401k Tune Up Pt1

1. Contribution Calculation

Every year, when you get a raise, you automatically save a little more money. At some point, you will likely hit the 401k contribution limit. Currently, that limit is $20,500. That amount is known as your Elective Deferral. If you divide the elective deferral amount by your base salary (ex. $150,000), the result would be the exact percentage you need to save to reach $20,500.

 

Annual Contribution	/	Base Salary	=	Decimal	X 100	Contribution %
$20,500	/	$150,000	=	0.1366	X 100	13.66%
$10,000	/	$150,000	=	0.0667	X 100	6.67%

If you only want to save $10,000 and you make $150,000, your savings percentage would be 10,000 / 150,000 = 0.0667. In the PG&E 401k, you must save a whole number as a percentage. So you can round up or down depending on your cash flow needs. 6% of $150,000 would be $9,000 and 7% would be $10,500. In tip #5 I will explain why you don’t want to maximize your contribution before the end of the year unless you use tips #4 & #5.

ProTip: Sign up for the 1% annual increase in your contribution limit each year in April. After your raise hits your paycheck, 1% goes to your 401k and the rest to you. This will help you reach your elective deferral limit sooner, which will help you maximize your savings over your career.

2. Catch Contributions (50+)

Age has its advantages, and one of them is the US Government tries to encourage people when they turn 50 to increase their savings. The government allows you to save an additional $6,500 per year. PG&E requires you to make a separate election for the catch contribution. When you turn 50, if you go into your Fidelity Net Benefits account, you set up your elective deferral amount on the page. You can select a percentage for the catch-up contributions.

The calculation is the same as above. The difference is you would divide $6,500 by your base salary. 

 

Annual Contribution	/	Base Salary	=	Decimal	X 100	Contribution %
$6,500	/	$150,000	=	0.433	X 100	4.33%

Again you need to pick a whole number percentage. In this case, as long as you can afford I would round up. I’ll explain why in tips #4 & #5.

3. Minimum Contributions to Maximize Match

Cash Balance (Union & Management) (New Pension)

Union Match equals $0.75 per $1 up to 8% after 1 year of service.

Management and A&T Match equals $0.75 per $1 up to 8% as soon as you start contributing.

Final Average Pay Matching Calculation (Old Pension)

Union

The match equals $0.60 per $1 up to 3% or 6%. 

1 to 3 years of service is $0.60 per $1 up to 3% 

3 years + is $0.60 per $1 up to 6%

Management and A&T

The match equals $0.75 per $1 up to 6%. 

4. Monthly Matching

Since PG&E matches every month, you need to make a contribution on each paycheck, or PG&E won’t add a matching contribution. The easiest way to see if you to make sure you are getting the maximum match is to look at your last December stub and make sure you made a contribution. 

At least once a year, a PG&E employee assures me they contribute monthly. After pulling their December paystub, they pull their November paystub, and so on, until they see the contributions. Then the realization that they have been missing out on a month or two of matching dollars for several years.

You can either adjust your contribution percentage downward using Tip #1, which, if done right, would pull the same amount of money and get the maximum matching amount. Or, you can read Tip #5, save more, and get the maximum matching amount.

to be continued...

5. Spillover Election

6. After-Tax Contributions, regardless of income 

7. BrokerageLink

*Bonus Tip

Visit Podcast website: https://poweringyourretirement.com/2022/08/11/401k-tune-up-tips-part-1/(opens in a new tab)