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.

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There is no telling what my Human Resource department thinks of me.  They finally stopped asking questions about my erratic 403(b) retirement contribution requests and just process them now as is.

I changed my contribution from 85% of my salary to my upper limit of 87% for several pay periods while I was front-loading. Then down to 19%. For yesterday’s check, I went all the way down to a 3% retirement contribution.  It will likely be about 5-6% for the rest of the year.  All in the name of an experiment for the Max Out of Pocket blog!

The 3% contribution was set to illustrate what a normal Average Joe Saver contribution might look like for someone in my position.  Thus, I got a normal paycheck on 4/12/2019! Much larger than my $12.00 paycheck from 3/1/2019, but I paid a lot more in taxes too.

Front-Loading Re-Visited

As you know, maxing out my 403(b) retirement account in 2019 defers 22 Cents on the Dollar in federal tax for Mr. and Mrs. Max OOP.  This totals $4,180 in deferred tax that will be invested into over 500 of the best companies on the planet. I also get a 3% match from my employer as long as I contribute at least 3% of my salary every pay period.

Front-Loading gets me part of that $4,180 tax deferral even earlier.  Employers calculate federal tax after the retirement contribution each check, so the greater the retirement contribution the less federal tax paid for that pay period. FICA taxes and medical insurance premiums stay the same regardless of the retirement contribution.

Here are the results of my experiment. It clearly shows the federal tax burden increase as my retirement 403(b) contribution decreases.  As you can see, I am modeling this for two alter egos at my hospital that make exactly the same amount as me. Please allow me to introduce Average Joe Saver and Even Steven.

THE TALE OF THREE SAVERS

AVERAGE JOE SAVER

Since Average Joe Saver read my Matchmaking article, he set his 403(b) retirement contribution at the minimum amount required by our employer to capture the 3% match over 26 pay periods. Why would Average Joe save any more than that? After all, considering where the world is, he figures he probably won’t live to see retirement. He will save 3% just in case he makes it through life’s gauntlet and needs a few dollars to celebrate by sharing a Guinness with his closest nursing home buddies. For my 4/12/2019 check, I set my contribution all the way down to 3% to model Average Joe Saver. As you can see, Average Joe will need to pay about $600 to the federal government for 26 pay periods totaling almost $16,000. He also gets the largest amount deposited into his checking account every week. Average Joe Saver gets a C for showing up to class.

EVEN STEVEN

Even Steven is pretty slick. He knows that he should max out his retirement account at $19,000, but he thinks front loading is too advanced for him. He also isn’t sure he can fund his weekly micro-brew tasting club and keep his house heated to an even 75 degrees on a $12 paycheck. Steve opts to just put in the same amount all 26 pay periods. Nothing wrong with this, just not fully optimized.   

I decided to model this with my 3/29/2019 paycheck. In a perfect world, this would come out to $731 for 26 pay periods ($731 X 26 = $19,000).

But, my employer makes me select big “round” contribution percentages to make their life easier. So in this case, 19% ($738) is the closest I can get to an equal distribution over 26 pay periods to come to $19,000. So for 25 pay periods, Even Steven would contribute $738 to his retirement with his last contribution of the year coming in at $562 for a total of $19,000. As you can see, Even Steven pays $459 in tax per pay period, totaling just over $12,000 for the year. This is $3,600 less than Average Joe will have to pay throughout the year.  Even Steven gets a B.

MAX OOP

Other than the fact that he tends to procrastinate, Max OOP is a mastermind wizard.  After missing his first pay period due to pure laziness, he strategically puts 87% of his paycheck into his retirement account for his early 2019 paychecks. He only has to pay the federal government $17 on these checks. He knows this tax will increase later in the year and his checks will look more like Average Joe’s.  He also knows in total, he will pay about the same tax as Even Steven. But Max OOP is greedy and wanted his money earlier in the year. Since Max OOP is allowed one tardy, he still gets an A+ for 2019 front-loading.

Only 8 pay periods into 2019 and Max OOP paid the federal government just $1,842. Even Steven has paid $3,674 and Average Joe Saver has paid Uncle Sam $4,798. Not even being fully optimized, Max OOP has almost $3,000 more in his pocket than Average Joe and over $1,800 more than Even Steven. It’s only April and Max OOP already has over $15,000 in his 403(b).

By front-loading, I am basically getting my hands on a big chunk of the $4,180 tax deferral and investing it NOW instead of slowly getting it over the course of the year. 

This is likely how the rest of the year’s “tax flow” would look for Max OOP, Even Steven, and Average Joe.

Max Out of Pocket for front-loading when fully optimized = $17.00 in taxes to Uncle Sam.

