Maxing 401k as quickly as possible?

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billydelp4
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Maxing 401k as quickly as possible?

Post by billydelp4 » Thu Dec 10, 2015 9:11 am

I am contemplating maxing out my wife's 401k quickly in 2016. This year she hit the contribution limit in September. I would be shooting for the max by March for next year.

Here are my thoughts on why this would be alright:
1) We are without a mortgage for the 1st quarter as we are staying with in laws while a new home is being built. It is estimated to be completed in March.
2) Longer time with the money in the market. - I am not sure if it will make any significant difference over the course of career but I don't anticipate it to be worse then spreading it out over the year
3) She doesn't have a match so we won't be missing out on employer contributions throughout the year even if she has hit the limit and isn't contributing.
4) For some reason, it is easier for us to be diligent about investing in the taxable account when the 401k contribution isn't coming out of our paychecks. This is turn helps us ensure our savings rate meets the necessary %.

Is there anything that I am missing that would make it wiser to spread the contributions out of the year rather than compacting them into the 1st quarter? My inclination is that this is as simple of a question as "lump sum vs. DCA" but since it is in a 401k, I'm not sure if there are nuances I may be missing.

Thanks in advance,

Billy

niceguy7376
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Re: Maxing 401k as quickly as possible?

Post by niceguy7376 » Thu Dec 10, 2015 9:19 am

The % limitation in contribution towards 401k in your spouse payroll.
some companies limit it to 25% of paycheck to 75% of paycheck that you can contribute to 401k. Depending on spouse salary, you will know the earliest you can hit the max.

Miguelito
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Re: Maxing 401k as quickly as possible?

Post by Miguelito » Thu Dec 10, 2015 9:24 am

I don't like that plan at all, personally.

I rather dollar cost average. In fact one of us gets a pretty hefty bonus in January and we make sure to opt out of the 401k in January just to avoid plunking down so much of the contribution in one go. The other one of us must make a 6% contribution every paycheck to get the company match, so it has to be spread out very carefully throughout the year.

livesoft
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Re: Maxing 401k as quickly as possible?

Post by livesoft » Thu Dec 10, 2015 9:26 am

I always tried to max my 401(k) plan contributions as soon as possible. I was happy to get a paycheck in the amount of $0.00 for a few months at the beginning of the year. Your spouse's plan to do the same seems fine with me if the plan fund options are fine with her.

And Billy, you don't max out your wife's contributions --- she does.
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ERISA Stone
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Re: Maxing 401k as quickly as possible?

Post by ERISA Stone » Thu Dec 10, 2015 9:45 am

livesoft wrote:
And Billy, you don't max out your wife's contributions --- she does.
Are you implying he made a sexist or demeaning statement?

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jimb_fromATL
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Re: Maxing 401k as quickly as possible?

Post by jimb_fromATL » Thu Dec 10, 2015 9:47 am

It depends partly on how much cash reserves you have. If there are unexpected expenses with the new home, it could be better to have a lot more cash on hand.

Without a crystal ball to predict the market, then over the rest of your life a few bucks more invested in the next three or four months is not likely to make much difference. And it will be a lot easier to contribute more to the 401(k) later than it would be to try get the money back out ... which in some cases is virtually impossible.

jimb

Topic Author
billydelp4
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Re: Maxing 401k as quickly as possible?

Post by billydelp4 » Thu Dec 10, 2015 9:56 am

ERISA Stone wrote:
livesoft wrote:
And Billy, you don't max out your wife's contributions --- she does.
Are you implying he made a sexist or demeaning statement?
With her blessing, I control the contribution %. :twisted:

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mhc
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Re: Maxing 401k as quickly as possible?

Post by mhc » Thu Dec 10, 2015 10:02 am

Maxing out the 401k early delays tax withholdings, which is a good thing. When you consider the time value of money, you will be paying less in taxes. A very little less, but why pay more than you need to.

nordsteve
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Re: Maxing 401k as quickly as possible?

Post by nordsteve » Thu Dec 10, 2015 10:04 am

Both my wife and I make maximum contributions at the start of each year. Benefits:

1. Money works for longer in tax deferred account
2. Match captured earlier, particularly if job change is a potential issue
3. Sure way to win the "smallest net paycheck" contest at work

This spreadsheet makes a rough comparison of the first year return of the equal monthly investment vs one where all of the contribution is front loaded to first five months of the year. The first year return in the latter scenario is over 50% higher than the former.

