figured out what % I needed to contribute from my paycheck to get to the maximum $18,000 a year allotment and set it to that deduction from my paycheck. Since the contributions occur before I see my paycheck and because it’s automatic, I really don’t miss not having the additional money.
Goal 2 – Max out husband’s 457 Plan & 403B Plan ($28,600)
This was the first year that we took advantage of the 457 tax deferred plan offered to my husband. In addition to his 457 plan, we can also still contribute to his 403b plan (another pre-tax retirement plan). Both plans have a contribution limit of $18,000 each. So in total, we have the opportunity to save up to $36,000 a year pre-tax. To be able to contribute that much of my husband’s income and to convince him to do it was quite the undertaking. Understandably, he was taken aback when I proposed that over half his salary go into retirement plans. After numerous conversations and spreadsheets showing how we could still enjoy our day-to-day lives on less income, he finally agreed to increase his contributions.
We are on track to contribute $16,600 to his 403B plan and $12,000 to his 457 plan. Since we started ramping up the contributions to these accounts towards the later half of the year, we were unable to hit the maximum limits. We should be able to hit both the 457 plan and 403B plan limits in 2017 since we will start out contributing the max in January. Again, these contributions are automatic and happen before we see any money from his check.
Goal 3 – Fund Backdoor Roth IRA’s ($11,000)
Everyone has the ability to contribute up to $5,500 to a Roth IRA and if you are over the income limit to contribute directly like we are, you can do the Backdoor Roth. Using my bonus, we funded our Backdoor Roth IRA’s, $5,500 each. This was the first year we did that and it is something we will continue to do going forward, as it is a great way to diversify our retirement portfolio. We are able to access the monies put into a Roth IRA or Backdoor Roth IRA tax-free in retirement as opposed to the monies in our 401K which are taxed when we want to access them in retirement.
Goal 4 – Fund 529 Accounts ($5,800)
We have about $5,800 earmarked for the kids 529 college savings account in 2016. It’s below the goal of $10,000, but I have to be honest here, I have been struggling with how much to put away for their college education. While I will encourage my kids to go to college, I am no longer sold on the fact that they have to go to college in order to be successful. The more I learn about our flawed educational system, the more I am disillusioned about it all. For now, I am going to hold off on contributing until we get back our 2016 W2 and begin to do our taxes. Contributions to their 529 accounts are tax-deductible in our state, so it is a great way to save on taxes while saving for their future. My plan is to see if we owe any money to our state and fund that amount into the 529 accounts, so that the balance owed to the state is $0. Once we get our W2’s, I will be able to run the different scenarios to see if and how much we owe (I use Turbotax). I have a little more time to make the final decision on how much we will contribute since we have until April 15, 2017 to contribute to the 2016 529 accounts.
Goal 5 – Begin Index Investing ($15,000)
Our goal is to annually invest $15,000 through index investing so that we have a more diversified portfolio. We have about $15,000 earmarked for index investing just sitting in our savings account. As of the date of writing this post, I have not put the money to work in the markets yet (and by markets I mean VTSAX through Vanguard). I must admit, I’m scared to pull the trigger. It’s a lot of money to drop in the market but I know I need to just get it over with and do it.
Goal 6 – Pay Additional Principal On Primary Mortgage ($6,900)
Retiring early is predicated on being able to get rid of our primary mortgage. Thus, we need to find ways to pay it off early. We have been paying an additional $800 a month on our mortgage and to date have paid an additional $6,900 on the principal balance.
So in total, we were able to save $85,300 this year!
How were we able to do it?
- By utilizing pre-tax savings and investments vehicles
- By cutting back on our expenses and living below our means
- By sticking to a budget
- By making saving automatic and a priority
- By being willing to be uncomfortable
My husband and I make a decent living but we are not rich (yet). We work hard and make everyday sacrifices to accomplish our goals. I am not saying any of the above is easy but it IS doable. With sacrifice and planning you can accomplish your savings goals too, whatever they may be.
Here’s a challenge for you. How much do you contribute to your 401K now? Whatever it is, set a goal to slowly increase it over time in 2017. For example, if you contribute 5% now, consider increasing your contributing to 6% in January and then increase it to 7% in April and so forth. Remember, you will be saving a lot in taxes by choosing to contribute pre-tax, so while it may seem like a huge blow to your take home pay to contribute say $500 a month to your pretax retirement accounts, when you account for the fact that the government would’ve taken a portion of that $500 anyway, your real net out-of-pocket cost is really a lot less, maybe only $300 (since $200 would’ve went to taxes).
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This is a complete inspiration! Because of your tips, I have now maxed out my 401K. I didn’t even do it slowly, I went ALL IN!
I have also revamped my budget and will focus on being very intentional about my spending in 2017!
Thank you for all you share and congrats on reaching/exceeding your goals!
Yes!!! Now that’s what I’m talking about , jumping feet first. I can’t wait to hear more about your progress as you go fwd. thank you for reading. I’m glad I was a help to you!
I’m truly in awe by how much you both saved. Great job. I think I will copy the maxing out my 401(k). I always do the contribution percentage but never take advantage of maxing out. Great suggestions!
Thank you! I can’t believe it myself. Yes, if you can max out, do it. It’s something I wish I would’ve done in my 20’s. My portfolio would’ve been double it’s size. And as always you can dial back the contribution % if it’s too much so it doesn’t hurt to try it out for a few months.
Wow, you really knocked your goals out the water. We always hear stories of folks paying off this much debt, but not enough of those who save this amount in a small time frame. This is awesome motivation!
Hi Latoya! Can’t believe I missed your comment! Thank you for the kind words. I’m glad I could provide some motivation for wanting to save and invest more!
Great work, Jamila! I love what you said about having doubts about college for your boys. We are encouraging our four kids (17,13,12,10) to really go after their passions where work is concerned. If those passions require college, great, but if they don’t, we’re totally okay with that too!
Thank you! I really just don’t know if I believe in the system anymore as it relates to preparing our children for the real world or careers they love. I just want them to be happy, productive members of society that are able to support themselves. Thanks again for stopping by.
Congratulations Jamila. Would you consider maxing out your tax advantaged account if you were planning to retire early?
Hi! Yes , we are maxing out our tax advantaged accounts in an effort to save on taxes and it makes sense for our income level. So yes, I’d recommend maxing out all available retirement accounts. Getting your money out early from these accounts without the penalty is not impossible , you can do a ROTH IRA ladder and other things.