## Formula/tool to figure out benefits of max'ing 401(k) based on month

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benevo
Posts: 122
Joined: Wed Apr 05, 2017 7:21 am

### Formula/tool to figure out benefits of max'ing 401(k) based on month

Hi there!

Does anyone know of a good tool (or formula) to determine the benefits of max'ing your 401(k) at various times of the year? For example, if I max it in April vs October, how much more potential do I have to earn, etc.

Ideal would be a calculator that takes starting 401(k) balance into effect and, using the date entered, shows you how much you'd have extra in 5/10/20/etc years vs max'ing later.

Thanks for any advice!
-be

mhalley
Posts: 6610
Joined: Tue Nov 20, 2007 6:02 am

### Re: Formula/tool to figure out benefits of max'ing 401(k) based on month

Sounds like market timing, the opposite of the bogleheads philosophy.

phantom0308
Posts: 153
Joined: Thu Aug 25, 2016 6:52 pm

### Re: Formula/tool to figure out benefits of max'ing 401(k) based on month

I don’t think this is market timing. It’s the traditional DCA vs lump sum investing question. I don’t see an easy way to compare month to month like you’re suggesting. You can compare monthly contribution with annual contributions on portfolio visualizer.
If you want a rough idea, then you can use the historic annualized returns of the S&P 500 (9.8%) which is 0.782% compound monthly growth rate. If fast max out occurs in 3 months and slow max out occurs in y months and 401k max is z.
You’d compare
z*1/3 *.00782^12 + z*2/3 * .00782^11 + z*3/3*.00782^10 + z*.00782^9 ....
against the same thing for y months. That’s the annual difference which you could compound for as many years as you want.

#Cruncher
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### Re: Formula/tool to figure out benefits of max'ing 401(k) based on month

benevo wrote:
Thu Jan 10, 2019 3:31 pm
For example, if I max it in April vs October, how much more potential do I have to earn … Ideal would be a calculator that … shows you how much you'd have extra in 5/10/20/etc years vs max'ing later.
Say you invest \$10,000 annually in your 401(k). If I understand correctly, benevo, you'd like to estimate how much more you'd have by investing \$2,500 / month the first four months versus \$1,000 / month the first 10 months. I developed a little spreadsheet that does this for the simple case of a constant monthly growth rate. Here it is assuming annualized growth of 5%. It shows that after 20 years, you'd have accumulated about \$4,000 more by making your annual contribution over four months instead of ten.

Code: Select all

``````Row  Col A                               Col B      Col C    Col D
1  Starting balance                        0
2  Annual contribution                10,000
3  Annual growth rate              5.000000%
4  Monthly growth rate             0.407412%
5  Months to spread contribution          10          4
6  Value at end of year            10,268.50  10,393.92 [1]
7  Years                             Balance    Balance     Diff
8      5                              56,740     57,433      693
9     10                             129,156    130,734    1,577
10     15                             221,580    224,286    2,706
11     20                             339,538    343,685    4,147 [2]``````
To use this spreadsheet with other assumptions:
• Select All, Copy, and Paste [3] the following at cell A1 of a blank Excel sheet.

Code: Select all

``````Starting balance	0
Annual contribution	10000
Annual growth rate	0.05
Monthly growth rate	=(1+B3)^(1/12)-1
Months to spread contribution	10	4
Value at end of year	=FV(\$B4,B5,-\$B2/B5,0,0)*(1+\$B4)^(12-B5)	=FV(\$B4,C5,-\$B2/C5,0,0)*(1+\$B4)^(12-C5)
Years	Balance	Balance	Diff
5	=FV(\$B\$3,\$A8,-B\$6,-\$B\$1,0)	=FV(\$B\$3,\$A8,-C\$6,-\$B\$1,0)	=C8-B8
10	=FV(\$B\$3,\$A9,-B\$6,-\$B\$1,0)	=FV(\$B\$3,\$A9,-C\$6,-\$B\$1,0)	=C9-B9
15	=FV(\$B\$3,\$A10,-B\$6,-\$B\$1,0)	=FV(\$B\$3,\$A10,-C\$6,-\$B\$1,0)	=C10-B10
20	=FV(\$B\$3,\$A11,-B\$6,-\$B\$1,0)	=FV(\$B\$3,\$A11,-C\$6,-\$B\$1,0)	=C11-B11``````
• Format for readability.
• Modify assumptions in cells B1:B3 and B5:C5. Note that the starting balance in B1 won't affect the "Diff" column.
• You can change the number of years in cells A8, A9, A10, or A11.

1. Example calculation when \$2,500 invested at end of Jan, Feb, March, & April:
10,393.92 = 2500 * (1.00407412 ^ 11 + 1.00407412 ^ 10 + 1.00407412 ^ 9 + 1.00407412 ^ 8)
2. Example calculation of value after 20 years using the Excel FV function:
343,685 = FV(5%, 20, -10393.92, 0, 0)
3. If you have trouble pasting, try "Paste Special" and "Text".