Uncommon Cents

One week from today, I’ll have contributed as much as I legally can to my 403(b) plan for 2008. While not quite “dollar cost averaging”, regularly contributing to a 401(k) or, in my case, a 403(b), tends to be one of the most important factors in building a portfolio over the long term. The fact that most working Americans get paid twice a month (or sometimes more) means that if they’re contributing to their plan, they’re investing 24, 26, or maybe even 52 times a year.

Unless they’re like me and they hit the maximum early.

Why do I choose to hit the maximum early? For one thing, studies on the effectiveness of the concept of dollar cost averaging have shown that investing the same amount of money at one early date results in better earnings vs. spreading it out starting at that early date and going over time. I also like that I get a sort of “fake” raise starting in August; my paychecks the rest of the year in terms of take home are larger, which allows me to fund some other savings vehicles, like my Roth IRA.

If I could afford it, I would hit my maximum even earlier; in fact, I’m considering if I can do that in 2009. Heck, if I could afford it, I’d hit the maximum in the first paycheck of the year, but I don’t make nearly enough for that to be a possibility.

However, let me make something clear: even if you can’t afford to contribute the max to your 401(k) or 403(b), contributing anything is better than nothing. Try to at least contribute enough to get full use of any employer match or you’re leaving free money on the table. That alone ought to be enough incentive for anyone to contribute to these great retirement plans.

Tags: Goals, Investing, IRAs, Retirement

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