How much have you front-loaded this year?

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I overheard someone in the cafeteria at work the other day saying they do not contribute to their retirement account. I could hardly believe my ears. This person seems to be experienced enough to know this inaction would cost them some serious money. Could it really be these concepts I consider in the realm of ‘common sense’ are not followed by the entire workforce?

It is common for employers to match a certain percentage of your pay that you contribute to your retirement account. I often hear it called “free money”. You really need to consider it part of your compensation package for selling your valuable time, talent, and energy to a company.

How Much Does MAX OOP Get Matched?

As a benefit in 2019, my employer will match dollar for dollar (or even cent for cent) up to 3% of my salary on retirement contributions. So for every dollar I make, I can put 3 pennies into my 403(b) and my employer will also put 3 pennies into the same account. Assuming I finish out the full year of work in 2019, this will work out to about a $3,025 match for Max OOP.

Think of the match like roulette, but in this game, you know AHEAD of time the ball is going to land on red. Every single pay period. You put a percentage of your paycheck on red and win a full match EVERY spin. The only catch is – usually, you actually have to play every pay period to get your match.

There are retirement matches out there MUCH higher than 3%, but this seems about the market rate for healthcare workers. I hear Philip Morris International has a solid retirement match (rumored at 12% of salary). So if you want to join big tobacco and its contribution to our overall healthcare cost, that could be your best ticket.

Most companies increase the match percentage with years of service as you commit more of your limited time on earth to a company. I never thought of these match increases material enough to have the golden handcuff effect. Easy sacrifice for early retirement or a sabbatical.

Minimum Contribution To Get The Match

My current company requires me to put at least 3% of EVERY paycheck into my retirement account in order to get the full match that pay-period. Since I get paid over 26 pay periods, my match will come out to about $116.45 per paycheck. I will need to put in a minimum of $116.45 on red EVERY paycheck in order to secure my winnings.

In other words, if I front-load the full $3,025 into my retirement account on my first check, they don’t go ahead and give me the $3,025 match all at once. They want the match to spread out nice and evenly throughout the year. This seems like a pretty common strategy by employers to help retain (lock-in) worker bees for the full year.

So this is where we need to be careful with front-loading. If you front-load your entire $19,000 during your first several paychecks, you may be leaving your match on the table for the rest of the year. I am strategically leaving a little extra room (5%-6%) of my check to ensure I capture the match for the rest of 2019. This gives me some flexibility in case I see an unexpected bump in pay or leave for another job with a more generous matching program. If I take a sabbatical and leave work early in 2019 I will up my contribution on my last check to make sure I at least get the full $19,000 in the account.

My current employer requires contributions to be big ’round’ percentages. Not as easy as selecting specific contribution amounts but luckily I am married to a math teacher.

This is likely how it will look for 2019 for Max:

So by the end of 2019, between maxing out my 403(b) retirement account ($19,000) and the match ($3,025), I will have put away $22,025. Since Mr. and Mrs. Max OOP land in the 22% tax bracket, taking this $3,025 retirement match through my qualified retirement account defers another $666 in taxes from Uncle Sam. This match will be dollar-cost-averaged into over 500 of the largest companies in America for 26 pay periods.

Max Out of Pocket for $3,025 Match? A 2,080+ hour annual time commitment netting about $1.45 per hour.

How much is your match?

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Well, tax-deferred retirement contributions technically don’t save any tax. It is deferring tax until a later date. The goal is to use the deferred tax dollars to make money. You would then realize this as income at a point in the future when you’re in a lower tax bracket. Or, even better, take it during a year you are on sabbatical and not even in a tax bracket!

For the Max Out of Pocket crew, the tax deferral comes out to an even 22 cents on the dollar. That is $4,180 in 2019.

You can get this deferral whether you front-load or spread out your retirement contributions nice and evenly all year.  

Take Mr. and Mrs. OOP for example. After normal “average joe” deductions, we will land solidly in the 22% tax bracket for 2019 ($78,951 – $168,400).  This, of course, assumes I don’t take a sabbatical or retire early in 2019 – then we may drift down into the 12% bucket.

So for every single taxable dollar we make over $78,950, Uncle Sam will hit us with a 22% federal tax (22 cents).    

Putting $19,000 in my 403(b) retirement bucket prevents Uncle Sam from taxing it in 2019, thus deferring $4,180 in taxes for 2019. So instead of taking home just $14,820 – I get to keep my entire $19,000.

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

In other words, I am telling Uncle Sam, “Listen old man, let me keep my $4,180 for now and we can settle up later”. Uncle Sam says, “Sure, no problem, Max OOP. You can get me back later. I trust you are good for it. Want to go grab a beer with your $12 paycheck?” 

