Investing max in TSP early in the year instead of DCA over 12mo?

[Villanelle]

Based on the principle that it's better to lump sum money instead of DCAing over time (if you have the money up front), is there some reason not to increase TSP contribution percentages so that entire $19k annual limit comes out on the couple paychecks, even if that means it's the entire check?  (This would be $19k over a couple checks, minus the amount already invested this year.)

Cash flow isn't a problem. 

As I understand it, the TSP is set up so that you can't over-invest.  So you can basically set your allocation at 100% (assuming the system will allow that) and it will take that % until you get to the annual max, and then stop until next year, even if that means you invest for only a month or two at the start of each year.

Is there some reason not to do this?  Am I missing something?

ETA:  Husband is military, and there is no match for any of these investments.  The full $19k will go into the TSP in 2019; it's just a question of whether it goes in as a lot at the beginning of the year, or spread out over 12 months.

[frugalecon]

As I understand it, once you hit the max, your agency matching contributions will stop. Thus, you would need to structure it so that you were contributing the matchable funds through to the end of the year.

[Sailor Sam]

If you're uniformed Legacy, you can front load without any problems.

If you're uniformed Blended Retirement System, front loading will mean you miss out on part of the 4% match, but will receive the 1% match no matter what.

If you're Civilian, front loading will mean you miss out on the 4% match.

[terran]

Yes, in theory front loading tax advantaged accounts is a good idea.

Remember that, to make a fair comparison, this isn't lump sum vs DCA but rather more in tax advantaged accounts sooner than later because the alternative (regular contributions to tax advantaged) should simply mean you're investing the extra in taxable. The reason front loading is mathematically better is the same reason that lump sum is better than DCA.

For you and anyone else considering this the key things to make sure you've researched are whether you're employer contributions requires you to match it, if so when you have to stop contributing will they true up at the end of the year, and if so what happens if you leave before the end of the year. Also consider what happens if you find a new job after you've maxed out your workplace retirement plan -- will you then miss out on the match from a new employer.

Here's a relevant blog post: https://www.madfientist.com/front-loading/

[Villanelle]

If you're uniformed Legacy, you can front load without any problems.

If you're uniformed Blended Retirement System, front loading will mean you miss out on part of the 4% match, but will receive the 1% match no matter what.

If you're Civilian, front loading will mean you miss out on the 4% match.

Ugg, should have included that.  Husband is uniformed, legacy. 

[Villanelle]

Yes, in theory front loading tax advantaged accounts is a good idea.

Remember that, to make a fair comparison, this isn't lump sum vs DCA but rather more in tax advantaged accounts sooner than later because the alternative (regular contributions to tax advantaged) should simply mean you're investing the extra in taxable. The reason front loading is mathematically better is the same reason that lump sum is better than DCA.

For you and anyone else considering this the key things to make sure you've researched are whether you're employer contributions requires you to match it, if so when you have to stop contributing will they true up at the end of the year, and if so what happens if you leave before the end of the year. Also consider what happens if you find a new job after you've maxed out your workplace retirement plan -- will you then miss out on the match from a new employer.

Here's a relevant blog post: https://www.madfientist.com/front-loading/

I'm not following.  Basically, we will be investing $19k.  We can do it in a lump sum (or a couple lump sums since it would take a few paychecks), or we can do it over 12 months.  So it is lump sum vs. DCA, no?  Either way, that $19k is going in to a tax advantaged account.  We wouldn't take the extra money available monthly if we put in the smaller amount each month and put it in a taxable account because we want it in the TSP account. 

(Also, there is no match, but I didn't think to include that in the OP. And with military, there's essentially no chance of "new employer".)

[terran]

Yes, in theory front loading tax advantaged accounts is a good idea.

Remember that, to make a fair comparison, this isn't lump sum vs DCA but rather more in tax advantaged accounts sooner than later because the alternative (regular contributions to tax advantaged) should simply mean you're investing the extra in taxable. The reason front loading is mathematically better is the same reason that lump sum is better than DCA.

