Front-Load Max Out your 401K Early in the Year for Better Returns?

I was recently approached by a longtime reader with a seemingly random question on 401Ks,

Is it better to max out your 401K each year as soon as possible?

Upon digging a little deeper, I found out that a friend of his had been maxing out his 401K as soon as he possibly could and was recommending to him that he do the same (versus dollar cost averaging over the entire year).

The friend’s theory was that since the stock market trends upward over time, if you were to max out your contributions and invest them as soon as possible each year versus spreading them out or contributing more later in the year, then you would be able to capture better investment returns over time.

I read thousands of financial articles each year and had never seen one argue in favor of this strategy and I told the reader as much.

max out 401K early in year

But something kept pulling at my curiosity since that exchange. I get an awesome 50% of my contribution 401K match from my employer (up to the max), so I have made the maximum 401K contribution for a number of years now. Was it in my best interest to max out my 401K as soon as I possibly could each year?

I dug a little deeper to find an answer.

I compared the S&P 500 stock market index levels in the first half of the year to the second half of the year for each of the last 35 years (1989 – 2020). I didn’t want to simply compare start of year to end of year because it is extremely rare that a maximum contribution would come in one giant lump sum right at the start of the year.

I noted whether the market index was noticeably higher in the first half of the year, second half of the year, or was approximately a push. What I found was:

  • 1st half noticeably higher: 1990, 1992, 1998, 2001, 2002, 2008, 2011, 2015, 2018, 2022 (10 total years)
  • 2nd half noticeably higher: 1989, 1993, 1995, 1996, 1997, 1999, 2003, 2006, 2007, 2009, 2010, 2013, 2014, 2016, 2017, 2019, 2021, 2023 (19 total years)
  • roughly even: 1991, 1994, 2000, 2004, 2005, 2012 (6 total years)

That’s almost a 2-to-1 ratio of higher 2nd half versus higher 1st half index levels.

Not the largest sample size, but almost a 2-to-1 ratio of higher 2nd half versus higher 1st half index levels is pretty compelling.

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.

Sure, there is some context missing here, but it does provide some validation to the theory. Will the same kind of results hold true over the next 31 years? Nobody knows.

Investment return gains aside, I think there is another compelling reason to max out your 401K contributions earlier in the year if you can.

If you are at an employer with an appealing 401K match that vests immediately and is based off of your personal contribution (vs. salary) and you can afford to max out sooner, it might be to your benefit. If your job status changes (i.e. you get laid off) or you go to a new employer with a lesser 401K match, that means less free money for you.

Even if your match is so-so or non-existent and you are in a situation where you fear your employment may be in jeopardy, it is in your best interest to get as much of a match as you possibly can and also to be able to contribute more of your own funds towards retirement.

Of course, you have to be able to afford the lower paychecks until you max.

Something to think about.

* Note: this strategy does not universally work for every 401K plan. Some employers contribute a percentage of your total salary vs. a percentage of your contribution and set caps on how much they will match per pay period. Some employers do not contribute until the end of the year. And some have vesting schedules or other whacky rules preventing you from benefiting if you leave the company. In other words, your mileage may vary. Best to check with your HR department. Also, I’m not recommending this strategy – just highlighting the possibility, if your employer’s plan allows for it.

401K Maxing Discussion:

  • Do you max out your 401k early in the year for investment return reasons?
  • Do you max out early to lock in your 401k match and/or your own contributions?

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