Going from 24 to 26 pay cycles [Impact on 401(k) contributions?]

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Independent George
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Going from 24 to 26 pay cycles [Impact on 401(k) contributions?]

Post by Independent George » Thu Jan 02, 2020 12:54 pm

Starting this month, my employer is switching from semi-monthly to bi-weekly pay cycles. Out of idle curiosity, is this mathematically better or worse for my 401k contributions? I'm technically contributing earlier & more often each month, but I'm also contributing less with each pay cycle.

I know the difference will likely be minuscule at the end of the year, but I am curious about what the theoretical difference is. This will coincidentally also be the first year I max out my 401k contributions, which has me wondering about the effects.

ETA: shoot, I thought I'd posted this in 'theory'.

BuckyBadger
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Re: Going from 24 to 26 pay cycles

Post by BuckyBadger » Thu Jan 02, 2020 1:19 pm

I can't imagine any way this would change anything apart from the natural and unpredictable ebbs and flows of the stock market.

Check if your company does a top up or if you have to jump through hoops to try to max out on our last paycheck - but that doesn't have anything to do with number of pay periods, just with your particular plan.

livesoft
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Re: Going from 24 to 26 pay cycles

Post by livesoft » Thu Jan 02, 2020 1:22 pm

This is a totally unpredictable and unsolvable question to answer unless your 401(k) is invested in a savings account that pays a fixed rate for the entire year and thus is independent of how any volatile investments that one would use in a real 401(k) are priced.
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Quirkz
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Re: Going from 24 to 26 pay cycles

Post by Quirkz » Thu Jan 02, 2020 1:25 pm

Since you're stuck with it, I'd say it doesn't bear too much analysis. Why go digging for a reason to decide maybe you should potentially be a teensy bit upset?

But the real answer is it'll depend on when the investments post and what the market does over the entire year. You'd have to simulate one and compare it to the other to know for sure. Sounds like a lot of work for what could easily be little to no real difference.

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Kenkat
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Re: Going from 24 to 26 pay cycles

Post by Kenkat » Thu Jan 02, 2020 1:29 pm

Theoretically, if the contributions are invested when you are paid and since the market tends to go up over time, 26 paydays will get the money into the market slightly sooner and should be marginally better. But it would be very very very small.

If your company batches up paydays and sends the money in once a month, it won’t matter.

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gr7070
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Re: Going from 24 to 26 pay cycles

Post by gr7070 » Thu Jan 02, 2020 1:38 pm

Kenkat wrote:
Thu Jan 02, 2020 1:29 pm
Theoretically, if the contributions are invested when you are paid and since the market tends to go up over time, 26 paydays will get the money into the market slightly sooner and should be marginally better. But it would be very very very small.

If your company batches up paydays and sends the money in once a month, it won’t matter.
While seconding all the who cares responses, this was my reply as well. The market goes up historically; therefore get your money in ASAP.

It's the same answer/reasoning as lump sum beats DCA.

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whodidntante
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Re: Going from 24 to 26 pay cycles

Post by whodidntante » Thu Jan 02, 2020 1:39 pm

In general, you want to be paid as soon as possible after earning the money. Getting handed the money at the end of each working day would be ideal. But 26 pay periods will have to do.

You also want to invest the money as soon as possible after getting it, assuming you are a standard issue boglehead who will not admit to market timing. That's because expected returns for equities are currently positive and you can't admit to being able to time the market or you'll have to start a thread about it and track your time weighted returns. :happy

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rterickson
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Re: Going from 24 to 26 pay cycles

Post by rterickson » Thu Jan 02, 2020 1:53 pm

It may also depend on your employer.

I've worked places where payroll deductions are bimonthly -- for the two months per year where you receive a third paycheck, less gets taken out.

Gryphon
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Re: Going from 24 to 26 pay cycles

Post by Gryphon » Thu Jan 02, 2020 2:29 pm

rterickson wrote:
Thu Jan 02, 2020 1:53 pm
It may also depend on your employer.

I've worked places where payroll deductions are bimonthly -- for the two months per year where you receive a third paycheck, less gets taken out.
Where I last worked with a biweekly paycheck, it depended on the deduction. 401K contributions were taken from every paycheck (26 per year), but HSA contributions were only taken from the first two paychecks each month (24 per year). Which makes sense when I think about it. If you leave your job mid-year, your HSA eligibility will be prorated by month; having the same amount contributed each month eliminates any chance of over-contributing.