For you and anyone else considering this the key things to make sure you've researched are whether you're employer contributions requires you to match it, if so when you have to stop contributing will they true up at the end of the year, and if so what happens if you leave before the end of the year. Also consider what happens if you find a new job after you've maxed out your workplace retirement plan -- will you then miss out on the match from a new employer.

Here's a relevant blog post: https://www.madfientist.com/front-loading/

I'm not following.  Basically, we will be investing $19k.  We can do it in a lump sum (or a couple lump sums since it would take a few paychecks), or we can do it over 12 months.  So it is lump sum vs. DCA, no?  Either way, that $19k is going in to a tax advantaged account.  We wouldn't take the extra money available monthly if we put in the smaller amount each month and put it in a taxable account because we want it in the TSP account. 

(Also, there is no match, but I didn't think to include that in the OP. And with military, there's essentially no chance of "new employer".)

You have the $19k, so you're going to put in the tax advantaged account and invest or you're going to put it in the taxable account and invest it: you're lump sum investing it either way. DCA would be if you didn't invest it now and instead invested it slowly over time.

[Sailor Sam]

If you're uniformed Legacy, you can front load without any problems.

If you're uniformed Blended Retirement System, front loading will mean you miss out on part of the 4% match, but will receive the 1% match no matter what.

If you're Civilian, front loading will mean you miss out on the 4% match.

Ugg, should have included that.  Husband is uniformed, legacy.

No problem then!

I actually did an experiment in 2018, and front loaded my TSP using 100% of my base pay. It worked flawlessly, so there's at least n=1 with first person proof that Payroll will cut the TSP contributions off once you hit the maximum.

The only caveat might be Special Pay and Incentive Pay. My Personnel Center (USCG) has some wording which indicates the individual sailor has to monitor Special Pay contributions, and cut them off as appropriate. I believe @Nords can help with this part.

[Villanelle]

Yes, in theory front loading tax advantaged accounts is a good idea.

Remember that, to make a fair comparison, this isn't lump sum vs DCA but rather more in tax advantaged accounts sooner than later because the alternative (regular contributions to tax advantaged) should simply mean you're investing the extra in taxable. The reason front loading is mathematically better is the same reason that lump sum is better than DCA.

For you and anyone else considering this the key things to make sure you've researched are whether you're employer contributions requires you to match it, if so when you have to stop contributing will they true up at the end of the year, and if so what happens if you leave before the end of the year. Also consider what happens if you find a new job after you've maxed out your workplace retirement plan -- will you then miss out on the match from a new employer.

Here's a relevant blog post: https://www.madfientist.com/front-loading/

I'm not following.  Basically, we will be investing $19k.  We can do it in a lump sum (or a couple lump sums since it would take a few paychecks), or we can do it over 12 months.  So it is lump sum vs. DCA, no?  Either way, that $19k is going in to a tax advantaged account.  We wouldn't take the extra money available monthly if we put in the smaller amount each month and put it in a taxable account because we want it in the TSP account. 

(Also, there is no match, but I didn't think to include that in the OP. And with military, there's essentially no chance of "new employer".)

You have the $19k, so you're going to put in the tax advantaged account and invest or you're going to put it in the taxable account and invest it: you're lump sum investing it either way. DCA would be if you didn't invest it now and instead invested it slowly over time.

This is the misunderstanding.  It will be going into TSP (tax-advantaged) either way.  I would not take $19k and throw it in an taxable account right now.  It will either go into TSP now, or into TSP in installments over the year.  Basically, we are choosing between really small pay checks for a couple months (which gets the money in TSP as quickly as possible, and then gives us full paychecks the rest of the year), or moderately smaller checks the rest of the year, with the investment spread out through December. 

So yes, I am choosing between investing not, or investing slowly over time, or DCA vs lump sum, as originally characterized.

[Nords]

If you're uniformed Legacy, you can front load without any problems.

If you're uniformed Blended Retirement System, front loading will mean you miss out on part of the 4% match, but will receive the 1% match no matter what.

If you're Civilian, front loading will mean you miss out on the 4% match.

Ugg, should have included that.  Husband is uniformed, legacy.

No problem then!

Thanks for the tag, Sam!

