Should You Make 401(k) Contributions if There is no Match?

We all know to pay off debt and build an emergency fund. Usually, the next step is to maximize any available 401(k) match.

I turned off all 401(k) contributions after losing my company match

Life always come up and it’s easy to neglect the 401(k). I work in the energy industry which has been in a downturn for over two years. My employer quickly halted the company match on the 401(k). This was disappointing, but I knew there would be tough times ahead.

At the same time, I had also recently bought a house in a high cost-of-living area. I used a piggy back 80-10-10 loan and planned to quickly pay it off in less than five years.

Along with other unexpected expenses that come along with buying a house, my budget was rocked. I was still paying into my 401(k) with 0% company match. I decided to discontinue all 401(k) contributions and redirect them towards my house.

Now two years later, I have payed off my piggyback 80-10-10 loan. I refinanced my mortgage and lowered my interest payment substantially. I built up my emergency fund and things seemed pretty great. I wasn’t paying into my 401(k) at all, but with no company match, I didn’t think I should.

I was leaving money on the table

Meanwhile, I caught on to dividend growth investing and began saving/contributing in a regular, taxable stock trading account. My account grew and grew, but I had a nagging voice in my head that I wasn’t doing something right.

It was time to revisit my 401(k). Fewer investment options and no company match were not appealing to me. However, my whole dividend growth investment strategy was geared toward building an income stream of dividends. I realized the available 401(k) funds paid dividends too.

The tax advantages would be very small though, right? My taxable dividend income would only be taxed at a low 15%. If my overall portfolio dividend yield is 3.0%, taxes biting 15% out of that would be almost negligible.

There are good reasons to pay taxes and not contribute to a 401(k). If someone was saving up for a house down payment or expected large expenses, a taxable account allows withdrawal any time without penalties.

I already had a house, and I already had an emergency fund built up. I had no excuses. I had to do the responsible thing for my own self and begin my 401(k) contributions again.

In the past, I contributed to a 401(k) and never looked at that money again. This time around, I check my account after each pay period. Tracking my progress keeps me inspired. I am contributing less now to my taxable stock account, but I am fortunate to be maxing out my 401(k) limit. There’s still no company 401(k) match, and I don’t expect one any time soon. The good news is that my account (and my future income stream) is growing slightly faster thanks to the portion that is growing tax-free in my 401(k).

Looking at the numbers

Let’s look at an example.

Let’s say I contribute $1,000 to my 401(k), and my friend contributes $1,000 to his regular taxable stock account. Let’s also say we both get 3% in annual dividend yield and we both reinvest our dividends. Only he has to pay 15% tax on his dividends received, so he reinvests a little less than I can.

After the first year, my account grew $30 and his grew $25. $5 is hardly any difference he says, and he also likes having immediate access to that money if he were to need it.

The years go on and no one makes any additional investments. The dividends are reinvested and both accounts grow. My taxable friend has grown his initial $1,000 into a nice $1,614 after 20 years. He wants to know how I am doing.

I reached $1,605 after 17 years. I can get almost a 3-year head start on him in retirement!

Or, I can keep my money in for 20 years like he is doing. After year 20, my original investment will pay $53/year in dividends, and his will pay $41/year in dividends.

That fraction of a fraction of a percent really adds up when it comes to multi-year growth and reinvestment. Everyone’s situation is different, but I’m glad I am catching up on 401(k) investments this year and hope to max it out every year.

I haven’t even mentioned one of the biggest 401(k) benefits. I was able to deduct that original $1,000 investment from my taxable income that year. Even without considering the initial tax write-off, or a company match, the 401(k) outperforms regular taxable investing after a number of a years.

August 2017 Monthly Dividend Income (looking back)

August generated $70 more for me to add more stocks. It keeps on rolling. I’m shifting my portfolio a bit to focus on lower-yield stocks with higher dividend growth rates. I’m expecting my monthly income to fall a bit, but I’ve grown more disciplined in my long-term dividend growth strategy.

It’s great to think that I have an extra $70 to spend on stocks that I didn’t have at this time last year.

August 2017 Dividend Income

July 2017 Monthly Dividend Income (looking back)

After breaking $100 last month, I’m well below that in July. A large reason is that I’m buying stocks with lower (and hopefully safer) dividend yields. After holding these for a few years, I’m expecting the yields will grow as my dividend growth companies continue to hike their dividend payments.

July 2017 Dividend Income

June 2017 Monthly Dividend Income (looking back) – $100 milestone

I broke the $100 milestone. $108 in June! Wow. It’s obvious March, June, September, and December will be my best months! More heavy contributions and stock purchases are fueling my portfolio right now, but I’m getting increasing help from investments I made months back. $108 will be reinvested into more stocks.

June 2017 Dividend Income

May 2017 Monthly Dividend Income (looking back)

It has taken some dedication. All these dividends are a result of large contributions and stock purchases. I’m trying to catch up after not investing for most of my life. In May, I received about $65 in dividends. That’s a significant chunk that will be reinvested at no cost to me! Between more contributions, re-invested dividends, and dividend payment growth, I’m feeling good about where I’m headed.

May 2017 Dividend Income

September 2017 Monthly Purchases

I focused on my quest to balance my individual stock portfolio with a broad market index fund.

At the end of September, my taxable portfolio is roughly $44,000. $9,250 is in VTI and $34,750 is in individual stocks. I’d like to keep growing my VTI holding for the near future. This month was a good step in that directions.

I also received my first VTI dividend this month! That will help me stay motivated to keep adding to it.

7 shares of VTI @ $126.52/share ($885.68)
8 shares of VTI @ $128.48/share ($1,027.88)
1 Share of HRL @ $30.98/share ($30.98)
1 share of HRL @ 31.78/share ($31.78)
1 share of CSCO @ 32.59/share ($32.59)

September was a great month for my dividend income. A lot of it was reinvested into VTI through a DRIP. I took the rest and strengthened my HRL and CSCO holdings a bit. I’m looking forward to the day when these are equal to my other holdings in my portfolio. The great thing is that those positions will be almost fully-funded just by dividends.

Another encouraging sign is that 5% of my total September purchases were funded by reinvested dividends that I didn’t have to work for.

February 2017 Monthly Dividend Income (looking back)

Still coming along. I have yet to match my December total, but it’s better to compare quarter by quarter rather than month by month. Some good ones and bad ones in here. I’ll eventually clear out some of the higher-yield stocks and refocus on lower yield with higher dividend growth potential.

February 2017 Dividend Income

January 2017 Monthly Dividend Income (looking back)

It’s coming along. January 2017’s dividends were lower than December, but I like these dividend growers much more. Part of the reason for the lower payout is that these stocks have a lower dividend yield. The only two that stick out are RCS and STAG. They don’t have a place in my strategy and I will plan to sell them eventually.

January 2017 Dividend Income