Author Topic: Is it better to invest 401k in one lump sum or gradual over the year?  (Read 4734 times)

FuckRx

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I remember reading something about this but don't know where. I could invest the whole 17,500 at the beginning of the year and get it over with or I could invest it slowly over the year. Was it dollar averaging or something like that? So which would be financially a better move?

Ynari

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TheSimpleLife

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Re: Is it better to invest 401k in one lump sum or gradual over the year?
« Reply #2 on: August 07, 2014, 11:40:53 AM »
Every study I've ever read says front loading (all 17.5K in January) provides superior returns.

soccerluvof4

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Re: Is it better to invest 401k in one lump sum or gradual over the year?
« Reply #3 on: August 07, 2014, 11:41:03 AM »
I prefer to front load it

radix

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Re: Is it better to invest 401k in one lump sum or gradual over the year?
« Reply #4 on: August 07, 2014, 11:49:56 AM »
Front loading typically is better than DCA. But if you have an employer match, they may only match up to a certain amount per check, so you could potentially miss out on that.

Dr. Doom

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Re: Is it better to invest 401k in one lump sum or gradual over the year?
« Reply #5 on: August 07, 2014, 11:54:38 AM »
Front loading typically is better than DCA. But if you have an employer match, they may only match up to a certain amount per check, so you could potentially miss out on that.

Right, although a quick call to your benefits department will fix this.  They'll get the math right so you can frontload a certain amount while leaving enough slack so you can make the minimal contributions throughout the remainder of the year to get the full match.  I did this with my current company and they knew exactly what I was trying to do, and provided assistance.

Only wildcard here is if you're expecting a raise at some point during the year. 

ZiziPB

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Re: Is it better to invest 401k in one lump sum or gradual over the year?
« Reply #6 on: August 07, 2014, 01:58:02 PM »
Quote
although a quick call to your benefits department will fix this

Not necessarily.  My company's policy is to match on a "per paycheck" basis and they will not change it to accommodate front-loading.  Fortunately they also match after-tax contributions so, you are not limited to $17,500.

dodojojo

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Re: Is it better to invest 401k in one lump sum or gradual over the year?
« Reply #7 on: August 07, 2014, 05:21:10 PM »
I'm considering front-loading for 2015 since I do not receive an employer match.  My concern is if I frontload for the year and I leave for another job where the employer does match--I may lose out in that scenario.

Dr. Doom

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Re: Is it better to invest 401k in one lump sum or gradual over the year?
« Reply #8 on: August 07, 2014, 05:22:08 PM »
Quote
although a quick call to your benefits department will fix this

Not necessarily.  My company's policy is to match on a "per paycheck" basis and they will not change it to accommodate front-loading.  Fortunately they also match after-tax contributions so, you are not limited to $17,500.
Thanks for the education - I now consider myself fortunate to work for a place that accommodated my request.  BTW, that's awesome re: after-tax contribution match, nice.

seattlecyclone

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Re: Is it better to invest 401k in one lump sum or gradual over the year?
« Reply #9 on: August 07, 2014, 06:49:26 PM »
Yes, every company is different with regards to their matching policies. My previous employer required you to make contributions throughout the year to get the full amount of the match (but you could still do quite a bit of front-loading because the match was only 50% match on 3% of salary). My current employer will happily front-load the match, plus they have an after-tax 401(k) where you can do in-service Roth rollovers online without talking to a real person. It's pretty great.

not_a_trex

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Re: Is it better to invest 401k in one lump sum or gradual over the year?
« Reply #10 on: August 07, 2014, 11:23:16 PM »
Only wildcard here is if you're expecting a raise at some point during the year.

Why does that matter? Isn't the match only on a percentage of your total contribution, which is capped at $17,500? I don't think when you contribute matters, as long as you contribute.

Dr. Doom

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Re: Is it better to invest 401k in one lump sum or gradual over the year?
« Reply #11 on: August 08, 2014, 07:59:47 AM »
Only wildcard here is if you're expecting a raise at some point during the year.

Why does that matter? Isn't the match only on a percentage of your total contribution, which is capped at $17,500? I don't think when you contribute matters, as long as you contribute.

It matters with my current employer.  Their policy is you contribute 2%, they quadruple that at 8%, and they do this on a per-month basis.  If you don't contribute that 2% for that specific month, you miss their match that month.

Let's say you front-loaded and were done by April.  And let's say you left just enough room under the 17.5 cap to allow you to continue to contribute 2%/mo for the remainder of the year.

Suddenly you get a 10% raise -- well, you'll hit that 17.5 cap in November now.  No match in December for you. 

It sounds like this situation is atypical but it's how it works at my place.  That's all I meant when I mentioned raise could be a potential wildcard.

seattlecyclone

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Re: Is it better to invest 401k in one lump sum or gradual over the year?
« Reply #12 on: August 08, 2014, 10:20:47 AM »
Yeah, many employers cap the match at a certain percentage of your salary. If you expect a significant salary increase, the increased matching contributions that you'll receive by back-loading your contributions could outweigh the expected investment growth you get from front-loading your contributions.

This is all getting really deep into the weeds though. The important thing is to contribute as much as possible to your 401(k). Whether you do it toward the beginning of the year or toward the end makes much, much less difference.

Beric01

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Re: Is it better to invest 401k in one lump sum or gradual over the year?
« Reply #13 on: August 08, 2014, 04:59:04 PM »
My company does 3% match, contributed on a paycheck basis, so if I front load, I'm missing out on my match after I max out. However, they also do a "True Match" at the end of the year. I've decided it's best to set my contribution to as high as possible and max out early, and then get my "true match" amount at year end. The potential returns on the match are smaller than the potential returns on having more money invested (due to pre-tax).

Every study I've ever read says front loading (all 17.5K in January) provides superior returns.

That would take a substantial salary to do 17.5K in one month, particularly as many companies max out contributions at 75% of salary.
« Last Edit: August 08, 2014, 05:02:47 PM by Beric01 »