ERISA Stone
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Re: Maxing 401k as quickly as possible?

Post by ERISA Stone » Thu Dec 10, 2015 10:09 am

nordsteve wrote:Both my wife and I make maximum contributions at the start of each year. Benefits:

1. Money works for longer in tax deferred account
2. Match captured earlier, particularly if job change is a potential issue
3. Sure way to win the "smallest net paycheck" contest at work

This spreadsheet makes a rough comparison of the first year return of the equal monthly investment vs one where all of the contribution is front loaded to first five months of the year. The first year return in the latter scenario is over 50% higher than the former.
This is fine but keep in mind the match doesn't work this way for everyone. If your match is based on the payroll period (with no true up) and you frontload, you may be getting shorted in your matching contribution.

FuzzyButtons
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Re: Maxing 401k as quickly as possible?

Post by FuzzyButtons » Thu Dec 10, 2015 10:11 am

Nothing wrong with maxing it out early if your spouse's plan allows you to contribute enough per check to do it, and if there isn't an employer match tied to each check, and if you have the savings to cover any emergencies that might come up in the meantime. In general, in the market sooner works out better than dollar cost averaging over the year. I hear lots of stories of people doing it that way.

I do it the opposite way. At the start of the year I contribute the minimum 4% my plan requires to get the full match. I then switch to a higher percentage as my gross income passes the top of the 15% tax bracket. This works for me because I'm able to defer all my compensation that would have been in the 25% bracket, between 401(k), traditional IRA, HSA, and other deductions. But I'm not confident of my job security. If I were to lose my job halfway through the year, I'd rather not have put a bunch of money already in the 401(k) that would have ended up being in the 15% tax bracket. So I don't put it in until I've earned enough to hit that mark.

Last year I ended up doing 75% contributions for my last few checks, which is the maximum allowed on my company's plan. I've only done it this way for a couple of years, though. I'm convinced the math works right for this, given my concern about job security. But it is a bit weird, so sometimes I think I should just go back to putting the same percent in every check. :?

quantAndHold
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Re: Maxing 401k as quickly as possible?

Post by quantAndHold » Thu Dec 10, 2015 10:12 am

Does she have a 401k match? If she does, does it "true up" at the end of the year? Some plans do, some don't. If it doesn't true up, she'll be leaving a lot of the match on the table.

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jhfenton
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Re: Maxing 401k as quickly as possible?

Post by jhfenton » Thu Dec 10, 2015 10:15 am

Usually the issue is the company match, but since that's not a problem for your wife's plan, I don't see any issues with front-loading it. It might make sense from a cash flow perspective to take advantage of the quarter with no mortgage to front load the 401(k).

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jimb_fromATL
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Re: Maxing 401k as quickly as possible?

Post by jimb_fromATL » Thu Dec 10, 2015 12:02 pm

To get a better feel for the odds, I dusted off an old spreadsheet that calculates rolling monthly averages and returns for lump sum versus DCA and modified it to show investing it all in 4 months instead of spreading it out over 12 months.

Using Yahoo monthly date for Vanguard's balance fund VWELX, during approximately 417 rolling 12 month periods from 01/1981 to 10/2015, investing it all in the first 4 months instead of spreading it out over 12 months did better 65 periods -- 15.6% of the time.
For 34 full calendar years 4 months up front did better 7 years -- 20.6% of the years.

This counts the YTD results for 2015 as a full year, since it's so close.

Here would be the results for $18K per year using the same monthly returns of the following years:
Except for the second worst crash in history in 2008, not a hekkuvva lot of difference

Code: Select all

results for investing  $18,000  

monthly data
from		
year		first 4 mo 	full year	difference
2015	 	$18,456 	 $18,269 	1%
2011		 $18,661 	 $18,196 	2.6%
2008	 	$16,997 	 $15,291 	11.2%
2002	 	$18,283 	 $17,274 	5.8%
2001	 	$18,654 	 $18,424 	1.3%
1990	 	$19,024 	 $18,304 	3.9%
1987	 	$17,057 	 $16,704 	2.1%
1981	 	$18,804 	 $18,524 	1.5%
jimb

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