You’re right, Villanelle & Sam, legacy High Three servicemembers (and the handful of us Final Pay dinosaurs) can front-load their TSP contributions without worrying about agency/matching contributions.

Blended Retirement System servicemembers should always start their annual budget assuming 12 monthly contributions of at least 5% of base pay to the TSP in order to get the full DoD BRS agency/matching contributions.  (That’s especially important if they’re deploying to a combat zone.)  It’s even more complicated if they get a pay raise during the calendar year from a longevity column on the pay tables (or a promotion).  The agency/matching contributions are also not part of the elective deferral limit ($19K in 2019) so it’s important to hit that 5% minimum base pay contribution in all 12 months.

Speaking of combat zones, both legacy High Three and BRS servicemembers can contribute combat zone tax-exempt pay to the TSP up to the higher annual addition limit.  ($56K in 2019.)  If you’re a legacy High Three servicemember and you know you’re deploying to a combat zone then you’d want to contribute as much as you can of that total from the combat zone. 

For BRS servicemembers... it’s difficult to optimize your CZTE contributions because the TSP doesn’t explain it well and there are lots of moving parts.  The TSP is working on training materials, but it’ll be a year or three.  Several servicemembers are working on spreadsheets, calculators, and apps.  These are the best two references:
https://the-military-guide.com/maximizing-your-thrift-savings-plan-contributions-in-a-combat-zone/
(Use the spreadsheet)
http://keepinvestingsimplestupid.com/2019/02/01/maximizing-tsp-contributions-for-the-entire-year-when-you-deploy-to-a-combat-zone/
(Check your work against this spreadsheet)
Yes it’s ridiculously, horribly, stupidly overcomplicated.  It’s poorly documented on the TSP website (if it’s documented at all).  However I went three rounds with the DoD BRS office and the TSP’s CFPs to make sure my post is correct, and I’ve checked Dan’s spreadsheet.

I actually did an experiment in 2018, and front loaded my TSP using 100% of my base pay. It worked flawlessly, so there's at least n=1 with first person proof that Payroll will cut the TSP contributions off once you hit the maximum.

The good news is that the TSP computer system works, and the TSP has finally explained to CFPs and AFCs (and to me) that it works correctly for everyone younger than 50.  In the last year, every time I've seen a complaint about being cut off by the TSP we were able to trace it to the servicemember's actions.

The December contribution numbers are screwed up at the end of every year due to the contribution timing and the programming, but it clears up last year’s numbers by March (and the W-2s are almost always correct). 

The TSP (and most military pay offices) struggle to handle the catch-up contributions for servicemembers who are age 50 or older.  The National Guard servicemembers are very annoyed.

The only caveat might be Special Pay and Incentive Pay. My Personnel Center (USCG) has some wording which indicates the individual sailor has to monitor Special Pay contributions, and cut them off as appropriate. I believe @Nords can help with this part.

For MyPay and Marine OnLine servicemembers, traditional TSP contribution percentages are limited to 92% of base pay.  (7.45% goes to FICA.)  Roth TSP contributions percentages are limited to 60% or 65% (for income tax withholding).  Special pays and incentive pays can go to 100%.  Bonus payments have the above limits, but in a combat zone can be 100%.  It’s not clear to me that every MyPay checkbox for these percentages works correctly all the time.

I’ll defer to your experience on the Special Pay question... I haven’t run across it on the TSP website (yet) and I’ve never had the question from a MyPay servicemember.  As far as I can tell they cut off at the elective deferral limit with no servicemember intervention required.

Yes, in theory front loading tax advantaged accounts is a good idea.

Remember that, to make a fair comparison, this isn't lump sum vs DCA but rather more in tax advantaged accounts sooner than later because the alternative (regular contributions to tax advantaged) should simply mean you're investing the extra in taxable. The reason front loading is mathematically better is the same reason that lump sum is better than DCA.

For you and anyone else considering this the key things to make sure you've researched are whether you're employer contributions requires you to match it, if so when you have to stop contributing will they true up at the end of the year, and if so what happens if you leave before the end of the year. Also consider what happens if you find a new job after you've maxed out your workplace retirement plan -- will you then miss out on the match from a new employer.