LTD insurance premiums were also first two paychecks only.
Last edited by Gryphon on Thu Jan 02, 2020 2:34 pm, edited 1 time in total.

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One Ping
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Re: Going from 24 to 26 pay cycles

Post by One Ping » Thu Jan 02, 2020 2:32 pm

To put some numbers to this we can analyze the two scenarios using a future value calculation and see just how small the difference between the two is likely to be.

Assume the maximum 2020 contribution of $19,500 is evenly distributed between all 26/24 paychecks and those contributions see an annual rate of return of 6% throughout the year.

Scenario 1:
24 contributions of $812.50/check @ 6% have an account value at year end of $20,121.22.

Scenario 2:
26 contributions of $750.00/check @ 6% have an account value at year end of $20,119.35.

Variations in return through the year may change the numbers somewhat, but not worth thinking about IMO …
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Chadnudj
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Re: Going from 24 to 26 pay cycles

Post by Chadnudj » Thu Jan 02, 2020 2:32 pm

The real trick is to learn to budget as if you only receive 2 paychecks a month, and then plow the 2 times a year you receive a third paycheck in a month into investing/savings/debt reduction.

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Tamarind
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Re: Going from 24 to 26 pay cycles

Post by Tamarind » Thu Jan 02, 2020 2:33 pm

Doesn't matter for your investing, but if you have extra withholding amounts on your W-4, make sure you update it!

retiringwhen
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Re: Going from 24 to 26 pay cycles

Post by retiringwhen » Thu Jan 02, 2020 2:35 pm

whodidntante wrote:
Thu Jan 02, 2020 1:39 pm
In general, you want to be paid as soon as possible after earning the money.
I've listened to way too many Country songs to consider this an optimal approach :wink:

StrangePenguin
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Re: Going from 24 to 26 pay cycles

Post by StrangePenguin » Thu Jan 02, 2020 2:40 pm

Chadnudj wrote:
Thu Jan 02, 2020 2:32 pm
The real trick is to learn to budget as if you only receive 2 paychecks a month, and then plow the 2 times a year you receive a third paycheck in a month into investing/savings/debt reduction.
I do this! (I save money from each normal check as well)

Jags4186
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Re: Going from 24 to 26 pay cycles

Post by Jags4186 » Thu Jan 02, 2020 2:42 pm

The real difference is that you get 27 pay periods once every 7 years. You just got a raise (assuming your employer divides your annual salary by 26 and not 27 in those years, of course.)

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Psyayeayeduck
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Re: Going from 24 to 26 pay cycles

Post by Psyayeayeduck » Thu Jan 02, 2020 2:44 pm

FYI, it is possible that you may get a 27th paycheck this year depending on a few factors and how your payroll department handles them.

If your first bi-weekly paycheck starts this Friday (Jan 3rd 2020), you will end up with a paycheck on Jan 1st 2021 a year from now(it's Friday as well). Since many companies will treat it as a holiday, some payroll departments will opt to pay you the day before instead of paying the day of a holiday. This means that your Jan 1st 2021 paycheck, originally meant as a 2021 contribution, may land on Dec 31st 2020 which can translate to a 2020 contribution instead.

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bogleblitz
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Re: Going from 24 to 26 pay cycles

Post by bogleblitz » Thu Jan 02, 2020 2:46 pm

I've been on both 24 and 26 pay cycles.

I love 24 pay cycles since it is always on the same days (15th day and end of the month)

26 pay cycle is confusing because pay is always on a different day and some months you get pay 3 times. Which throws off the budgeting. As other mentioned, getting payed as fast as possible is better but I still prefer 24 pay cycle.

