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Dirty Market Timer Me? 401k
Old 01-18-2009, 11:51 PM   #1
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Dirty Market Timer Me? 401k

My company has hosted several rounds of layoffs and it is very likely more are coming in a month or two. While I cannot be sure I will lose my job, it seems quite possible. Fortunately, I have enough in Emergency Funds cash to last for quite a long job search, so that worry is taken care of. (This half looking forward to a forced semi-ER is a dangerous attitude.)

What does occur to me is that my ability to move funds into tax advantaged vehicles (like the 401k) will become limited if I have no job. However, my company plan will allow me to raise the percentage I contribute as high as I like. I used to try to spread it out as evenly over the year as possible to capture the company match and to evenly buy the market over the year (DCA). However there is no match this year since company eliminated that Jan 1. I am thinking that stocks are likely to languish here before turning up, but I won't know when that will be, so I would have kept buying as before. Instead, what if I raise my 401k contibution as high as I can stand - to get as much contributed before my qualifying income stream in 2009 is shut off. If I luck out and keep my job, then I'll have bought more in early 2009 instead of evenly over 2009. If I'm right and my job goes away and it takes a while to find a new one, I will have made as much of the 2009 limits allowed into 401k as I can.

I'm less worried about the extra cash I would have been putting in taxable investments getting pushed instead into the 401k, since I have a big enough stash to weather the job loss. I am worried that the 2009 limits for 401k won't wait until I find a new job. If I want to take advantage of them, it might have to be as soon as possible.

I suppose I could redirect the extra 401k contributions into something fixed and then DCA into the market after the job vanishes. But how bad a market timer would it make me if I just let it all get invested according my regular AA, just earlier in the year instead of spread out? Could I regret this if my taxable income for the year turns out to be lower than usual, so the tax deferred 401k doesn't have a much value to me?
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Old 01-19-2009, 05:22 AM   #2
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I suppose I could redirect the extra 401k contributions into something fixed and then DCA into the market after the job vanishes.
This is what I would do. Put the excess contributions into a MM fund within the 401K (I assume you have that as a choice), and DCA them into equities later in the year should you lose your job, or after you reach your maximum contribution should you not lose your job.

The market timing question depends upon the size of your current contributions versus your 401k account balance. If this size is small, the effect of which way you do it is probably minimal, but I like the idea of following your current DCA plan.
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Old 01-19-2009, 08:01 AM   #3
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I have maxed my 401(k) contributions near the beginning of the year for a few years now. I usually put the money into a bond fund because that fits my asset allocation. My company does not "match" but contributes a fixed percentage no matter how much I contribute. I do this early loading in case I decide to fully retire later in the year, so I will always have full year's worth of 401(k) contributions even if I work only a couple of months.

This front-loading can also be a good idea for folks who might be switching jobs. Often the new employer won't let you join their 401(k) for 6 months or a year, so you potentially miss out. It can be a bad idea if the new employer lets you join and has a better matching policy.

I have advised new employees who are not eligible to contribute to the 401(k) for 6 months to actually save some money as if they were contributing, then to backload in Sept-Dec when they become eligible for the 401(k). This lets them max out their contributions for the year as well. By saving ahead, they can live off their savings from Sept to Dec while putting 90% of their paycheck into the 401(k) and get to the max contribution limits before year-end.

My spouse's 401(k) is designed that she get the most match if she contributes from every paycheck. Nevertheless, she frontloads a substantial amount while making sure there is enough room left to contribute for the remaining paychecks for the year and capture the most match.

As for lowering your tax bracket if you retire or lose your job, I think that's great because then you can convert some of the 401(k) or a traditional IRA to a Roth IRA while in that lower tax bracket.

And I want to point out vehemently that this is not market timing and is not dirty. What's up with that?
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Old 01-19-2009, 09:07 AM   #4
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I also don't see any aspect of this that could be called market timing (dirty or not). You're not switching up your asset allocation based on your ideas about getting in / getting out of the stock market at the right time, you're just trying to find a way to max out your 401(k) based on external constraints (i.e., your possible job loss).

Your plan sounds like a smart idea to me, if you've got enough cash saved up to get you through the layoff.

