Author Topic: Frontloading 401K - 2016  (Read 6390 times)

canadian bacon

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Frontloading 401K - 2016
« on: January 27, 2016, 10:27:50 AM »
Hey, is anyone else frontloading their 401Ks for 2016?
Assuming that the market is down NOW and will be better at the end of the year... Seems to be a good idea.
I begin contributing at my company max (50%) next month.

J Boogie

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Re: Frontloading 401K - 2016
« Reply #1 on: January 27, 2016, 11:34:08 AM »
Yeah, doesn't seem like a bad time to frontload.

I would be, but I just bought a duplex that I'm renovating.  Tough to know exactly how much some of these updates will be (esp the ones I'm not doing myself), so I'm more interested in cash at the moment.




JoJo

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Re: Frontloading 401K - 2016
« Reply #2 on: January 27, 2016, 11:38:09 AM »
Just be sure your company continues their matching after you’ve contributed up to the max for the year.  Some zero out their matching once your contribution goes to zero from maxing out.

canadian bacon

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Re: Frontloading 401K - 2016
« Reply #3 on: January 27, 2016, 01:03:15 PM »
I am in this case with company matching.  The company will only match as long as I keep contributing.

I have to reserve 6% per paycheck for the company matching so my front loading has to be done with this reservation.  Added another tab to my retirement spreadsheet to keep track of yet another thing.  ha ha

mathlete

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Re: Frontloading 401K - 2016
« Reply #4 on: January 27, 2016, 01:04:42 PM »
Short answer: The title of this thread could be, "Timing the market - 2016"

Longer answer:
If you think the market is on sale then go for it. The Schiller PE ratio stands at about 24 right now which to me, is more or less as irrationally exuberant as the low 27s we were seeing when the market was hitting all time highs in 2015.

Front loading your 401k is equivalent to calling the bottom. There is nothing wrong with calling a bottom, but it should probably be backed up by something more than the assumption that the market is "down now and will be better at the end of the year."

Take 2008 for example. On this day in 2008, the S&P was around 1330, down from a high of about 1560 the prior year. By the end of 2008, the index was hovering around 900. A theoretical person maxing out their 401k who front-loaded at the start of 2008 would have cheated themselves out of about $4K in purchasing at or near the record bottom.

Of course I cherry-picked one of the worst years in modern history but the point still stands. Not all calendar years are up years. Most are, but then again, most 12 month periods probably are as well so you could make a case for loading in any month of the year.

Real Answer: Depending when a person plans to access their retirement accounts, it probably doesn't matter.

woodnut

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Re: Frontloading 401K - 2016
« Reply #5 on: January 27, 2016, 01:13:53 PM »
I'm front-loading my 401k but for entirely different reasons.  I intend to not have a job at some point this year, thus I am front-loading now to get as close to $18K limit as possible.

J Boogie

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Re: Frontloading 401K - 2016
« Reply #6 on: January 27, 2016, 01:24:43 PM »
Front loading your 401k is equivalent to calling the bottom.

Front loading ≠ market timing.

In this instance, the OP is infusing a little market timing into his decision to front load - but regardless, front loading can be proven as an effective strategy on its own.

Front loading is just putting your money to work as quick as possible.  If you are not a market timer, you will always err on the side of front loading.  Therefore it's market timing to avoid front loading on the suspicion that the market will go down.

Like you said, it probably doesn't matter.  But you front load enough and those dividends and gains are likely to add up.  I'll probably front load next year if I have a better cash position.

BarkyardBQ

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Re: Frontloading 401K - 2016
« Reply #7 on: January 27, 2016, 01:30:05 PM »
Front loading your 401k is equivalent to calling the bottom.

Front loading ≠ market timing.

In this instance, the OP is infusing a little market timing into his decision to front load - but regardless, front loading can be proven as an effective strategy on its own.

Front loading is just putting your money to work as quick as possible.  If you are not a market timer, you will always err on the side of front loading.  Therefore it's market timing to avoid front loading on the suspicion that the market will go down.
Like you said, it probably doesn't matter.  But you front load enough and those dividends and gains are likely to add up.  I'll probably front load next year if I have a better cash position.

Or you could get a couple 0% cash back credit cards, and pay them off after you front load. We do this and only hold cash for approx 3 months.

J Boogie

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Re: Frontloading 401K - 2016
« Reply #8 on: January 27, 2016, 02:13:59 PM »
Front loading your 401k is equivalent to calling the bottom.

Front loading ≠ market timing.

In this instance, the OP is infusing a little market timing into his decision to front load - but regardless, front loading can be proven as an effective strategy on its own.

Front loading is just putting your money to work as quick as possible.  If you are not a market timer, you will always err on the side of front loading.  Therefore it's market timing to avoid front loading on the suspicion that the market will go down.
Like you said, it probably doesn't matter.  But you front load enough and those dividends and gains are likely to add up.  I'll probably front load next year if I have a better cash position.