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dm200
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Re: Going from 24 to 26 pay cycles

Post by dm200 » Thu Jan 02, 2020 2:58 pm

Psyayeayeduck wrote:
Thu Jan 02, 2020 2:44 pm
FYI, it is possible that you may get a 27th paycheck this year depending on a few factors and how your payroll department handles them.
If your first bi-weekly paycheck starts this Friday (Jan 3rd 2020), you will end up with a paycheck on Jan 1st 2021 a year from now(it's Friday as well). Since many companies will treat it as a holiday, some payroll departments will opt to pay you the day before instead of paying the day of a holiday. This means that your Jan 1st 2021 paycheck, originally meant as a 2021 contribution, may land on Dec 31st 2020 which can translate to a 2020 contribution instead.
Yes - the actual frequency of a 27th pay period is about (or exactly,) every eleven years (on average).

I think there are several different ways employers do 401k deductions. I think some just take the deductions from the first (or only) two paydays per month, while others take the deduction from every paycheck. I cannot recall how such employers handle a 27 check year.

Frankly, nothing to do with 401k, I much prefer a 26 (and occasional 27) pay period year:
1. You always are paid (except perhaps with a holiday) on the same day of the week
2. You always submit or verify hours, vacation, sick time, etc. on the same day of the week.
3. If you budget/plan expenses based on two paydays a month - you then have two (occasionally three) months a year for any over budget and/or unplanned expenses.

On my first job after college for a Megacorp, I was paid every week. Weekly pay was once more common, but much less common today. At a later employer, I was also paid weekly for the first year, and then they converted from weekly to biweekly.

an_asker
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Re: Going from 24 to 26 pay cycles

Post by an_asker » Thu Jan 02, 2020 2:59 pm

Independent George wrote:
Thu Jan 02, 2020 12:54 pm
Starting this month, my employer is switching from semi-monthly to bi-weekly pay cycles. Out of idle curiosity, is this mathematically better or worse for my 401k contributions? I'm technically contributing earlier & more often each month, but I'm also contributing less with each pay cycle.

I know the difference will likely be minuscule at the end of the year, but I am curious about what the theoretical difference is. This will coincidentally also be the first year I max out my 401k contributions, which has me wondering about the effects.

ETA: shoot, I thought I'd posted this in 'theory'.
Is the biweekly salary times 26 exactly equal to the twice-a-month salary times 24? If so, pat yourself on the back. You will make out like a king. Every year, you will be paid for one extra day :-) In 12-13 years, you will get one biweekly salary check more than you would get with your current (before changed pay schedule) situation.

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dm200
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Re: Going from 24 to 26 pay cycles

Post by dm200 » Thu Jan 02, 2020 3:19 pm

Jags4186 wrote:
Thu Jan 02, 2020 2:42 pm
The real difference is that you get 27 pay periods once every 7 years. You just got a raise (assuming your employer divides your annual salary by 26 and not 27 in those years, of course.)
I calculate about every eleven years (11.2 to be more precise, according to my calculations).

If the employer does the math correctly and precisely - there will be (nor should there be any "raise". The correct divisor should be 26 plus a fraction - and should be the same for all years.

On my first out of college job for a MegaCorp, when I got my first weekly pay statement, I did the math to verify that I was paid correctly - according to my job offer letter. The weekly gross pay was $147.00. So, I first multiplied this by 52 weeks - and the result was a little lower than the annual amount on my offer letter. Then, I considered that a year had one extra day beyond 52 weeks - still a little short.

Then, I realized that there was a leap year every four years - and then it came out to my annual salary on my offer letter.

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dm200
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Re: Going from 24 to 26 pay cycles

Post by dm200 » Thu Jan 02, 2020 3:21 pm

an_asker wrote:
Thu Jan 02, 2020 2:59 pm
Independent George wrote:
Thu Jan 02, 2020 12:54 pm
Starting this month, my employer is switching from semi-monthly to bi-weekly pay cycles. Out of idle curiosity, is this mathematically better or worse for my 401k contributions? I'm technically contributing earlier & more often each month, but I'm also contributing less with each pay cycle.
I know the difference will likely be minuscule at the end of the year, but I am curious about what the theoretical difference is. This will coincidentally also be the first year I max out my 401k contributions, which has me wondering about the effects.
ETA: shoot, I thought I'd posted this in 'theory'.
Is the biweekly salary times 26 exactly equal to the twice-a-month salary times 24? If so, pat yourself on the back. You will make out like a king. Every year, you will be paid for one extra day :-) In 12-13 years, you will get one biweekly salary check more than you would get with your current (before changed pay schedule) situation.
I hope the OP lets us know the exact ratios.