Here's a relevant blog post: https://www.madfientist.com/front-loading/

I'm not following.  Basically, we will be investing $19k.  We can do it in a lump sum (or a couple lump sums since it would take a few paychecks), or we can do it over 12 months.  So it is lump sum vs. DCA, no?  Either way, that $19k is going in to a tax advantaged account.  We wouldn't take the extra money available monthly if we put in the smaller amount each month and put it in a taxable account because we want it in the TSP account. 

(Also, there is no match, but I didn't think to include that in the OP. And with military, there's essentially no chance of "new employer".)

You have the $19k, so you're going to put in the tax advantaged account and invest or you're going to put it in the taxable account and invest it: you're lump sum investing it either way. DCA would be if you didn't invest it now and instead invested it slowly over time.

You’re both right for the conditions you’re stipulating.  The difference is that many servicemembers are only investing in their TSP and IRA accounts, especially early in their careers.  They front-load their TSP contributions while living off savings.  After they’ve hit the TSP contribution limits then they shift to IRAs (at a smaller contribution limit) and spend the rest of the year rebuilding those savings.  They never contribute to taxable accounts (especially if they're paying off student loans or other consumer debt).  The following year they front-load their TSP contributions while living off the savings from last year.

In the bigger picture, once someone’s saving 40% of their gross income and has a few promotions then every year they’ll maximize their TSP and IRA contributions and put even more in taxable accounts.  Then the discussion about tax-advantaged versus taxable accounts would be applicable. 

[Nords]

As I understand it, once you hit the max, your agency matching contributions will stop. Thus, you would need to structure it so that you were contributing the matchable funds through to the end of the year.

If you're uniformed Legacy, you can front load without any problems.

If you're uniformed Blended Retirement System, front loading will mean you miss out on part of the 4% match, but will receive the 1% match no matter what.

If you're Civilian, front loading will mean you miss out on the 4% match.

I had to look that up.

Here's the text from the DoD Blended Retirement System policy document, paragraphs 5.b - 5.d and 6.b - 6.d:
https://militarypay.defense.gov/Portals/3/Documents/Blended%20Retirement/Combined%20BRS%20Policy%20Document.pdf?ver=2018-09-19-094018-610

(b) This 1 percent automatic contribution by the Secretary concerned will continue for each pay period in which a member receives either basic pay or inactive duty pay, or both, through the end of the pay period during which the member completes 26 years of service, as calculated from his or her PEBD.
(c) Commencing with the pay period that follows a Uniformed Service member’s election to enroll in the BRS, in accordance with procedures in paragraph 9.b., the Secretary concerned will contribute an amount that matches the individual Service member’s individual contribution of basic pay and/or inactive duty pay to TSP in accordance with Table 1.
(d) No matching contribution, as described in paragraph 7.b.(6)(c), will be made to a Service member’s TSP account after the pay period during which the member completes 26 years of service, as calculated from his or her PEBD.

The 1% agency contributions appear to happen every month until 26 years of service, even though matching contributions might not happen.

It looks like the only thing which could stop the agency contributions (before 26 years) would be the annual additions limit in a combat zone:
https://www.tsp.gov/PlanParticipation/EligibilityAndContributions/contributionLimits.html
"This limit is per employer and includes employee contributions (tax-deferred, after-tax, and tax-exempt), Agency/Service Automatic (1%) Contributions, and Matching Contributions."
However it's not clear to me that the DFAS computers would cut off the 1% contributions just because the annual additions limit was reached ($56K in 2019).  They might cut off everything else, but they don't specifically mention the 1% agency contributions.

[Villanelle]

Thank you! 

This came up because I'm doing my annual rebalancing, which meant checking the TSP balances, and in doing so I discovered that we came up short last year by about $500 in contributions. I think this is because I based the math on a full year of changes I calculated we needed to make, but the changes were made at roughly this time last year so the higher contribution percentage didn't apply to the first few months.   Not wanting that to happen this year, I started doing the math to make it come out exactly right, which is made more complicated by a years-in-service raise happening soon.  I realized it would be easier to just overpay slightly to make sure we got all $19k in this year, which led me to research to make sure one can't over contribute.  Once I confirmed that, I realized there was no reason to try to make it come out almost right, and we might as well do it now and get it all over with. 

