Depending on how your 401k is set up, you could get more out of it by contributing your maximum allowed amount as early in the year as possible. G.E. Miller of Twenty Something Finance explains why.
Miller took a look at the S&P 500 market index levels and compared the first half of the year with the second half of the year. The comparisons he made weren't just a look at the start date value vs. end date value of each year, but instead a look at significant ups and downs that occurred during the first half and second half of each year. Here's what he found:
- 1st half higher: 1990, 1992, 1998, 2001, 2002, 2008, 2011 (7 total years)
- 2nd half higher: 1989, 1993, 1995, 1996, 1997, 1999, 2003, 2006, 2007, 2009, 2010, 2013 (12 total years)
- push: 1991, 1994, 2000, 2004, 2005, 2012 (6 total years)
The sample size isn't exactly all-encompassing, but from 1990 to 2013 the second half of the year was higher nearly twice as much as the first half of the year.
"With the 2nd half of the year being higher than the first, theoretically, the more you invest in the first half of a year, you would be able to capture more gains on your contributions for that year, over time. Every little gain adds up."
Something important to note is that this will not work with all types of 401ks. If your plans are based on a percentage of your total salary instead of a percentage of your own contributions this might not work at all, especially if your employers wait to contribute at the end of the year or have set specific caps on monthly contributions. So, approach this strategy with caution, and make sure you check your plan with your HR department if you're unsure.
Max Out 401k Early For Better Returns | 20 Something Finance
Photo by gfpeck.
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