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

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

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

Post by benevo » Thu Jan 10, 2019 3:31 pm

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

Post by mhalley » Thu Jan 10, 2019 11:08 pm

Sounds like market timing, the opposite of the bogleheads philosophy.
https://www.bogleheads.org/wiki/Boglehe ... philosophy

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

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

Post by phantom0308 » Fri Jan 11, 2019 12:13 am

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.

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

Post by #Cruncher » Fri Jan 11, 2019 8:13 am

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".

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