Many employers won't allow you to contribute beyond 15% per paycheck, so if you went several months without a job there's a good chance that you will not be able to catch up and make the max 2009 contribution even if you got a new job after a few months. Increasing your contributions now to ensure you make the max contribution sounds like a good strategy to me.

Whether you would feel more comfortable putting it all into your normal asset allocation right away, or into a MM fund in your 401(k) and then DCAing that into your normal asset allocation over the course of the year, I think both are fine and you should do whatever you are more comfortable with. But neither sound like market timing to me. I personally wouldn't worry about trying to DCA across the entire year, I would just invest per my usual asset allocation and be done with it. But, to each his own - I can see the logic in being more comfortable the other way, since it's replicating what you would have done had you not lost your job.
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Old 01-19-2009, 09:26 AM   #5
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I did this when I retired in March 2007. I essentially asked to withhold 100% and the HR folks throttled it back enough to cover FICA and other minimum deductions.
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Old 01-19-2009, 12:26 PM   #6
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Becareful on putting money into your 401K too fast. Some plans will only match the first set % in each payroll period. If you contribute in too fast, you may miss having the match take place by reaching your limit of $16.5K before your last pay period.

If you want to contribute more early, that is fine, but determine the aomunt reguired to keep the match over the full year and then reduce your contribution at the appropriate point to reach $16.5 K at the last pay.
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Old 01-19-2009, 12:54 PM   #7
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Becareful on putting money into your 401K too fast. Some plans will only match the first set % in each payroll period. If you contribute in too fast, you may miss having the match take place by reaching your limit of $16.5K before your last pay period.
Yeah -- the key is in understanding how the company match works.

A few years ago, my megacorp just matched the first $X dollar for dollar. It didn't matter how the contributions went in. You could contribute $X in the first two months, nothing in the last ten months, and get the full possible match.

But over the last couple years they changed the match to be on the first 5% of contributions per pay period. So if you put in 4% one week and 6% in another week, you'd get less of a match than if you put in 5% in both weeks. So as I think you were saying, the key in my plan is to make sure I don't front-load my contributions so much that I can't continue to put in 5% of pay (and bonuses, if there are any this year) in every pay period.
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Old 01-19-2009, 01:03 PM   #8
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Becareful on putting money into your 401K too fast. Some plans will only match the first set % in each payroll period. If you contribute in too fast, you may miss having the match take place by reaching your limit of $16.5K before your last pay period.

If you want to contribute more early, that is fine, but determine the aomunt reguired to keep the match over the full year and then reduce your contribution at the appropriate point to reach $16.5 K at the last pay.
I understood the was OP saying that his employer had canceled the match for 2009, so this wouldn't be an issue.
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Old 01-19-2009, 01:13 PM   #9
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I understood the was OP saying that his employer had canceled the match for 2009, so this wouldn't be an issue.
True in this particular case, but in the general case it's still something that needs to be considered.
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Old 01-19-2009, 03:00 PM   #10
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Yes, back when we had a match, the match was only per pay period, so loading up early meant that later pay periods would get no match. That's one of the reasons I try to keep the contributions level over the year. This year, the company has suspended the match, so I don't need to keep the contributions level for that reason. In fact, I'm thinking of front-loading my contributions to make sure I get to make them, even if my job goes away during the year.

Oh, and apologies to market timers. I meant it as a catchy headline, and didn't mean to give offense to cheerful, happy market timers anywhere. Sorry.
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Old 01-19-2009, 07:07 PM   #11
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I am worried that the 2009 limits for 401k won't wait until I find a new job. If I want to take advantage of them, it might have to be as soon as possible.
Is there the potential that you could have the opposite problem if you contribute too much right now? The total max 401K pre-tax contribution an employee can make in 2009 is $16,500. The max total combined 401K (employee+employer) contribution that can be made for 2009 is $49,000. If you put $49,000 into your 401K with your present employer, that means you'll be able to contribute nothing for 2009 with your new employer. If that new employer has a juicy match, you might not be able to take advantage of it.

Also, would being out of work for awhile open up any other tax-deferred savings opportunities (maybe get you below the deductible IRA limits, etc)?
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