Author Archives: Chris Costello

When to Start Contributing to your 401k?

At blooom, we are huge advocates for starting to save early and often for your retirement. We are commonly asked the question – I still owe money on my student loans –is it OK to start contributing to my 401k?

Often times people are advised to pay off all of their debts (other than a mortgage) before beginning to save for retirement. I disagree with that strategy.

If you work for a company that offers a pre-tax retirement savings account like a 401k, 403b, or similar AND that company offers a match based on your contributions I think it would be foolish to pass up this free money while you are busy paying off debts. You would be missing out on a guaranteed return on your money by not contributing to your 401k. If you are still saddled with student loan debt, credit card debt, car loans, etc – my advice would be to contribute just enough (and not a penny more) to get the maximum match from your employer. All other excess funds should be aggressively applied to paying down your debts from smallest balance to largest balance – the Debt Snowball method that Dave Ramsey has advocated for years. Once these debts are paid off you can ratchet up your contributions to 10% or more.

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What the heck does “pre-tax” really mean?

You may have heard the term “pre-tax” used in the context of your company sponsored retirement plan (401k or similar). What you may not realize is just how beneficial, and rare, that term really is.

Let’s Assume That Your Employer Offers a Retirement Savings Plan Like a 401k.

These types of tax-favored retirement plans allow participants to contribute some of their salary to their 401k account before taxes are assessed. If you don’t contribute anything to your 401k your friends at the IRS would be assessing taxes on ALL of your salary.

So let’s also assume for this illustration that your salary is $50,000 and that you have elected to contribute 10% of your paycheck to your 401k. That means you are contributing $5,000 (10% of $50,000) into your 401k. To your benefit, the IRS is now only able to tax you on $45,000 NOT your $50,000 salary because your 401k contribution is taken from your paycheck pre-tax. (Note: Pre-tax does not mean you avoid any FICA taxes, e.g. Social Security and Medicare tax, you may owe. FICA taxes are based on gross pay.)

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One Million Cups Presentation – Kansas City

In the event that you set your alarm clock for PM instead of AM, and you missed our early morning presentation at One Million Cups, here it is!

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Finovate Fall 2014 Presentation

In case you missed it, here is the HD version of our presentation at Fall Finovate 2014! They did a great job of making us look so good with so little makeup!

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As much stock as you can handle…then some more

We at blooom are occasionally asked why the recommended allocation from our proprietary glide-path includes (what seems to be) a rather heavy mix of stock funds over bond funds. Their question often stems from what I call the “Good Morning America” or “one-size-fits-all” allocation advice which carelessly recommends that you allocate the same percentage to bonds vs stocks as your current age. For example, if you are 33 years old – taking that advice for your 401k would mean you would allocate 33% to bonds within your portfolio. I am sorry, but when it comes to your 401k retirement savings – we think it is ludicrous for a 33 year-old (with possibly 25+ more years before retirement) to allocate 1/3 of their portfolio to an asset class that will most likely provide ZERO real return over the remainder of their working years.

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