Tuesday, February 18, 2014

A new 401k Contribution Strategy

Its tax season. We just filed our taxes and took a dent to my bank account. One thing tax consultant told us is to maximize 401k contributions. He also made another interesting comment: "You don't know how the laws will change in future, tax rates might differ, govt might cancel Roth IRA. In any case, it is better to save taxes today than later, hence go for traditional 401k"

After the initial mourning phase of the demise of good chunk of bank balance, it made me think, is there a way in which you optimize your 401k contributions in a year that maximizes returns. I am not talking about how much you should contribute, that question is easy: contribute as much as you can up to the maximum that govt allows. I am talking more about how to spread your contributions over the year to maximize the returns from the money.

The usual strategy that most people use, including me, is to contribute x% of your pay check towards 401k, every pay check. Lets call this plan A. Lets say the total amount out of our pay at the end of the year is A$. Now is there any other way to invest A$ but with in a non-uniform spread over the year.

The parameters are:
- Maximum you can contribute towards 401k
- Schedule of your company's matching your contributions
- Your salary

Here is the heuristic approach I chose:
- Contribute every month to get company's contribution
- Chose the maximum amount you can contribute per month
- Calculate the amount you need to contribute to get maximum from the company
- Every month, contribute: minimum( max you can contribute, max you can contribute per year - amount you need to contribute per month to get maximum from company*months remaining in the year - amount contributed so far in the year)

As an example:
- Salary per month: $8000
- max contribution per year allowed (2014 IRS number): $17500
- max you can contribute per month: $4000
- max contribution from the company per paycheck: 50% of your contribution up 6%
- max contribution from the company = $240
- min you need to contribute to get max from company: $480 (6% of 8K)

Depending on this the table of contributions for usual method and the new method looks like this:


Month New Old
Jan 4000 1458
Feb 4000 1458
Mar 4000 1458
Apr 1660 1458
May 480 1458
Jun 480 1458
Jul 480 1458
Aug 480 1458
Sep 480 1458
Oct 480 1458
Nov 480 1458
Dec 480 1458


What difference does it make with this contribution? For demonstration purposes, if we assume your 401K portfolio grows at 8% a year, the difference at the end of first year is: $356. Just like that, you have $356 more in your account. If you continue to do this for all your working years, the total savings may look like the following:


Of course it assumes same salary, same contributions, same growth of 401k portfolio, which is an oversimplified assumption, but hey, it shows the point.

In some companies, the employer contribution isn't restricted as what i mentioned above. Some companies pay 100% up to first $x (like QCOM, x = $1500), and then slabs as your contribution grows. The new approach might be much better than old approach in such situations.

Anyway, this is my analysis. If you have any questions, and/or comments on my analysis, I would like to know.

Monday, February 10, 2014

Satya Nadella's first email and my views on it

By now almost everyone who follows semiconductor and consumer computing markets must be aware of Satya Nadella becoming CEO of Microsoft. For anyone to be CEO of a company with such great heritage is an honor. As an Indian living in America, it is definitely a proud moment. He now joins the elite status of people like Vinod Khosla,Indra Nooyi etc. Congratulations to him and good luck to Microsoft in its future direction.
I read the first email sent by Satya to his employees. It is plain and simple as you can expect from Satya, if you have to believe what news reports say about his personality. Here are some of my thoughts on his statements. Please remember these are my thoughts, what I felt and I in noway deem to be an expect critic at the matter. Anyway, here you go..

First para:
"I saw then how clearly we empower people to do magical things with our creations and ultimately make the world a better place."
Initially I thought what is he talking about? Microsoft empower people to do magical things? What magical things are we talking about? Given the current brand image of microsoft, it might be difficult for consumers who use tablets and smartphones to realize that it was Microsoft that made consumer usage software ubiquitous, with its Windows roll out. That change along with Apple's products changed the computing world forever. When it started, it must have been magical for people. So I'll say even though today his statement might sound pompous and frankly unreal, I do understand the spirit in which he said it.

Third para:
"While we have seen great success, we are hungry to do more."

This is very interesting. In my view, the statement should be read: "while we have seen great success, we are starved to do more."
The next statement reads: "Our industry does not respect tradition — it only respects innovation"
I can't agree more. You let your guard down for a moment and you are eaten alive. Look around to see how many companies used to exist at the turn of century in consumer computing space and see how many are left now. Companies that didn't innovate or didn't copy enough of the innovation being done by their competitors just perished. Whether MS innovated enough or not is a different question. However it did keep up with the innovation, closely, may be clumsily following the competitors.

The para ends with "Our job is to ensure that Microsoft thrives in a mobile and cloud-first world". Well this is as of today. As such MS was late to jump on to mobile and cloud computing. However, as I said given the money it has, it could gobble up smaller companies that are marching ahead in innovation. However, these smaller companies have problems: how to tackle heavy investment demanding devices like tablets and smartphones. I think that's where MS can help small companies. What surprises me is, how and why did he end this para with such a statement. As of today, mobile and cloud are the happening things. I expected he would say something like, "our job is to keep MS leads new frontiers of the new technologies, including the current mobile and cloud", but well its me. I thought the context switched midway, from a very long term to mid-term view.

Monday, February 3, 2014

The No Complaining Rule

On a lazy Sunday afternoon, my wife and I strolled into Barnes and Nobles in downtown Bellevue, just to get a glimpse of new arrivals and more accurately to get a coffee from Starbucks inside B&N. While sipping hot coffee, I went to the Business & Investing section to find this book "The No Complaining Rule". It was a very timely find. Off late I've been hearing a lot of constant complaints from my colleagues at work, especially the same damn thing again and again. It was like a constant nagging of a old imbecile lady, with really no substance at all. At first I thoughts these complaints were to vent their anger and are a fleeting emotions. Unfortunately they weren't.

As someone who does think about constantly improving efficiency of people and the team, I feel complaining to the extent you call out the problems is required. It is both cathartic and helpful to note down items that need attention and to be taken care of. However, just complaining alone isn't enough. There are enough people in the world with negative outlook, and I don't need my team to be one. I don't want people around me to be that either. I've consciously made decision to distance myself from such people in the last few years.

Now back to the book I started talking about. It is a fictional story of a lady who has a great career position but complains about little things, which becomes a habit thereby effecting her moods and performance. It is about how she, with advice from a sweet nurse, turns her life around and how things change for her over time. That one little advice is: "Do not complain! If you complain, add a statement which has a positive effect ." With this one piece of advice, her home life, her social life and her career take turn for better. And everything is rosy and happy ever after.

I have a few problems with such kind of books.
1. Author has just one point to convey to the readers: "Don't complain or add something to fix that complaint." The rest of the book is just a fictional story; in fact bordering a fairy tale
2. Author tries very hard to convince this is THE essential thing to go after
3. Life doesn't turn around and not everything falls right into its place, just because one person started this no complain rule.
4. $15 for this book is useless. May be worth $5 at most

Overall, I would say the point conveyed is very good: "Don't complain, but if you do, suggest something that fixes it", but I don't like the fairy tale used to convey it.

Now it is your turn to try out this rule and tell how it affected you! For me, I stopped complaining until I find a way to help the situation. Not many times I succeed but then it does help to keep positivity around me.