While writing the post about front-loading my 401(k) contributions a couple weeks ago, I made some additional calculations that I thought were interesting enough to share in a separate post.
In the post, I used a theoretical example using a single fund, VTSAX, over a 10 year period. After 10 years of front-loading the annual contributions by March of every year, the final 401(k) balance was $10k larger, a 3% difference.
However remember, that was over a 10 year period, meaning our annual average return is more like .3%.
Is that enough of a boost to balance out the cons of front-loading?
To get a better idea of what’s going on, let’s take a look at the year-over-year difference. To make things easy, we’re using the following assumptions:
- We front-load within the first 3 months of the year.
- We include the headwind of a .7% 401(k) administration fee.
- To make the math simple, contributions are made on the last day of each month:
|Year (Limit)||Dec. 31st Balance
|Dec. 31st Balance
|YOY Difference||YOY %|
A couple observations:
- In three of the years we actually lost money doing front-loading: 2011, 2015, and 2018. Don’t expect it to work every year.
- Four years had greater than 10% year-over-year improvement with front-loading.
- I don’t show it here, but I found the headwind of the 401(k) administration fee can make a difference. Without the fee, 2015 wouldn’t have been a losing year.
Those are some impressive year-over-year deltas.
Comparing Front-Loading Speed
What if we play with how fast we front-load? Does it make a difference if we front-load by the end of March instead of June?
The following table shows the annual average return difference over the same 10-year time period. This chart plays with different speeds of maxing out the annual contribution. Each column is what month front-loading was concluded by. I used an image because it showed the heat-map so well.
Front-loading makes a bigger impact if you’re done by March than if you’re done by July. But front-loading everything by January 31st would require an annual income of at least 250k (includes payroll taxes but no benefit deductions). That’s probably out of reach for most, but many could front load it by March 31st or early April.
However, over time it’s still only a fraction of the total return. Getting to the point of maxing out 401(k) contributions is going to have more of an effect on the account balance than front-loading ever will.
Front-loading does take some of the bite out of the .70% annual administration fee.
I’m going to continue front-loading 401(k) contribution for the foreseeable future. Changes in my situation, say an anticipated employment change or the introduction of a match to my 401(k) may lead to modifying the strategy, but for now I think it’s worth it to me.