I probably over simplified above.  I suspect what will happen is that we will continue TSP and IRA contributions while we load up the TSP, but little else.  Then for a few months we will let the accounts grow again, and then  I will pick up with what I usually do, which is dumping money into taxable accounts when the account balances creep higher than necessary for comfort.  But front loading would still get the money in the market more quickly.  (Although in theory, I could structure it the same way--lots of investing in taxable accounts up front, then easing off to let the accounts pick up.  But for whatever reason--inertia?--I wouldn't do that.)

So the primary goal is to make sure we get every penny of that $19k into TSP, and don't miss out on any like we did last year.  But secondarily, if I can get that money in the market a bit sooner, I will.

So it looks like tonight I'll get Husband to change the contribution to 100%, or whatever the max is they system will allow.

 *For those not familiar with military pay, this is only 100% of a certain portion of the pay, not 100% of the paycheck.  So it's not like the entire paycheck will disappear for the pay periods they are supposedly taking 100%.   Military pay is comprised of a bunch of pays and allowances: base pay (from which they take these contributions) which is based on rank and time in service, housing allowance, sustenance allowance, special pays (flight pay, hazardous duty pay, family separation pay, etc.) and perhaps other things as applicable.  Some of these are taxable, some aren't.  Some come and go, some don't.  And different people qualify for different pays and allowances.  It's a very confusing system, and it's part of why it's actually somewhat complicated to figure out what a comparable salary on the civilian side might be.   

[ericbonabike]

I had considered doing this with my 401k too.  But, I guess I don't understand the "why".
What do you do with all that extra money last 8-10 months of the year?
do you spend it all?  Or does some of it go into a brokerage account ?



Let's say you make 8000 a month.
Let's say you need $2000 to cover costs (bills)
Option 1 (early maxing) would go something like: 


Jan:  $6000 into 401k;  Feb:  6000 into 401k,  March:  6000 into 401k   April:  1000k into 401k.


Congrats, you've maxed out your 401k.  But what do do with that extra $5000 in April, and the extra $6000 for rest of the months?
Well, if you're an MMM, then I'm guessing you'd put the extra money into an IRA or brokerage account or a 529 plan.

April:  1000 into 401k, 5000 into brokerage.
May - December:  6000 into brokerage


How is that any different than just doing:

Jan:  $1600 into 401k AND 4400 into brokerage account
Repeat 12 times.  You'll hit the 19k cap in december and you'll have $200 extra takehome pay.


You avoid having to mess with bureaucracy, you invest the same amount of money,  and the only difference I can tell is that the tax advantaged dollars in Option 1 would have a little  more time to "cook".   I can't imagine that would be significant IF you stick to the plan above.


 

[Villanelle]

I had considered doing this with my 401k too.  But, I guess I don't understand the "why".
What do you do with all that extra money last 8-10 months of the year?
do you spend it all?  Or does some of it go into a brokerage account ?



Let's say you make 8000 a month.
Let's say you need $2000 to cover costs (bills)
Option 1 (early maxing) would go something like: 


Jan:  $6000 into 401k;  Feb:  6000 into 401k,  March:  6000 into 401k   April:  1000k into 401k.


Congrats, you've maxed out your 401k.  But what do do with that extra $5000 in April, and the extra $6000 for rest of the months?
Well, if you're an MMM, then I'm guessing you'd put the extra money into an IRA or brokerage account or a 529 plan.

April:  1000 into 401k, 5000 into brokerage.
May - December:  6000 into brokerage


How is that any different than just doing:

Jan:  $1600 into 401k AND 4400 into brokerage account
Repeat 12 times.  You'll hit the 19k cap in december and you'll have $200 extra takehome pay.


You avoid having to mess with bureaucracy, you invest the same amount of money,  and the only difference I can tell is that the tax advantaged dollars in Option 1 would have a little  more time to "cook".   I can't imagine that would be significant IF you stick to the plan above.

