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As it turns out, 2019 was a pretty great year for front-loading my 403(b) account. My low-cost VIIIX (Vanguard Institutional Index Fund Institutional Plus Shares) fund generally tracks the performance of the Standard & Poor’s 500 Index. The S&P 500 returned just over 30% in 2019. Thus, VIIIX put up a very similar return for 2019. On 12/31/2018 VIIIX was worth $227.57 per share and by 12/31/2019 is was worth $290.25 per share. That’s a $62.68 per share pick up on capital appreciation alone. All with a rock bottom expense ratio of 0.02%.

Let’s face it, these are monster returns. My $19,000 retirement contribution was worth about $22,277 by 12/31/2019. That’s a $3,277 gain. It hasn’t stopped either. At the time of writing this VIIIX is up to $303.84 per share. I suppose it pays to own 500 of the largest companies on the planet. But here is where I need to put in the usual reminder that past performance isn’t indicative of future results. I have no idea if this fund will go up or down over the next year. I only know that statistically, time in the market is more important than timing the market. Even so, let’s look at how I got lucky and was able to take advantage of this banner year with front-loading. A real-life case study, if you will.

By front-loading my 403(b) contributions, I ended the year on 12/31/2019 with approximately $952.54 more in my 403(b) than if I had split up my contributions evenly all year.

Front-Loading Re-visited

We learned way back in 2019 that the Max Out of Pocket crew would land solidly in the 22% tax bracket for the calendar year. Therefore, any contributions to my retirement accounts would defer 22% in taxes. Maxing out my contributions to the IRS limit would allow me to hold onto $4,180 in taxes I would have otherwise forked over to the federal government. 

$19,000 X 22% = $4,180

So I maxed out my 403(b) account to the IRS limit with a $19,000 contribution. This is not a common move for someone in my age group. In fact, according to Vanguard, only 13% of all workers whose plans were managed by Vanguard maxed out their account to the cap in 2018. It appears the same 13% trend was there in 2015 and 2016. I have been maxing out my 403(b) account since 2013 and Mrs. Max OOP did the same for several of those years.

As uncommon as it is, I went even further and maxed out my 403(b) with style in 2019.

By the end of March 2019, I had already contributed over 80% of the IRS maximum into my 403(b) through a front-loading strategy. This came out to just over $15,000 in contributions.

So by front-loading my retirement account, I was able to capture a big piece of the $4,180 tax deferral earlier in the year. I took that money and invested it into VIIIX. 

Here is how it would have looked if I had split this up evenly all year.

Taking Advantage of a Raging Bull Market

Statistically, the S&P 500 has generally gone up every year. We have seen some bad years along the way, but the general trend is up. Although I dollar-cost average into my medical office building portfolio, it is technically a suboptimal strategy. Lump-sum investing is normally the better way to go. Front-loading is a great way to lump-sum invest. 

So, I had $15,000 baking in the stock market since March 2019 and was able to take advantage of much of the growth the 2019 S&P 500 had to offer. If I would have spread out my contributions evenly all year, I would not have been able to enjoy the ride as much. Compare the “value on 12/31/2019” columns.

I did have to be careful though. I needed to leave a little room in my $19,000 bucket to allow for consistent contributions for the entire year. That’s because my employer requires a 3% contribution each paycheck to qualify for their 3% match. So, I left a decent buffer to leave me room to make smaller contributions all year and account for an unexpected raise or job change.

How Does It Work?

Okay, let’s get specific. On January 18, 2019 I front-loaded $3,299 into my 403(b)-retirement account. The share price for VIIIX was $242.64 so I was able to buy about 13.6 shares.

By December 31, 2019, VIIIX was up about 20% to $290.25 per share. So those 13.6 shares were now worth $3,947. That’s almost a $650 gain on that front-loaded investment.

$3,947 – $3,299 = $648 gain

Now, if I would have evenly spread out my contributions all year, my contribution would have been about $738 per pay period with the last pay-period coming in a little lower. 

Therefore, on January 18, 2019, I would have only contributed $738 to my retirement account. This would have only had the purchasing power to buy about 3 shares of VIIIX. On December 31^st, these shares would have been worth about $882. Still a 20% gain, but since I had more money invested, I was able to better capitalize on the 2019 bull market. 

$882 – $738 = $144 gain

So on this single transaction alone, I netted $504 extra in capital appreciation.

In total, between capital appreciation, dividend payments, and capital gain distributions my total front-loaded investments were worth about $22,277 by the end of the year. If I would have split everything up evenly, I would have had about $21,324.

$22,277 – $21,324 = $953 in my pocket

Once again, past performance isn’t indicative of future results. 

January can be a Great Time of Year for Front-Loading

A lot of companies offer year-end bonuses in December. Bonuses can provide the necessary cash flow to fund a reasonable standard of living in the early months of the following year. This cash cushion can allow us to dump all our W2 earnings from our early paychecks into our retirement accounts at the beginning of the year. My paychecks were coming in at about $12.00 in early 2019.

It can also be a good time of year to reduce spending to make something like this work. Setting New Year’s resolutions and temporarily reducing spending can provide some motivation to allow room for front-loading.   

Thankfully, for the last several years, the Max Out Of Pocket crew has been in a position where we don’t need my paycheck to meet month to month financial obligations. Therefore, bonus aside, I have regularly front-loaded my paycheck into this raging bull market since 2013.

Mistakes Were Made

If you recall, Max was a bit lazy early in the year getting my contribution requests in. So I missed out on buying a bunch of VIIIX on 1/4/2019 at the rock bottom price of $229.89. This inaction probably left several hundred dollars on the table by the end of 2019. 

Bottom Line

Who knows, maybe I will regret not front-loading my retirement account in 2020 when I reflect back on it in 2021. But that decision was based mostly on giving me time to think about liquidity/flexibility and not squeaking out extra gains.

Time in the market is more important than timing the market. Front-loading gives me more time in the market each year since I am deferring taxes early in the year instead of slowly deferring those taxes all year. Having access to these deferred taxes earlier in the year allowed me to park them into a roaring bull market longer. Between deferring $4,180 in taxes and the extra $953 in my pocket from investment returns, I closed 2019 out with an extra $5,133 in my portfolio. That doesn’t even include my employer match.

A few caveats here, though. If I wasn’t front-loading these accounts earlier in the year, my after-tax paychecks would have been much larger. This analysis assumes I am not using those larger paychecks to make similar VIIIX investments in a brokerage account. That would be a much tougher calculation. Additionally, these returns are not “locked” in. I am still fully invested in VIIIX.

Even so, regularly front-loading on our way to financial independence can be a unique strategy that will statistically squeak out some extra gains. But there is always that risk it could work against us one year.

What am I missing in the analysis? Does anyone know of a tool online I can use to easily put something like this together instead of using Excel? Any other caveats I am not thinking about here? Are you front-loading in 2020?

This is not investment advice and for the third time, past performance is not indicative of future results. Invest at your own risk. See my disclaimer page if you have questions.

Tags: 401(k)403(b)EARLY RETIREMENTFRONT-LOADINGVIIIX