A woman by the name of Melissa called the public radio program Marketplace Money and said her husband had a 50% pay-cut a few months ago. In order to make up for the lost income, she took up teaching part-time at a college. The college just notified her that she’s now eligible to join the college’s retirement plan.
It sounds like a 401(a) money purchase plan. The decision is one-time: if she doesn’t join now, she won’t be able to join later. If she joins, she must contribute 5% of her pay and the college puts in 8%. But, she’s tight in her budget. You can imagine so after her husband’s pay was cut in half. So she asked the radio program if she should join the retirement plan.
What do you think? I don’t know how much colleges pay part-time instructors. Let’s say she earns $40,000 a year from this job. So we are talking about $2,000 a year.
It turns out she and her husband have substantial savings, both retirement and non-retirement, to the tune of $200k in each bucket. It makes the question such a no-brainer.
Money is fungible. If she uses her savings to make up for the reduced pay because of retirement plan contributions, she effectively moves the money from non-retirement savings into a retirement plan, eliminating taxes on the future growth of that money, and earning a 160% match to boot. What a deal!
What if she doesn’t have any non-retirement savings to make up for the shortfall in pay? Should she still join the retirement plan? What if she doesn’t have any savings at all, retirement or otherwise? Should she still join the plan? If she does join, where does the money come from? I will leave these questions to you. I trust you will be able to figure them out.
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Wai Yip Tung says
Don’t forget the contribution is tax deductible. Assume her marginal tax rate is 30%, contributing 5% will reduce her take home income by $116 a month, a negligible amount compare to her family income. For this $116 reduction she will get $433 deposit to her retirement account every month. It will be tragic for her to pass it up. This should totally be made mandatory either by the college or by some law. Don’t let people make unnecessary and silly choice.
Interesting title “Money is fungible”.
Unfortunately, the IRS does not understand this concept at all..
Heartland Patriot says
Putting the money into a retirement fund makes sense if there is any sort of security in that retirement fund. However, people have invested in retirement funds in the past only to see it all go down the drain. Hopefully, this worked out well for the lady and her husband.
Harry Sit says
Putting the money in a retirement account and what you buy in such retirement account are two separate issues. A retirement account itself doesn’t mean high risk. If you invest prudently it won’t all go down the drain. If you only buy CDs in a retirement account it will be safe and guaranteed at all times.
Randall Amberson says
She’s a person with $200K in non-retirement savings who came to you saying that “she’s tight in her budget”. Nope. She isn’t. THAT’S why it’s a no-brainer.Randa