Participating in 401(k)
Question: My fiancÃ©e has about $40K in student federal loans outstanding and because of that, has yet to contribute to her company’s 401k program. I think her company matches dollar for dollar up to $2000 and .50 cents up to $4000. What’s the best “financial equation” to use to figure out how much to contribute to the 401k and how much to set up for monthly deductions for her student loan payments? DJ, San Francisco, CA
Answer: The simplest answer is that she should invest enough to take full advantage of the employer match. Warren Buffet, David Swensen, and any other investing superstar of recent decades can’t come close to the kind of investment performance recorded by the match. Plus, most of the growth in a 401(k) plan doesn’t come from investment earnings but from the match. (And that’s why it’s doubly devastating when employers reduce or eliminate the match.)
There are additional issues she could consider. For example, she could look at the interest rate she’s paying on her student loans. She can put in more money than the match if she thinks she’ll do better than that interest rate over time. She should also increase her contributions as her income grows.
Still, for now, the simplest equation is to “invest to the match.”
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