401(k)/(a) contribution strategy

[InDebtInDC]

As we all know, the IRS limit for pre-tax retirement savings is $15,500 per tax year. Please share your strategy on how you contribute.

I get 26 paychecks per year. The minimum I put in each pay check is 5% to get the employer matching. The rest is a crap shoot.

Right now my current strategy is to put in 99% of my paycheck for the first 4 or 5 paychecks, and put in 5% for the rest of the year. Theoretically I would earn more interest that way, but basically from January-March of every year I would starve. It's especially bad when it's cold out and heating costs are high.

The other alternative is to put in about $600 every pay check. This would balance it out for the entire year, but I wouldn't earn as much interest.

What's everybody's approach?

[moneybags]

We balance it out over the year. There is a theory called "dollar cost averaging" that is recommended when investing. You spread your investment out evenly over time. This works well for stocks & bonds. It sounds like you may just be putting your money in a money market type fund that is only earning interest. In that case, you need to diversify and include stock & bond funds in your mix.

[jIM_Ohio]

11% right now, and that is close to 50% of yearly max. Employer matches 50% of first 6%, I believe.

I don't see the reason to max out... money I invest in other places (taxable accounts and Roth) give me more withdraw strategy options.

[InDebtInDC]

My main reason is because the administration costs are very low. I have more withdrawl options elsewhere but if you add up the pretax savings, earnings, and low costs I earn more with this than anywhere else.

The fund options themselves are pretty limited. I diversify evenly between small cap, large cap, and international.

I'm going to max out the $15.5. That much I know. I just didn't know if it's better to put it all in the beginning of the year or balance it out over 12 months.

[cptacek]

First of all, you are not earning "interest" on your 401(k) unless you are just holding the money in cash. You are investing in stocks or bonds, either by buying them directly or buying mutual funds that hold stocks or bonds. This misnomer, that you earn interest in your 401(k), is kind of a pet peeve of mine.

So, you have to think about it like this...do you know that the stock price or bond price will be lower in January - March than it is the rest of the year? If you do know that, for sure, then quit your job and start your own mutual fund company. If you do not know that, then buying throughout the year would probably be best, because it won't put a cramp in the money you need for heating.

[Fern]

i contribute 15% annually, which falls below the $15,500 limit, but that's all i can afford at present.

[Snodog]

I would get the money in the stock market as soon as possible. You will come out ahead more times than not since the market usually goes up.

[humandraydel]

Are you sure that you can elect to have 99% of your paycheck deposited into your 401k? Many companies have a maximum contribution of 20-30% of your pay.

Besides, even though "theoretically" you could make more money, the hassle doesn't seem worth it to me. What if you drain your savings January-March so you can deposit everything into your 401k and then you lose your job in April?

[InDebtInDC]

Originally Posted by cptacek

First of all, you are not earning "interest" on your 401(k) unless you are just holding the money in cash. You are investing in stocks or bonds, either by buying them directly or buying mutual funds that hold stocks or bonds. This misnomer, that you earn interest in your 401(k), is kind of a pet peeve of mine.

With all due respect, this is straight from the literature:

"The Fund offers the opportunity to earn rates of interest similar to
those of long-term Government securities.

"Payment of principal and interest is guaranteed by the U.S. Government."

"The interest rate resets monthly and is based on the weighted average
yield of all outstanding Treasury notes and bonds with 4 or more years
to maturity."

"Earnings consist entirely of interest income on the securities."

"Interest on the Fund securities has, over time, outpaced inflation and
90-day T-bills."

"The Fund [interest?] rate is set once a month by the U.S. Treasury based on a statutorily prescribed formula (described below), and all Fund investments earn that interest rate for the month."

"Fund securities earn a statutory interest rate equal to the average market yield on outstanding marketable U.S. Treasury securities with 4 or more years to maturity."

It may not be correct for all people, but I'm using terminology consistent with my provider. Thanks for the input though.

Originally Posted by cptacek

So, you have to think about it like this...do you know that the stock price or bond price will be lower in January - March than it is the rest of the year? If you do know that, for sure, then quit your job and start your own mutual fund company. If you do not know that, then buying throughout the year would probably be best, because it won't put a cramp in the money you need for heating.

