When people hear about “front-loading” their retirement account they get different ideas about what front-loading is. There is a good reason for this, as there are three possible definitions for front-loading.
- The first form of front-loading involves the type of retirement account used. Front-loaded accounts are traditional retirement accounts like the traditional IRA and traditional 401(k) contributions. Front-loaded accounts get a deduction now and pay tax upon distribution in this definition of front-loading.
Back-loaded accounts are of the Roth type (Roth IRA or Roth 401(k)). In these types of retirement accounts contributions are not tax deductible, but distributions, including from gains, are not taxed.
Which type of retirement account you should use comes down to your personal facts and circumstances. One size does not fit all.
I discussed these types of retirement funds in the past and encourage a review of these articles.
- The second type of front-loading involves your working career, where you invest as much as possible in the early years so you can either retire early, semi-retire early, or reduce retirement contributions as you age.
In this type of front-loading your goal is to grow the size of your retirement accounts as fast as possible so you have choices later in life, but before normal retirement age.
- The final type of front-loading is where you max out your contribution limit on your retirement account early in the year. For IRAs this means funding the account at the beginning of the year versus at the end of the year or when you file your return. For employer plans (401(k), 403(b), 457, etc.) you save a large percentage of your salary into your work retirement account early in the year, maxing out your annual contribution limit before year-end.
Whatever your strategy, there are benefits to each type of front-loading with a few caveats to also consider.
Is It Better To Front-Load 401(k) Contributions?
One common reason to front-load your employer retirement plan involves timing. The earlier you get your money invested the longer your money is working for you.
Investing is about time, not timing. Nobody knows where the market is headed over the short-term. Front-loading is often viewed as a way to get just a bit more out of your investments. In theory, the few extra months your money is working should give you a modest account value boost. But because the time is so short the gain will be negligible and if the market is down later in the year you will suffer a disadvantage.
There is a good reason, however, to front-loading your employer plan contributions. By getting those monies into your retirement account early you get it out of the way. This removes the temptation for cutting your contributions later in the year before you reach the contribution limit.
By front-loading your employer retirement plan you can maximize your contributions early and have extra money during the holidays later in the year when additional retirement contributions are not allowed due to reaching the contribution limits.
So far we discussed #3 above because it is what most people mean when we say front-loading. But what about #2 where we front-load our employer retirement plan early in our career?
This is where time really digs in. Front-loading on an annual basis only gives you months of added time in the investment before the money would already be invested anyway by the end of the year. But front-loading early in your working years gives you decades of extra time for your money to work. Time does matter now since the market over these time frames are almost always higher, meaning your account values will be higher versus spreading your retirement contributions over a greater part of your working years.
Why is this such a powerfully good idea? Simple. By getting your retirement funds to work early you have choices later in life. Some choices are forced upon you. If, for some reason, you must reduce your work level, you now have your retirement investments available to fund an early retirement or reduced work schedule, whether by choice or forced upon you.
Another powerful benefit to front-loading your retirement accounts early in your career is so you can pursue other options later in life. You may want to try your hand at a business or a side hustle instead of formalized work. Having a safety net, an amply funded retirement account, allows you to pursue your dreams without destroying your Golden Years.
Should I Front-Load My 401(k) In 2025?
There is one major risk when front-loading your 401(k). You may lose some of your employer’s matching contributions once you are no longer contributing to your 401(k) due to reaching the contribution limit. Under this situation it is best to spread your 401(k) contributions over the year to maximize employer contributions.
However, your employer may have a provision in their 401(k) documents where they “true-up” the employer match. This means your employer will continue matching all your salary or wages once you reach the contribution limit. Under this situation front-loading is a reasonable option. Check with your employer to verify if you have this provision in the retirement plan they offer.
Benefits Of Saving For Retirement
Time counts and keeps counting. Retirement age is always approaching, regardless if you plan on an active retirement or not.
Some of the benefits of going ahead and saving for retirement include:
- Every dollar invested gets you closer to your retirement goal. Even if you have no set retirement goal, each dollar invested is a dollar at work, building wealth for you. You can always spend that dollar later, but once spent it is gone.
- Saving and investing is a habit best learned early. There are two reasons for this. First, the sooner you start the more you will have. And second, you learn to live on less than 100% of your income.
So many people live paycheck-to-paycheck because they spend every dime they bring in. Learning to live on less than 100% of your income is a powerful source of self-control. When you are in control you make the rules, deciding what is and is not important to you.
- At some point you reach enough. Yes, you can always have more, but using the 4% Rule as a guide, you know exactly when you have “enough”.
For example, if you determine you need $100,000 annually in retirement, once your retirement account value reaches $2.5 million (multiple your annual distribution needs by 25, the 4% Rule turned upside down) you have enough to meet your retirement needs. Anything above that is only extra.
Knowing when you can stop is important. Many people ask about when they are able to retire. Knowing the point where you have “enough” is the tool you need for making the optimal decision.
- Habits, once started, are easy to maintain. The sooner you develop a proper financial habit the sooner you take control of your financial life and all it affects.
