My Personal Finance Journey

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2004 401(k) Strategy

Contributed by mm | November 29, 2003 9:35 AM PST

Lacking visibility and confidence on both the equity and fixed income market, I have been parking most of my 401(k) balance in money market funds since July. As a result, I am very reluctant to push more cash into 401(k) accounts. For the year 2003, I expect to save 8.8% of my salary income in 401(k) accounts. Adding another 3% matchup from my employer, I'm saving a total of 11.8% of my wage before tax. Still not a bad number.

Looking forward to 2004, first, the economy seems to be improving thanks to the tremenous stimulus from the administration. However, it also spreads the seeds for major future problems like inflation. Therefore, I do not see how I can get more confidence in either taking an equity or fixed income position in the 401(k) account. I might consider to try dollar-cost averaging in Oakmark Equity and Income or Royce Low-Priced Stock, but with the overall opaque outlook I might not choose to contribute to the full amount of the 401(k) allowance.

Second, putting money in 401(k) is still a viable tax strategy. As I'm working on my 2004 budget, I notice I will have at least $30,000 net cash increase anyway even if I elect to only contribute 6% into 401(k). Without a liquidity problem, I would like to save more in 401(k). Even though I don't have much latitude in deciding the investments, the more I save in 401(k), the more I have if I switch job and roll that into an IRA, in which I can basically choose any investments I want.

Another consideration is the potential passage of the new tax-advantage accounts the Bush Administration is proposing. If that becomes a reality, I don't want to contribute a dime more to my 401(k) before I top the limit of the Roth IRA-like account.

So, my near-term strategy is to continue contributing 6% for at least the firsts quarter -- 6% is the minimal to get full employer matchup. Depending on the visibility, I might choose to contribute more starting Q2. For the entire year, I target to put at least 10% of my job income into 401(k) (before matchup), if not more.

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