I am not banking on the fact that prices are lower. I am considering the "earnings" of $14k for 9 months as opposed to $1,500 a month. In the long run, the first strategy earns a little more.

Originally Posted by humandraydel

Are you sure that you can elect to have 99% of your paycheck deposited into your 401k? Many companies have a maximum contribution of 20-30% of your pay.

Yes, I may specify 1-99% in integer values of base pay.

Originally Posted by humandraydel

Besides, even though "theoretically" you could make more money, the hassle doesn't seem worth it to me. What if you drain your savings January-March so you can deposit everything into your 401k and then you lose your job in April?

That's an excellent point, but since the max I may contribute is 99% of my base pay, I'll work overtime and live off of overtime pay. It's slightly uncomfortable but not totally undoable.

I just wanted to weigh the options. Thanks for the input.

[cptacek]

Point taken. In your investment case, it is actually interest, and so it might be better to get in in January.

MOST of the time, people are investing in stocks and bonds, so that is not interest.

[kv968]

Originally Posted by InDebtInDC

"The Fund offers the opportunity to earn rates of interest similar to
those of long-term Government securities.

Is this the only fund you're investing in through your 401k?

[InDebtInDC]

Originally Posted by kv968

Is this the only fund you're investing in through your 401k?

It's one of the options I have available. Lately though I've been inclined to park my money in this fund and let the other funds play out.

[humandraydel]

Originally Posted by cptacek

MOST of the time, people are investing in stocks and bonds, so that is not interest.

Bonds pay interest. Stocks do not.

[InDebtInDC]

Originally Posted by humandraydel

Bonds pay interest. Stocks do not.

To be fair though, not all bonds pay interest, at least not prematurely.

[JasonEngler]

Originally Posted by humandraydel

Bonds pay interest. Stocks do not.

True... but stocks do pay dividends...

[cptacek]

When I think of "earning interest", it is in the vein of savings account interest. As in, if I keep this money in my savings account, then I am guaranteed the interest and I won't lose the principal.

If you are investing in a stock fund or a bond fund, the value of that fund can go up or down. Sure bonds pay interest. But if you invest in a bond fund and the value plummets, you will lose money. And yes, some - not all - stocks pay dividends. But again, you can lose money.

So, semantics aside, I think my original comment is still valid. If you know that whatever you are investing in will be worth less in January - March, or on the flip side, you know that the money you put in in January - March will be worth more April - December, then invest everything in January - March if you can swing it. If you don't know that, then spread it out over the year.

[InDebtInDC]

Originally Posted by cptacek

If you are investing in a stock fund or a bond fund, the value of that fund can go up or down. Sure bonds pay interest. But if you invest in a bond fund and the value plummets, you will lose money.

"The Fund invests in very-short-term Treasury securities specially issued for this plan. This is equivalent to a high-yield stable value fund, and there is no risk of loss. By law, the interest paid by this fund is equal to the average rate of return on outstanding Treasury securities with four or more years to maturity."

Good comments though. I will try to invest more up front whenever possible.

[Tree0164]

You probably won't be able to do it because most 401Ks have a limit on 70% of income going towards the 401k.

Your best bet is to check with the plan admisntrator or if you have online access-check online and contribution limits.

[cptacek]

Originally Posted by InDebtInDC

The fund options themselves are pretty limited. I diversify evenly between small cap, large cap, and international.

So you diversify evenly between small cap, large cap, and international, but then claim to only invest in this very-short-term Treasury securities with a guaranteed return? Which is it?

[InDebtInDC]

Originally Posted by cptacek

So you diversify evenly between small cap, large cap, and international, but then claim to only invest in this very-short-term Treasury securities with a guaranteed return? Which is it?

Originally Posted by InDebtInDC

It's one of the options I have available. Lately though I've been inclined to park my money in this fund and let the other funds play out.

Please, I never claimed to only invest in the Treasury fund. As I said above, normally I would put my money evenly into those 3 funds, but due to the market, lately I've been inclined to put all my money in the Treasury fund.

I should buy more shares while the prices are low. That's what people say. Maybe they just don't want investors to panic and pull all their money out.