Answer this question:  what do you do with the extra money each paycheck when you spread it out over the year? 

I can either have tiny paychecks for a few months, then large paychecks the rest of the year, or fairly large paychecks all year.  But in the end, just as much money is coming to me (annual salary-$19k).  So yes, my later paycheck will have extra money and I will have to decide what to do with those.  But if I go with a system that spreads this over a year, each paycheck has a little bit of that extra money, so I still have to figure out what to do with it.

The difference here is that (I'm going to pretend I started this in January, for the sake of the argument) I'd have low income for January and February.  Our expenses would stay the same. I'd likely be spending down a bit of what I call our slush fund, which is the extra money we keep in our checking account so that we don't have to worry if we want to make a sudden large purchase.  Typically, when that account gets over a certain amount, I scrape off the excess and invest.  Well, instead, I'd be dropping it a bit lower than we generally keep it.   So I'd spend March and April building it back up.  No "scraping" would occur.  My May, we'd be back to normal and in June we might be due for a scrape.  But the key is that during that time, all the money would have been in the market, working for me.  Likely without this, we'd be due for a scrape in April or May instead of June, but we'd still have less dollar/day units overall, because with this method, we will reduce our "comfort" fund (which is really just part of our E-fund concept) a bit lower, knowing it is going to grow back quickly once contributions end. 

So yes, more time to cook.  But also, eliminating the chance of what happened last year, which was that due to imprecise math (and the inability to enter a fraction of a % as the requested contribution amount) we didn't get the full $18.5k into the very best account.

If you got $12k today, would you invest it all, or would you spread it out $1000 a month for the year?  If you'd do the former, then you already recognize how important "time to cook" is, and this is really the same question. 

[Nords]

I had considered doing this with my 401k too.  But, I guess I don't understand the "why".
What do you do with all that extra money last 8-10 months of the year?
do you spend it all?  Or does some of it go into a brokerage account ?

How is that any different than just doing:

Jan:  $1600 into 401k AND 4400 into brokerage account
Repeat 12 times.  You'll hit the 19k cap in december and you'll have $200 extra takehome pay.

You avoid having to mess with bureaucracy, you invest the same amount of money,  and the only difference I can tell is that the tax advantaged dollars in Option 1 would have a little  more time to "cook".   I can't imagine that would be significant IF you stick to the plan above.

Eric, you make it all sound so simple, yet it’s complicated by this:

*For those not familiar with military pay, this is only 100% of a certain portion of the pay, not 100% of the paycheck.  So it's not like the entire paycheck will disappear for the pay periods they are supposedly taking 100%.   Military pay is comprised of a bunch of pays and allowances: base pay (from which they take these contributions) which is based on rank and time in service, housing allowance, sustenance allowance, special pays (flight pay, hazardous duty pay, family separation pay, etc.) and perhaps other things as applicable.  Some of these are taxable, some aren't.  Some come and go, some don't.  And different people qualify for different pays and allowances.  It's a very confusing system, and it's part of why it's actually somewhat complicated to figure out what a comparable salary on the civilian side might be.

Military servicemembers can’t simply set a contribution at $1600/month and have it happen 12 times in a year.

The military’s various pay websites set up their TSP [401(k)] contributions in percentages.  This is done to automatically boost the dollar amount of the contributions whenever military pay goes up. 

The other issue is that military pay rises (at a minimum) annually in January (with the federal pay raise), with every promotion, and with almost every two-year longevity period.  It also changes with special situations:  sea duty, special duty (submarine pay), special billets (temporary promotions or extra responsibility), combat zones (imminent danger pay, hazardous duty pay) and bonus (retention) contracts.  Then there are occasions when the Dept of Defense overpays someone (which seems to happen at least once every 2-3 years) and recoups the overpayment.  There are even horrifying (hopefully rare) situations where someone goes without pay, sometimes for a few months. 

That’s just military pay.  The (untaxed) allowances are messed with even more frequently, to the point where it’s essentially impossible to know how much you’re being paid next month.  You simply project last month’s pay into next month and try to adjust for any known changes-- assuming that the military’s pay system knows about the changes too.

