Assume that:

  1. The employers catch up on the missing match at the end of the year, via as year-end true-up contributions. Should one max out one's 401(k) at the beginning of the year?
  2. I have no idea how to time the market. I.e., I have no predictions regarding whether the market will go up or down.
  3. I simply invest all the wages I receive (401k or not) in broad, low-fee index ETFs, such as BND, VTI, VWO, VPL and VXUS.
  4. I contribute to both 401(k) and Roth 401(k).
  5. I have no plan to stop working (= stop contribute to the 401(k)).

Pros of maxing out one's 401(k) at the beginning of the year that I am aware of:

  1. Placing as much money as early as possible in tax-advantageous bank accounts.

Cons of maxing out one's 401(k) at the beginning of the year:

  1. Year-end true-up contributions come a bit late.
  2. Investing via a lump sum is the contrary of the dollar cost averaging investing strategy, which is typically recommended for the clueless investors such as myself.

Given all that, and possibly including pros/cons I might have missed, should one max out one's 401(k) at the beginning of the year?

I have read many webpages about that topic via Google, but 1) no actual simulation 2) nothing beyond the simple pros/cons I mentioned in this question.

  • 4
    I would say con #2 should really be pro #2: lump-sum investing is superior to dollar-cost averaging. Here's a Vanguard study that shows lump-sum investing outperforms dollar-cost averaging about two-thirds of the time.
    – Craig W
    Jan 30, 2022 at 2:15
  • @CraigW Thanks, good point and great study! Jan 30, 2022 at 2:20
  • 3
    @CraigW yes; the point is if you have all the money right away - then it’s better to invest it all right away. Dollar cost Averaging is only better than saving up your (limited) monthly investment ability all year and then investing.
    – Aganju
    Jan 30, 2022 at 2:55
  • 1
    They also say "Time in the market beats timing the market". Investing a lump sum may have advantages over trying to average costs. Jan 30, 2022 at 3:09
  • 1
    Discussed here: ofdollarsanddata.com/…
    – minou
    Jan 31, 2022 at 3:54

2 Answers 2

  1. I have no plan to stop working (= stop contribute to the 401(k)).

That is the risk that always worries me about trying to do what you propose. I never started the year with the idea that I would be switching companies during the year. In some cases there was another opportunity I couldn't pass up, in other cases the project I was on came to a sudden end, and due to problems elsewhere in the company the only way to not have a gap was to switch companies.

If you aren't with them at the end of the year, then they will not true-up their match.

Other comments: You have to be able to have the cash flow to afford to do this. Most employees can't do this. Most employees don't maximize the annual contribution, some don't even put enough in to maximize the match.

The discussion of lump-sum vs DCA is always interesting. The math and studies tells us that lump sum is better. But that is when you have a pile of cash, and once you have decided to invest it, there is no reason to string it out, because the cash is earning zero or almost zero in the bank account before you invest it.

Those studies don't reflect reality. Most employees with access to 401(k), are better served by making a contribution with every paycheck. Their alternative is to put the money into a small bank account, earning very little, and then making one big investment. The 401(k) lets them make 26 small lump sum investments.

What you propose is letting the company hold a significant portion of the match, paying you zero percent interest, and then putting the money in at the end of the year.


There is another variation which I used.

To keep the math simple, say you earn $100K, and are paid via 50 checks, $2000 each over the year. The employer matches only the first 5%, so a $2000 check will get a $100 match whether you deposit $100 or some higher amount.

Since it's good to have the match not stop early for reasons others stated, you can use a high 401(k) withdrawal up front until you have enough so the maximum match remains for the rest of the year.

In my case, I'd start the year with a large percent, about 50%, and a few paycheck later, drop it to that 5% level and leave it at that through year end. I saw this as the best of both approaches.

Keep in mind, one can contrive specific scenarios where any approach is superior. You load up by Jan 30th and the market tanks? Your coworkers are buying low through the year while you bought at the year's high. The market rises steadily through the year? You are ahead.

100% 'yes' to mhoran's answer. I am just offering a different math solution to a math problem.

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