Or you could get a couple 0% cash back credit cards, and pay them off after you front load. We do this and only hold cash for approx 3 months.


I'm no Dave Ramsey guy, but I get a little freaked out by that kind of leverage.  My job situation is pretty solid but my wife is pregnant and we've talked about her quitting a few times.  I can't help but want to feel a little more solid financially, like in a consistent routine with my mortgage payments and collecting rent from the other unit before going hard on the 401k.  The other thing is as a duplex owner I don't want to be undercapitalized which I currently am.

I can see doing that when I've got no big expenses on the horizon with at least 8k cash on hand.  I just don't want to get in the mindset of using credit when cash is tight.

BarkyardBQ

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Re: Frontloading 401K - 2016
« Reply #9 on: January 27, 2016, 02:22:46 PM »
What works for you works. I just like sharing alternatives around hoarding cash. We have stable jobs and three expenses requiring cash, so it works for now. Once we have kids though, we'll probably revert to a more conservative format too.

CryingInThePool

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Re: Frontloading 401K - 2016
« Reply #10 on: January 27, 2016, 02:30:21 PM »
I'm Frontloading but that's just to cover myself in case I do decide to pull the plug and RE this year.  I'm 98% certain that 2016 is not going to be the year but I didn't want lack of 401k contribution to be a factor. 

I didn't really consider this a flavor of market timing as the extra going into 401k is coming from what would have been market bound in a taxable account anyways.  No additional contributions; just a different mix between non-tax/taxable from first half of the year to last.




Gone Fishing

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Re: Frontloading 401K - 2016
« Reply #11 on: January 27, 2016, 02:56:38 PM »
I'm front-loading my 401k but for entirely different reasons.  I intend to not have a job at some point this year, thus I am front-loading now to get as close to $18K limit as possible.

+1


Assuming the frontloaded funds would have been otherwise invested in taxable investments, this might actually result in increased future taxes in the event 401(k) gains are taxed at a higher rate than the gains on the taxable investments.  Don't have time to run any comparisons but my gut is that for someone on the MMM plan, the difference would be pretty minimal as long as the favorable dividend/cap gains rates remain in effect.  The (best?) reason to frontload is to hedge against job loss which could impair 401(k) contributions for at least some period of time, assuming someone has enough in a taxable account or ROTH contributions on hand to fund living expenses. 
« Last Edit: January 27, 2016, 02:58:56 PM by So Close »

woodnut

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Re: Frontloading 401K - 2016
« Reply #12 on: January 27, 2016, 03:29:58 PM »
I'm front-loading my 401k but for entirely different reasons.  I intend to not have a job at some point this year, thus I am front-loading now to get as close to $18K limit as possible.

+1


Assuming the frontloaded funds would have been otherwise invested in taxable investments, this might actually result in increased future taxes in the event 401(k) gains are taxed at a higher rate than the gains on the taxable investments.  Don't have time to run any comparisons but my gut is that for someone on the MMM plan, the difference would be pretty minimal as long as the favorable dividend/cap gains rates remain in effect.  The (best?) reason to frontload is to hedge against job loss which could impair 401(k) contributions for at least some period of time, assuming someone has enough in a taxable account or ROTH contributions on hand to fund living expenses.

Yeah, the funds would have gone to the taxable account.  I'm currently in the 28% bracket, but won't be this year working part of the year.  Makes sense what you are saying with the drop in effective tax rate.  But, my plan is to take a sabbatical and try out the semi-FIRE thing.  My current WR would be 6%, so not all the way to FIRE yet.  My thought is to try to get income as low as possible by front loading so I have some head room to do some Roth conversions at a low tax rate.

And yes, I have taxable investments and Roth contributions to keep us afloat for some time.  If the semi-FIRE thing doesn't work out, I'll go back to a full time job to get all the way to FIRE.


Travis

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Re: Frontloading 401K - 2016
« Reply #13 on: January 27, 2016, 03:34:17 PM »
I started the year with some extra cash so I knocked out half of one of our IRAs.  I'm going to max out my tax-advantaged accounts as early as possible this year.  I don't get matching with the military TSP, so I upped my contribution to 40% starting next month.  I'll keep ramping it up until I max them and then move onto my taxable portfolio.  I've read a few articles on having just a few more months time in the market earlier can be worth it.

use2betrix

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Re: Frontloading 401K - 2016
« Reply #14 on: January 27, 2016, 07:33:26 PM »
I am front loading. I am putting in 18% for my first 2.5 months. I will switch to 5% for the remainder of the year which is what I need to get my full match and have me maxed out by the end of the year. If I stay with my company the whole year they'll contribute about $8000 to my 401k, which is fully vested from day 1 of employment. Pretty sweet gig.

aschmidt2930

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Re: Frontloading 401K - 2016
« Reply #15 on: January 27, 2016, 07:54:48 PM »
Hey, is anyone else frontloading their 401Ks for 2016?
Assuming that the market is down NOW and will be better at the end of the year... Seems to be a good idea.
I begin contributing at my company max (50%) next month.

