Funded my 401K/IRA and Lost $$ - but my investments went up...What's the dealio?

Funded my 401K/IRA and Lost $$ but my investments went up...HUH?: So from the title I know that you are already scratching your head..."how does one lose money with a 401K/IRA if the investments have not gone down??" It's simple if you follow the Cavitation way ;-) ...let me explain... For the past ~10 years Jen and I have been putting money into both our 401Ks.

Rob: I contribute regularly to my work 401K which is matched generously by my company. For 2006, the maximum contribution allowed was $15K. I unfortunately do not do that...I only put in ~$10K (not including employer contributions), meaning I am losing out on both the tax deferred gains on $5K as well as the income tax deduction I could have gotten (lost $$ #1). The reason for not kicking in the extra $5K was plain and simple --> comfort. I am not quite yet willing to take the $400 per month bite that would be necessary. [I am sure that someone will point out here that not all $400 will show up as a net decrease due to offsetting tax benefits.] The interesting thing is that a one time contribution of $5K this year (age 32) would compound into $116K by age 65 (assuming 10%)...and that would translate into $5800 per year in dividends for every year after 65 (assuming a 5% rate of return on the $116K). Hmmm...that seems like a no brainer....

The reason I am not currently stressing about the $5K (well at least I wasn't until I I wrote the last paragraph) is due to the fact that my employer kicks in another ~$9.5K on top of my contributions...so in total I am actually putting ~$20K/yr into my retirement fund...and at age 32, I think that is pretty good...but we shall test that in a later post. For now, the money being lost here is tied back to the $5K shortage in my contribution levels.

Now for Jen: Ever since Jen stopped working a few years ago to take care of the kiddos, we rolled her employer 401K into a rollover IRA and continued contributing at the max rates. In 2006 and 2007 that max rate is $4000 per year. In 2008, that will increase to $5,000. So in the case of Jen, it is not a question of not putting in the max allowable...it is a question of timing! I tend to wait until the end of the year when I am pulling together my taxes and then I realize...oops...I forgot to put that money into her IRA back in Jan of the previous year. So I cough up the dough and fund the max IRA contribution for the previous year. Needless to say, that means I am losing on average about $400 in gains (assuming market average of 10%) just because I make the contribution later than I could have. And to make matters worse, then there is the subsequent impact of lost compounded gains due to the delta in the two start dates --> the delta on $400 invested 1 year apart (again assuming 10% market growth) equates to a delta of about $800 at age 65! (lost $$ #2)

So the moral of our story: Just because you think you are doing great by making the effort to plow lots of cash into your retirement account...chances are you can still do more. Just a little tweaking here and there can make a huge difference in the end!