Perhaps I am good for it, but hopefully, we settle up for much less than $4,180 in tax.

In the meantime, I can take my full $19,000 and invest the entire amount into over 500 of the best companies in America through my fancy VIIIX index fund.  In turn, those companies will use it to make great products and services for us all to enjoy. 

You don’t even have to thank me – those companies will thank me later by sharing their profits with me.  

Max Out of Pocket on the $19,000 retirement contribution in 2019? $0.00 in taxes in 2019

What tax bracket do you land in?

The post 22 Cents on the Dollar appeared first on Max Out of Pocket.

I immediately got irritated. After all, I have been front-loading thousands of dollars of every paycheck into this fund over the last few months.

Max OOP had researched the hell out of this fund.  It gave me access to invest in 507 of the largest companies in America at a rock bottom expense ratio of 0.035% annually.  Normally someone would need $5 million just to be allowed to invest in this fund. Trust me, I don’t have 5 million dollars, but my employer gave me special access to drop my money here.  

So for every $100,000 I invested with VINIX – my Max Out of Pocket would only be $35 per year.

Much cheaper than the unreasonable NINE HUNDRED DOLLARS in annual expenses I would pay on the most expensive fund offered through my employer.

They said somewhere in the letter that if I didn’t pick a new fund they would pick a “like fund” from the new offering of index funds in early 2019. I threw the letter away and went on with life thinking I would just deal with it later.

Come to find out on 2/25/2019 they took it upon themselves to move my investments into another “like fund” called VIIIX.

For all practical purposes, this ACTUALLY IS the same fund.  It invests in 507 of the largest companies in America.  The top ten companies are all the same.  Healthcare, my favorite sector, makes up 15.4% of both index funds. Let’s take a look:

Only two main differences:

• You normally would need $100 MILLION to invest in the new fund.  My employer evidently waives this requirement.
• The expense ratio on the new fund is ONLY 0.02% compared with 0.035% I was paying to invest in my old fund.

So now for every $100,000 I invest with VIIIX I will only pay $20 annually compared to the $35 I would be paying otherwise.

There you have it – a 43% reduction in fees.  May seem small – but this could easily turn unto THOUSANDS of dollars over my lifetime.

Kudos to my employer and retirement account administrator for doing the right thing.  They didn’t go behind my back and increase my expenses but DECREASED them by over 40%.  I would love to see how much this move will save the entire workforce over the next decade or two.  

What is your annual Max Out of Pocket on your retirement balances?

The post How I Slashed My Retirement Expense Fees By Over 40% appeared first on Max Out of Pocket.

Since Max doesn’t need much cash from my paycheck these days, I figured I would continue my front-loading strategy for 2019. My tax-deferred 403(b) retirement bucket can hold $19,000 in 2019.

Front-loading is basically paying myself before the federal government. I defer taxes now instead of slowly all year. It gives me more time in the market. The Mad Fientist can explain it much better than I can here.

Trust me, if I can do it, you can do it.

My fourth paycheck of 2019 hit 2/15/2019 and I purchased another large section of the US economy. I grossed $3,882 on that check and I front-loaded 87% of my pay into my 403(b).  How did I do it?  I simply ran some numbers and asked my HR department if they would increase my 403(b) contributions to 87% of my paycheck. Oh, and a reasonable standard of living and over a decade of an extremely high savings rate helped as well.

Why only 87%?

87% seems to be as high as I can go while still having enough left over to pay my voluntary Medical Premiums and non-voluntary Medicare and Social Security “premiums”.  These tax-deferred accounts only defer/shelter federal taxes, not FICA (Social Security / Medicare) taxes.  It left me a whopping $12 for my checking account. Yeah, I needed some cash for happy hour at my favorite pub – that is about 3 beers worth.

Here is where the rest went:

So I took $3,377 of my pay (87%) and purchased 13.35 units of VINIX at the price of $253.01. This fund contains 507 of the nation’s largest stocks and basically tracks the S&P 500.

Normally you would need $5 million in assets to be able to invest in a fund like this but thanks to my company’s 403(b) options, I can get in for much less.

The expense ratio is a paltry 0.035% for an annual expense of $1.18. I would say that is a low barrier of entry to own some of the best companies on the planet.

$3,377 X 0.035% = $1.18

Max Out of Pocket for next year = ~$1.18.

What 403(b)/401(k) index fund options does your company offer?

*If you plan on implementing a strategy like this yourself, make sure you understand your employer’s “match” requirements and leave the room if necessary to capture the match.

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