Yes, but I do every year.  No idea what will happen with the market, it may be lower at the end of the year for all I know.  My logic is I'd rather have more money working for me and generating dividends to purchase more shares with, than being withheld via taxes.

Cougar

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Re: Frontloading 401K - 2016
« Reply #16 on: January 28, 2016, 07:09:30 AM »

since mathathlete opinion is this could be considered timing the mkt and that's what people here think i try to do, i'll reply as such.

i am maxing out my 401k but i am directing it into bond funds in my 401k; you should be able to do that if you ask your 401k manager and then you should be able to rebalance it once or twice a year. that way you put it in before it is taxed but still avoid what almost all economic indicatros say is a slowing economy and probably recession coming.

you should also be able to rebalance your existing 401k funds.

do or don't do this; but consider this.

if you lose 28%(avg bear mkt decline) over the next year; how long does it take you to get back to even ? you have to make 56%. it basically took you 7 years of you life to get back to even from 2008. if you just waited until the decline hit 28% before getting back in you still would have lost money; but you'd be much further ahead today unless you were able to shovel in money at unbelieble rates after 2009; but it's still lost time and money.

mathlete

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Re: Frontloading 401K - 2016
« Reply #17 on: January 28, 2016, 08:42:48 AM »

since mathathlete opinion is this could be considered timing the mkt and that's what people here think i try to do, i'll reply as such.

For the sake of clairty, J Welterweight is right. All else being equal, money in the market sooner is better, so frontloading isn't necessarily an attempt at timing the market.

The OP's motivation for frontloading seems to be market timing though.

rantk81

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Re: Frontloading 401K - 2016
« Reply #18 on: January 28, 2016, 08:45:23 AM »
I consider maxing out my 401k to be an annual "mandatory" expense, and I feel "under water" for the year until it is fully funded.  Fortunately, my employer continues their match after the 401k has been maxed out, so I have no concerns there.  The maximum my employer allows is for 60% of the gross pay to be put into the 401k.  This leaves me a little bit more than necessary to "live on", until it is fully funded for the year.  Then toward the end of March or beginning of April, I'm "done" and I get a massive "pay raise" for the rest of the year ;)

PhysicianOnFIRE

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Re: Frontloading 401K - 2016
« Reply #19 on: January 28, 2016, 09:08:59 AM »
As of tomorrow, my 457(b) will be fully funded for 2016.

I don't frontload the 401(k) because my employer spreads out the match over about 20 bi-weekly paychecks.  When you stop contributing, you stop receiving the match.  They will do a true-up the following January.  I learned this the hard way last year, but it will work in my favor, since I'll be getting most of last year's match tomorrow when share are lower.  More shares for me, but most years that would not be the case.

Frontloading shrinks your paychecks, so there is less available for taxable investing (and living), but it also reduces the amount withheld for income taxes.  Given the choice, I'd rather see January / February income go to my retirement accounts than the taxman's.

PhrugalPhan

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Re: Frontloading 401K - 2016
« Reply #20 on: January 28, 2016, 09:16:02 AM »
I've been frontloading since 2007.  As pointed out, in down years it can hurt you, but up years can give you crazy good returns (2009 I did much better than the market).  More years will go up than down, so this should help you over the long run.  As an aside, its possible with some employers to change your tax withholdings through the year to help smooth out your paycheck over the year (i.e. pay less tax while making large savings deductions early, then pay more tax at end of year when not making deductions).  I did that for a few years when I didn't have too large of a 'stache to hold me through the year.  NOTE: This is technically not legal, and I certainly wouldn't do it if I worked for a small employer (it could mess with their tax payments).  If you work for a large enough company your tax withholding changes will just be part of the overall static, and no one should care.  IANAL - so be careful out there.

zephyr911

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Re: Frontloading 401K - 2016
« Reply #21 on: January 28, 2016, 09:19:03 AM »
I'd consider it, but... I don't have much of a surplus and it's a pain to adjust periodic withholding for TSP, so I'm leavin' it.

MIGHT front-load IRA or at least the first half in Feb, but it depends on exact savings rate and total avail. to invest.

markpst

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Re: Frontloading 401K - 2016
« Reply #22 on: January 28, 2016, 10:12:00 AM »
I changed mine a couple of weeks ago. Currently 28%, will have to drop to 12% later in the year to max out and still receive the full match (50% of 6%) from my employer.