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Author: Fuskie Big funky green star, 20000 posts Top Favorite Fools Old School Fool Ticker Guide SC1 Red Winner of the 2010 Rule Breakers Challenge Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 74776  
Subject: Re: I think I am missing something Date: 3/23/2011 9:01 PM
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Let me try to give you a mathematical example based on my old employer's 401k plan.

Let's say you are eligible to contribute $15,000 a year. Why $15,000? Because it's an easy number.

Now let's say you get paid bi-weekly on an annual salary of $75,000, meaning 26 pre-tax payments of $2884.62.

Now let's say that your company matches 1.5 x the first 4% of your contribution.

Your goal is to contribute the max amount of your salary to reach your $15k limit over 12 months, so you contribute 20% and the company matches with 6% (1.5 x 4). This comes out to $576.92 plus $173.08 matching per pay period. Over 26 pay periods, you will total contribution will be $15,000 and your company match will be an additional $4500.

Note that when your employer co-match is vested may vary by plan, but for this example, we will assume you are immediately fully vested.

Now let's say you live really frugally and can afford to contribute 30% of your salary each pay period. Your goal is to max out your $15,000 as fast as possible so your money starts working for you sooner than later. 30% of $2884.62 comes out to $865.37 and your 6% (1.5 x the first 4%) company match stays constant at $173.08.

But because you have a $15,000 limit, you can only contribute for 17.33 pay periods before you max out your eligibility. This means your company matching contribution is limited to $3000 ($173.08 * 17.33). Therefore, by trying to jump start your investment gains, you are sacrificing $1500 of your potential company matching contribution.

Now maybe you can make up that difference through gains, but maybe not.

Fuskie
Whose advice from his own experience is to stretch your contributions over the full year and take all the free money your employer is willing to offer...
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