How to save (potentially) thousands more for retirement in one easy step

Keep your investment fees (otherwise known as the expense ratio) low–this means on everything you have invested: your IRA/401k/403b/457b/taxable investments. This interactive infographic from PBS’s Frontline explains what fees are and why you should keep them as low as you can. If that doesn’t light a fire under your butt and get you looking at what fees/expense ratio you are paying, I don’t know what will.

So, what’s a “low” fee? If you are looking at your employer’s list of 401k investment options, you should be able to compare their expense ratios as well their rates of return. But for a comparison, Mr. Money Mustache likes the Vanguard VTSMX index which has an expense ratio of 0.17%. I have a Fidelity IRA in FUSEX, which has an expense ratio of 0.10%. And my 457b with my employer is in VIIIX, which has an expense ratio of 0.025%.

You might also notice the examples I’ve given are all index funds. That’s because actively managed funds generally have higher fees than a straightforward index fund which simply tracks the S&P 500. You can find a million other articles about index funds, or you can read one book: John Bogle’s Little Book of Common Sense Investing (preferably free from your local library). I read most of it in a weekend, and then immediately switched a bunch of our mutual funds to index funds. Fun stuff.

One for you, nineteen for me

Since I did a taxes post last year, I thought I should also do one this year, and admit that I am fallible. Yes, I made a mistake on our taxes.

In my excitement to get everything done, I filed on Feb. 3 and within less than a week, we had paid our federal taxes and gotten our state refund. Then, we stopped by my husband’s former residence to visit family, and discovered a 1099-B which I’d forgotten about.

We cashed out an old mutual fund in the beginning of 2011 and put it into an IRA and claimed that deduction on our 2010 taxes. However, I forgot that because we cashed it out instead of rolling it over, we’d have that darn 1099-B. It worked out, though, because re-filing the amended forms will result in refunds from both federal and state, since there was a loss on the mutual fund, an investment made by my husband’s father on his behalf. Because we have to re-file by mail, though, we won’t see that money for 8-20 weeks. I think the 20 weeks estimate is a little extreme, but if you’re going to pad a number, might as well make it 5 months, right?

Otherwise, the taxes worked out fairly well. We owed $327 federal but got back $197 from the state, so in all, only ‘owed’ $130. This is even closer than last year’s numbers, in which we got refunds for both, so I’m pleased. Other things:

1) We saved 8% of our adjusted gross income in our emergency fund in 2011.
2) We paid nearly 18% of our adjusted gross income toward debt in 2011, while only 6% of that was required payments, meaning nearly 12% was debt snowball payments.
3) Total, we saved/put toward debt over 25% of our adjusted gross income.

I’ll definitely be checking in with the 2012 withholding calculator to see if we can’t get our withholding even closer this year, but I think it would be tough.

Are you ready for your 2012 pay cut?

Unless the Super Committee can agree in time, everyone paying payroll taxes will see a 2% increase in their payroll taxes on their paychecks come 2012. Payroll taxes were cut from 6.2% to 4.2% at the beginning of 2011 to help stem the tide of recession. This put a little bit more into our pockets each month in 2011, but, in my opinion, this is unlikely to continue.

We got a letter from my spouse’s employer informing us that the organization is increasing salaries by 2% in 2012, which will offset the taxes, so his paychecks will stay the same. My employer is increasing salaries by 1%, so I’ll actually see a decrease come January. We will budget with this in mind, which is all we can do. Better to know this now than after our first paychecks of the year and the budget being short.

Declare the pennies on your eyes

I finished our taxes last night, and what a relief that was. It was the culmination of our plans in 2010. Here’s why:

1) I adjusted our withholdings earlier in the year so they would be as near to perfect as possible.
2) We wanted to maintain our student lifestyle even with our significantly better jobs/income.
3) We wanted to reduce our taxes through the use of Section 125 plans and pre-tax retirement savings (401k and 457b).

So, did we succeed? I’d say so.

1) Our federal refund is $201, and our state is $161. The only reason we got a federal refund was that neat little $800 Making Work Pay Credit. I have no idea what that is, but I trusted TurboTax that we qualified for it. We also got a $66 credit from our state because we had Long Term Care insurance.
2) By rough estimates, we put a bit more than 20% of our 2010 adjusted gross income toward debt and a fully funded emergency fund. In other words, we lived just fine on 80% of our income.
3) A rather large portion of our gross income went into our 401k, 457b, and a cashed-out mutual fund toward the end of the year went directly into an IRA.

I already adjusted our withholding for 2011 to get it even closer this year–woo, slightly more take-home pay! I’ll check throughout the year to make sure we’re still on track, because I’m nerdy like that, and it makes me happy to see that “your refund or tax payment will be $25 or less.” Aww, yeah.

Year end wrap-up

We’re nearing the last couple paychecks this year, and I was looking at some of our numbers for the year in an attempt to get ready to do our taxes as soon as the forms start rolling in…

$13,369.27 of debt paid off
$2,000.54 in student loan interest paid (estimated)
$10,000 goal for emergency savings by the end of February 2011 — nearly there

This is also going to be the first year that we’re probably going to owe federal income tax–and I’m more than definitely okay with that. Only $2,500 of student loan interest is deductible, so I’m glad we aren’t over that amount. Seeing that we paid as much as we did on interest makes me feel a little twitchy, and the tax benefit only slightly makes up for that. Next year, the plan is to kick the debt snowball into high gear and pay off more than half of what’s left. We’re coming to get you, debt…

I love payday

I really love paydays. Since I get paid every other week, and so does my husband, but on opposite weeks, a paycheck arrives in our account every single week. I love watching that net worth change each week in my account. I also love knowing we’re taking home the right amount. What do I mean by that?

I recently checked that our federal income tax withholding is accurate. I used this easy calculator from the IRS. Since I adjusted my withholding a few months ago, it looks like we’re on target to be within that sweet $25 range (either having to pay less than $25 in taxes, or get a refund of less than $25).

Now, I love getting a tax refund as much as anyone, but my husband and I decided that rationally, it didn’t make sense to give the government an interest-free loan of our money. We could be paying down our own debt with that money, or actually getting some small amount of interest in a savings account, or even putting that money into our IRAs for our new life in Spain in 2045… kidding. Maybe.