Thinking about money is a necessary evil in our modern world. It does not have to be an all-consuming activity. When a proper financial plan is put in place it takes very little time and effort to maintain momentum.
What Is the Golden Rule of Retirement Savings?
The Golden Rule of Retirement Savings says you should save 15% of your pre-tax income. However, like the 4% Rule, these rules are more guidelines than hard and fast rules.
The 4% Rule is determined by the failure rate. Safety is the guiding principle of the 4% Rule. In other words, how often does a rate of distribution in retirement end with funds running out before you do. Research says 4% is a safe rate of distribution in all but a few historical instances.
The Golden Rule of Retirement Savings is also a guideline meant to be adjusted as circumstances require. For the Golden Rule, 15% is a starting point. Your first goal should be to get to saving 15% of your income. That is not easy if you never saved before.
Once you build a strong savings habit you can become hardcore and save more than 15%. Doing so gets you to your retirement goals sooner. And that is the ultimate goal. The sooner you reach your “enough” number you are now in control. Economic conditions are no longer a concern for you. A layoff is not a crisis.
When you hear the word “Rule” in personal finance, know that these are suggestions and often meant as a baseline. If your retirement account values continue climbing in retirement it is still safe to take a bit more in distributions. But if your account values decline faster than expected you may have to reduce those distributions, even if only temporarily.
And 15% should only be a starting point for retirement savings and investments. 15% requires a long working career to meet your goals. The old 10% guideline locks you into a long working career and assumes no interruptions over your working years. That is a tall order, since things go wrong over 40 year time periods. Investing 15% of your income shortens the time frame needed to reach your “enough” goal by a bit, but only a bit. The higher the rate the sooner you have “enough”.
Where Should Your 401(k) Be By Age?
If we are going to talk about “enough”, we need to define what enough is and how to determine what your enough should be.
Let’s start by looking at where everyone else is. According to Fidelity, the average 401(k) account value by age at the end of the third quarter of 2024 was:
- People in their 20s: $18,700
- People in their 30s: $60,000
- People in their 40s: $130,900
- People in their 50s: $223,100
- People in their 60s: $249,600
- People in their 70s: $252,100
We can learn a few things from this data. First, Fidelity only looks at each account individually. Most people have more than one retirement account, not just a single 401(k). People often have money in 401(k) accounts from a previous employer. And the 401(k) is often not the only retirement account since many people also fund their IRA. (It should be noted that people that have $0 in their 401(k) are not counted.)
Second, a lot of people are very behind on their retirement savings. Less than a quarter of a million dollars in your 401(k) in your 60s is not a lot. Using the 4% Rule, that $249,600 average only allows for a $9,984 safe annual distribution rate.
Third, even with such modest account values, the account values still climbed modestly in the 70s on average. This is an important understanding. While many worry about running out, the truth is many see their net worth climb in retirement.
Now that we know where everyone is at, we need to set a framework for where we should be. By each select age you should have (according to Kiplinger):
- Age 30: 1X of salary
- Age 40: 3X of salary
- Age 50: 6X of salary
- Age 60: 8X of salary
- Age 67: 10X of salary
A quick glance tells you these numbers are light. If we are to use the 4% Rule, you need 25X (25 times) your anticipated spending rate when you enter retirement. If the best you can do is 10X you are not saving enough. For example, at full Social Security retirement age of 67, if you only have 10X you salary, you will be taking an income cut in retirement. A $100,000 salary at 10X is $1,000,000. The 4% Rule says you have a safe withdrawal rate of $40,000. See the problem?
According to The Wealthy Accountant, a better guideline would be:
- Age 30: 1.5X of salary
- Age 40: 5.5X of salary
- Age 50: 12X of salary
- Age 60: 20X of salary
- Age 67: 25X of salary
And remember, these are minimums. Anything less and you increase your risk of running out of money before you run out.
Of course, other facts come into play. You may have a pension or other investments to pull from. My guideline combines retirement plans and non-qualified (non-retirement) accounts in aggregate. And this leaves no room for early retirement.
Social Security will also reduce the amount you will need. Using $100,000 as our salary we will need $2.5 million to reach 25X. But part of your income will come from Social Security and will cover some of your living expenses.
The Kiplinger guideline assumes Social Security carries a significant burden. The Wealthy Accountant guideline disregards Social Security. The truth is somewhere in the middle.
Developing an accurate retirement plan requires a review of your estimated Social Security benefits. Once you understand your potential Social Security benefits you can adjust how many X of salary you will need at the start of your retirement to meet your financial needs in retirement.
Finally, you need to understand your “X of salary” is a moving target. Over time wages and salary go up to reflect inflation and your growing experience. At age 30 you might enjoy a $50,000 salary that grows to $150,000 by age 60, or something similar.
Using The Wealthy Accountant guideline, you would need a 401(k) account value of ~$75,000 at age 30. By age 60 that will climb to $3,000,000. In other words, the climb is steeper than you think because not only do you need to build the account value, but do so on an ever increasing salary. The good news is that much of the heavy lifting is done by funds already invested.
And nothing is more satisfying than watching your money grow with no effort on your part.
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