This means that someone trying to hit the limit in December would have to know when (and how much) to change their TSP contribution limits.  They'd also have to make the change at the correct part of the month so that the new percentage would be saved in the pay system before the network processes the next month's payroll.  Then they'll only know that it's been done correctly after their next contribution is deducted, so they'll have to correct for any system errors.

Some military units are deprived of bandwidth (and pay services) for weeks or even months per year.  I used to go for over 90 days between times when I could even access the Internet, let alone make changes to my pay deductions or TSP contributions.  You set everything in autopilot and hope it keeps going while you're out of contact.

Imagine if a Fortune 500 company paid their employees this way.  I bet retention would sink to the military’s numbers.

Villanelle is doing the best which can be done under the existing system.  Everyone who’s in the military’s legacy High Three pension system and who can reach a TSP contribution limit (elective deferral, annual addition, and catch-up contribution limits) should try to reach them before the final month of the year.  They want to force the TSP system to cut them off at the max instead of trying to glide neatly into the limit at the end of December.

Servicemembers in the Blended Retirement System will have to make sure there’s room for at least 5% base pay contributions every month of the year, which means that they might not hit the contribution limits with their last dollar in December.  However the agency/matching “free money” contributions make up for coming up a little short.  At least that's what the military hopes people conclude.

[Sailor Sam]

Servicemembers in the Blended Retirement System will have to make sure there’s room for at least 5% base pay contributions every month of the year...

In Jan, I sat down with each of JO's, and we calculated what they needed to contribute in order to maxamize, but still have the 5% to match for the 16-31 Dec paycheck.

I'm a big, smart grownup, and that evolution was nothing but pain. Sea pay, sea pay increase, longevity raises, retention contracts starting, retention contracts ending, being paid in arears. Converting all that to a percentage. Blah, blah, blah. Errrrrgh.

The truly shitty part is that the exercise was hugely popular, and I'm going to have to do it all over again this year, for the 2020 CY. Merry Christmas to myself :(

Total thread hijack, but errrrrrrrhg, it was so terrible. On the upside, my frustration and swearing frightened the JO's from touching their allocations, and I'm have hope my entire jr wardroom will [come as close to] max[imising as BRS allows].

[ericbonabike]

I had considered doing this with my 401k too.  But, I guess I don't understand the "why".
What do you do with all that extra money last 8-10 months of the year?
do you spend it all?  Or does some of it go into a brokerage account ?

How is that any different than just doing:

Jan:  $1600 into 401k AND 4400 into brokerage account
Repeat 12 times.  You'll hit the 19k cap in december and you'll have $200 extra takehome pay.

You avoid having to mess with bureaucracy, you invest the same amount of money,  and the only difference I can tell is that the tax advantaged dollars in Option 1 would have a little  more time to "cook".   I can't imagine that would be significant IF you stick to the plan above.

Eric, you make it all sound so simple, yet it’s complicated by this:

*For those not familiar with military pay, this is only 100% of a certain portion of the pay, not 100% of the paycheck.  So it's not like the entire paycheck will disappear for the pay periods they are supposedly taking 100%.   Military pay is comprised of a bunch of pays and allowances: base pay (from which they take these contributions) which is based on rank and time in service, housing allowance, sustenance allowance, special pays (flight pay, hazardous duty pay, family separation pay, etc.) and perhaps other things as applicable.  Some of these are taxable, some aren't.  Some come and go, some don't.  And different people qualify for different pays and allowances.  It's a very confusing system, and it's part of why it's actually somewhat complicated to figure out what a comparable salary on the civilian side might be.

Military servicemembers can’t simply set a contribution at $1600/month and have it happen 12 times in a year.

The military’s various pay websites set up their TSP [401(k)] contributions in percentages.  This is done to automatically boost the dollar amount of the contributions whenever military pay goes up. 

The other issue is that military pay rises (at a minimum) annually in January (with the federal pay raise), with every promotion, and with almost every two-year longevity period.  It also changes with special situations:  sea duty, special duty (submarine pay), special billets (temporary promotions or extra responsibility), combat zones (imminent danger pay, hazardous duty pay) and bonus (retention) contracts.  Then there are occasions when the Dept of Defense overpays someone (which seems to happen at least once every 2-3 years) and recoups the overpayment.  There are even horrifying (hopefully rare) situations where someone goes without pay, sometimes for a few months. 