I would strongly suspect that almost all private employers would not do it this way - and would, rather, do it correctly and precisely - even taking leap years into effect.

soccerrules
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Re: Going from 24 to 26 pay cycles

Post by soccerrules » Thu Jan 02, 2020 3:31 pm

I would adjust to the 2 paychecks a month and live off of that amount. Then in 2 of the months (Jan and July for me) this year you will have an extra check-- save that amount for Roth, 529, Car fund, vacation --whatever.
Don't let your outflow exceed your income or your upkeep will be your downfall.

stan1
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Re: Going from 24 to 26 pay cycles

Post by stan1 » Thu Jan 02, 2020 3:35 pm

We always had 26 pay periods per year but operated on a monthly budget (mortgage, utilities, etc). We often used the extra two pay periods to make an extra mortgage payment.

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dm200
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Re: Going from 24 to 26 pay cycles

Post by dm200 » Thu Jan 02, 2020 3:36 pm

stan1 wrote:
Thu Jan 02, 2020 3:35 pm
We always had 26 pay periods per year but operated on a monthly budget (mortgage, utilities, etc). We often used the extra two pay periods to make an extra mortgage payment.
Yes - that can be an excellent way of budgeting.

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NearlyRetired
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Re: Going from 24 to 26 pay cycles

Post by NearlyRetired » Thu Jan 02, 2020 3:39 pm

Independent George wrote:
Thu Jan 02, 2020 12:54 pm
Starting this month, my employer is switching from semi-monthly to bi-weekly pay cycles. Out of idle curiosity, is this mathematically better or worse for my 401k contributions? I'm technically contributing earlier & more often each month, but I'm also contributing less with each pay cycle.

I know the difference will likely be minuscule at the end of the year, but I am curious about what the theoretical difference is. This will coincidentally also be the first year I max out my 401k contributions, which has me wondering about the effects.

ETA: shoot, I thought I'd posted this in 'theory'.
I'd be more interested in why they have made the switch in payment frequency
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an_asker
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Re: Going from 24 to 26 pay cycles

Post by an_asker » Thu Jan 02, 2020 3:42 pm

dm200 wrote:
Thu Jan 02, 2020 3:21 pm
[...]
I hope the OP lets us know the exact ratios.

I would strongly suspect that almost all private employers would not do it this way - and would, rather, do it correctly and precisely - even taking leap years into effect.
Speaking only for my employer - based on the few years that I get an official letter from boss saying that my new pay will be $x for the year - that annual number is a strict multiple (by 26) of my biweekly pay check. In other words, I am getting my annual salary for "working 364 days".

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Re: Going from 24 to 26 pay cycles [Impact on 401(k) contributions?]

Post by LadyGeek » Thu Jan 02, 2020 4:09 pm

This thread is now in the Investing - Theory, News & General forum (theory). I also retitled the thread for clarity.
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Independent George
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Re: Going from 24 to 26 pay cycles [Impact on 401(k) contributions?]

Post by Independent George » Thu Jan 02, 2020 4:22 pm

an_asker wrote:
Thu Jan 02, 2020 2:59 pm
Is the biweekly salary times 26 exactly equal to the twice-a-month salary times 24? If so, pat yourself on the back. You will make out like a king. Every year, you will be paid for one extra day :-) In 12-13 years, you will get one biweekly salary check more than you would get with your current (before changed pay schedule) situation.
I had been getting my annual salary divided by 24 - I'll tell you once I get my new paystub, but I assume that the new paycheck will be my annual divided by 26.
soccerrules wrote:
Thu Jan 02, 2020 3:31 pm
I would adjust to the 2 paychecks a month and live off of that amount. Then in 2 of the months (Jan and July for me) this year you will have an extra check-- save that amount for Roth, 529, Car fund, vacation --whatever.
I aim for about $1,000 of buffer left in checking after paying off my primary credit card on the 5th. This was a bit easier when paid semi-monthly, but it's all just a matter of tracking your expenditures.
NearlyRetired wrote:
Thu Jan 02, 2020 3:39 pm
I'd be more interested in why they have made the switch in payment frequency
I have no idea - so you might say... it's above my pay grade.

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