Deferred Annual savings - limits?

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mjonis
Posts: 7
Joined: Wed Apr 10, 2019 7:07 pm

Deferred Annual savings - limits?

Post by mjonis »

New user here.

Assuming I am reading/understanding the "Deferred annual savings" correctly:

1) This is where I'd put in how much I'm contributing each year to say, 457(b) or 401k plan, yes?
2) The documentation says this increases by the rate of inflation every year?
3) but doesn't seem to understand what the limit is?


For example, let's say I'm already at the max limit (15%). If the average rate of inflation is say, 3%, how does the software deal with this? I can't deposit 18% the next year as there's IRS limits (yes, 15% but there's also a dollar limit which may be governed by whether your plan is in a "safe harbor" or not).

I'm wondering if the software is going to over-estimate future contributions and skew results?
jimr
Posts: 821
Joined: Thu Feb 28, 2008 6:48 pm

Re: Deferred Annual savings - limits?

Post by jimr »

The simulation logic doesn't know anything about the contribution limit, so you'll want to make sure you enter an amount and a COLA rate that will keep the contribution under the limit. IIRC, the rules for this can be pretty squirrly, especially for highly compensated employees and that would be way too much complexity to try to incorporate into the simulation.

If you enter the deferred savings cash flow in additional inputs instead of using the main input window, you can manually set the inflation adjustment (COLA or cost of living adjustment) to a percent that's lower than inflation to be more conservative.
mjonis
Posts: 7
Joined: Wed Apr 10, 2019 7:07 pm

Re: Deferred Annual savings - limits?

Post by mjonis »

Thanks, I must've done something wrong.

So when I entered "additional inputs" and put the 457b contribution (current year 15% would be 15,399), and a 1% COLA
I notice on the Detailed View, it actually DECREASES the "new investment" amount so that by the time I'm 65 it's only depositing like $10,490

??

Or is that to compensate for inflation?
ie: when I'm 65, the $15,399 (actually it'll be more since it needs to factor in yearly wage increases), will only be worth $10,490??

And how to factor in wage increases for 457/401k contributions?

Our average has been 2%/year on the conservative side.
jimr
Posts: 821
Joined: Thu Feb 28, 2008 6:48 pm

Re: Deferred Annual savings - limits?

Post by jimr »

the year-by-year detailed view table shows all amounts in today's value dollars. So an amount that stays the same from year to year is exactly tracking inflation. An amount that doesn't keep up with inflation will decrease year-to-year and an amount growing by more than inflation will increase year-to-year
mjonis
Posts: 7
Joined: Wed Apr 10, 2019 7:07 pm

Re: Deferred Annual savings - limits?

Post by mjonis »

thanks Jim,

So is there a way to both:
1) account for increased contributions (ie, if you're getting a 2% raise every year and putting 15% of your income into the fund, then the dollar contribution will increase every year)

and

2) Account for inflation?

IF I'm understanding you correctly, the "default" I think is 3% inflation, so if you left it alone, (at the 3%), and you were getting a 2% increase every year, that really means you're at like a 1% "decrease" caused by inflation? (ie, your 2% increase isn't keeping pace with the 3% inflation rate).

Sorry for the stupid question, I'm just trying to make sure I'm putting things correctly.
jimr
Posts: 821
Joined: Thu Feb 28, 2008 6:48 pm

Re: Deferred Annual savings - limits?

Post by jimr »

It sounds like you have a good understanding of how it works. The only real question is whether you want to accept the default 3% inflation rate or adjust it downward. Alternatively, you could just leave it at 3% and also set up your savings contributions so they keep up with inflation instead of using the fixed 2% increase.

That's all really just a judgement call about what kind of assumptions you want to make about the future. It also can make sense to try both approaches and see how much the difference is in the result.
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