That’s just military pay.  The (untaxed) allowances are messed with even more frequently, to the point where it’s essentially impossible to know how much you’re being paid next month.  You simply project last month’s pay into next month and try to adjust for any known changes-- assuming that the military’s pay system knows about the changes too.

This means that someone trying to hit the limit in December would have to know when (and how much) to change their TSP contribution limits.  They'd also have to make the change at the correct part of the month so that the new percentage would be saved in the pay system before the network processes the next month's payroll.  Then they'll only know that it's been done correctly after their next contribution is deducted, so they'll have to correct for any system errors.

Some military units are deprived of bandwidth (and pay services) for weeks or even months per year.  I used to go for over 90 days between times when I could even access the Internet, let alone make changes to my pay deductions or TSP contributions.  You set everything in autopilot and hope it keeps going while you're out of contact.

Imagine if a Fortune 500 company paid their employees this way.  I bet retention would sink to the military’s numbers.

Villanelle is doing the best which can be done under the existing system.  Everyone who’s in the military’s legacy High Three pension system and who can reach a TSP contribution limit (elective deferral, annual addition, and catch-up contribution limits) should try to reach them before the final month of the year.  They want to force the TSP system to cut them off at the max instead of trying to glide neatly into the limit at the end of December.

Servicemembers in the Blended Retirement System will have to make sure there’s room for at least 5% base pay contributions every month of the year, which means that they might not hit the contribution limits with their last dollar in December.  However the agency/matching “free money” contributions make up for coming up a little short.  At least that's what the military hopes people conclude.

Ah, ok.  Makes sense.   That's well beyond my expertise.    But for my own edification...if the pay was regular enough to predict 12 months in advance.  And you could dial everything in to be within some acceptable tolerance, would there be any advantage  in maxing out 401k/TSP per my earlier analogy?  Seems money in the market would be the same, just a very minor difference in which "buckets" got funded first.

[Nords]

But for my own edification...if the pay was regular enough to predict 12 months in advance.  And you could dial everything in to be within some acceptable tolerance, would there be any advantage  in maxing out 401k/TSP per my earlier analogy?  Seems money in the market would be the same, just a very minor difference in which "buckets" got funded first.

You're right, very minor.  (And less bureaucratic hassle than front-loading.)  The front-loading difference is a slightly earlier start on the tax-deferred compounding. 

However that slightly-earlier exponential compounding makes a difference.  It's too small to notice on a monthly basis and barely detectable each year.  It's far smaller than daily market volatility.   

Yet over a decade, it's noticeable.  Financial planners can see it in their analysis when they choose whether compounding occurs monthly or annually (even for the same geometric annual rate).  They see it when contributions occur at the beginning of the month or at the end.  They see it when withdrawals are set annually or monthly.  Over a decade, you might reach FI a few months earlier... even though market volatility might have a bigger effect.

Karsten Jeske (Big ERN, the PhD economist of Early Retirement Now) does his analyses of the Safe Withdrawal Rate in monthly periods vice annually.  It makes a difference in the results when you're seeking the failures in the 4% SWR.  I'm sure that he's waiting for processing power to reduce the analysis increment to daily.

Personally, I think it's better to put saving/investing in autopilot in order to avoid decision fatigue.  But that's behavioral economics, not math.  The psychology of financial behavior derails the math every time.

Here's another example of emotions triumphing over math:  human heuristics also suck at assessing exponential growth, because (just like front-loading) it's hard to see.  This is why we get discouraged at a high savings rate for a 20-year plan... the first decade of progress is growing exponentially, yet it's emotionally impossible to appreciate what it's going to produce by the end of the second decade.  Depending on your exponent (annual compounding) most of the growth occurs during the last 20% of the journey to FI. 

The real challenge is persisting through the first 80% of the journey (16 years!), when your progress seems constant (and taking at least twice as long) instead of exponential.