Some Super Savers Are Front-Loading Their 401(k) Contributions — Should You?
Written by
Laura Bogart
Edited by
Kristen Mae
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For many people, their 401(k) isn’t exactly front of mind; it’s like a silent engine of retirement savings humming in the background of their day-to-day lives. They think the automatic contributions that come out of their paychecks will cover them. But for some people, this amount is just pennies in the bucket compared to the amount they aim to save for the retirement of their dreams. They prioritize saving for their retirement like it’s a full-time job in and of itself.
To bring their savings goals to the forefront of their financial management, some super savers adopt strategies like front-loading their 401(k) contributions. This means “maxing out” the amount they’re allowed to contribute for the year as early as possible.
While this approach can supercharge retirement savings, is it the right strategy for you?
You Could Gain More in the Market
Investment markets can be unpredictable. One day, your portfolio might see promising gains; the next, you could face unexpected losses due to market volatility. However, if your insight into the markets suggests real growth is coming, you’ll want to have more money invested to capitalize on that growth as it happens.
This relates to the classic investing adage: “It’s not about timing the market; it’s about time in the market.” The idea highlights that long-term investment success typically comes from staying invested longer rather than trying to predict market swings.
If you’re a regular market-watcher, it might make sense to front-load your 401(k) if you feel confident you’ll get some real bang for your buck. Consider this: Let’s say you and a peer at the same company decide to max out your 401(k)s, only you choose to front-load yours during a promising market period while they spread their contributions over the year. While you both contribute the same amount, if markets continue to grow, you’ll have more to show for it.
You Should Only Do It if You Have a Robust Emergency Fund
In a post about his own approach to retirement savings, writer and analyst Andre Nader explains his preference for front-loading his 401(k). However, he offers a clear warning: Don’t do it unless your emergency fund is already well-stocked.
“Please don’t do this unless you have a strong emergency fund. Even if you have a strong emergency fund, notice how I intentionally overfund my emergency fund towards the end of the year,” he wrote. “This is because I have planned this out. Particularly now as tech companies are counting [on] layoffs, it would be foolish to do this without that emergency fund as a foundation.”
Be aware of trends within your industry, as well as your personal finances, before committing to prioritizing your 401(k) over everything else. Only proceed if you’re confident you could weather situations like job loss, sudden illness, or injury using your emergency fund.
Consider Your Employer’s Matching Contributions
Forgoing your employer’s matching contributions to your 401(k) can be like leaving money on the table. Some matching contribution plans aren’t conducive to front-loading, as they only match contributions during pay periods when an employee contributes — leaving you vulnerable to reduced employer matching.
For example, if you and your friend receive a 5% 401(k) match from your employer and you opt to front-load your contributions in the first quarter, you’ll max out your annual contribution by the end of March. That’s a 5% match on only a quarter of your income. Meanwhile, your friend who contributes steadily throughout the year gets a 5% match on their entire income for the year.
At the end of the day, whether to front-load your 401(k) or spread out contributions depends entirely on your financial situation and preferences. However you choose to save, one thing remains essential: Make sure you’re putting money away for retirement.
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