This is a blog swap post from Joe at Retire By 40, where he writes about his journey to early retirement. Feel free to check out my post, Best Financial Advice, at his site for a comparison.
The best financial advice I’ve ever received was from my dad when I finished college and started my first job. He advised me to contribute as much as I can to the 401k plan. I didn’t want to do that because I was a starving college student for so long. I wanted to get a nice car, nice apartment, new guitar, big TV, go out, and all that good stuff. Who wants to wait 40 years before using that hard earned money?
This was an unexpected advice from my dad. He had always been self employed and never formally saved for retirement. Any money coming in was always spent on necessities, the kids’ education, and “investments.” These investments included high risk stocks, antiques, gambling, land, and more. His risk tolerance was extremely high and he never figured out how to conserve capital, so he always had to start over again and again. So imagine my surprise when he was adamant about contributing to the 401k plan right away.
In any case, I started contributing to the company’s 401k plan as soon as I started working. Looking back over the record, it took me about 4 years before I maxed out the contribution and I stayed maxed out ever since. I got married a few years after and convinced the Mrs. to max out her contribution as well. In hindsight, maxing out the 401k contribution as soon as we did was the best move we could have made at the time. The 401k is the biggest chunk of our net worth now. Here are some reasons to contributing as soon as you start a career.
- You are used to the starving student lifestyle so you won’t really notice the automatic deduction that happens every pay check. This is still the most money you’ve ever seen.
- The earlier you start saving the better off you’ll be in the future. This power of compound interest is undisputed. If you don’t know what to invest in, just put it all in a large cap index fund. When you are starting out, the amount of contribution matters much more than how well your investment does. You can adjust it later when you know more about investing.
- There are the usual reasons that the 401k is a great investment. These includes pre-tax savings, employer matching contribution, and auto deduction.
I will have to thank my dad again for this great advice the next time I see him.
Remember – Nobody thinks about quitting when they started a new career so they don’t think about retirement. It’s our responsibility to help them start saving for retirement right off the bat.
Crystal’s Comments: I want to scream when I hear that people are not contributing up to at least the minimum to get the maximum company match! Grrr…STOP GIVING AWAY FREE MONEY!!! Yep, I’m a big fan of contributing to a 401(k) and a Roth IRA so you can balance your withdrawals in retirement to stay in the lowest tax bracket possible. 
Our company just recently started matching our 401(k) contributions and I jumped on board! I’m with you Crystal, and I’m not about to give away free money!
Retirement funds are important, but not exciting. It’s best to set up these 401(k) and Roth IRA funds early in life. Once they’re set up, you’ll most likely not even notice the extra money that’s being taken out.
I’m really glad we don’t have the same “best financial advice” so readers can compare and contrast.
Many companies also have Roth 401k now so there are even more options to help with minimizing tax at withdrawal.
I think this is good advice, but I’ll add one thing. When you are just starting out, be sure to consider long term savings outside of retirement plans also. I don’t really want to lock up all my “retirement savings” until age 59 1/2. I’d like to have a good chunk of money that I could access outside these plans if for whatever reason the markets do well, I am able to reach high savings, etc. and actually have the chance to retire prior to the minimum age to begin withdrawing from these accounts. I’ll need money I can access if that (hopefully) happens.
Saving early is the key to retiring early. Compound interest can do magical things over 40+ years
@Bogey. I think when you’re starting out, 401k and Roth IRA should be where you put all the retirement money. Once that is maxed out, then you can put left over in stock accounts and real estates. Look at it this way, when you’re 50, you can always make money somehow. You can have a side job or some other avenue of generating income. When you’re 60, it would be more difficult to make money so let’s save the “retirement portfolio” for that time.
So firebug+Alexa is the problem and causing it to time out. But we will need alexa toolbar to get the ranking, I will figure out what to do. Anyway, is the blog swap today? darn, I am losing it, I totally forgot, so did my swap partner I guess. I was going to write about pay yourself first… Retirement contribution is a great advice Joe. One of my friend is still not contributing t 401k and leaving the match, everytime I talk to him I almost yell at him for leaving free money. He knows he has to, he just doesn’t know what to choose it seems. I told him to choose cash now… oh well, I can’t sign for him, otherwise I would
Starting early beats everything else! If you put $2,000/year at 20 yrs old at 65 you have $837K (8% return) vs. starting at 35 yrs old you have $247K. Is that dramatic enough.
I wish someone would have given me this advice!! Now I am at a company that offers a pension… I recently found out my sister has a company match and hasn’t configured one penny to her 401k in almost three years!! I got her on board this year though- she’s contributing to full match potential. Hopefully she won’t miss it much!
Great topic for a post!
best advice i ever received was to spend less than i make . . . apparently not as common a sense we’d expect it to be
Definitely, definitely, definitely brilliant advice on utilizing your company’s 401k match program. While I was still living in the states, I used mine and it really adds up quick. Now that I’m living abroad (in Germany), it’s entirely on me to set up my own personal pension (there’s social security here, but like in the states, who knows if that’ll actually be around in 40 years). I reckon this year I’m going to be doing some serious research to find the best bang for my dollar (Euro) here. I’ll keep you posted!
YES YES YES. If you only take this one step, your possibility for substantial wealth at retirement is quite real. How is your dad doing? Did he transition to a more conservative investment approach?
I feel the same way. I’d rather still be a little “broke” in the starting a new career right out of college sort of way. And contribute to my 401(k) then have a nice car. When I can retire a little bit earlier I’ll really enjoy that car!
@Suba – Tell him to put in SP500 index for now. Later on, he can always move it. Or put 70/30 SP500/bond fund.
@krantcents – Exactly! Starting early makes a huge difference over time.
@Sunil – Yes! That is Crystal’s advice. Head over to my site to read her post.
@Graham – Good luck! I have no idea what the plans are in Europe.
@Barb – He lost more money in this last correction. The good thing is my mom finally learned her lesson after 30+ years and split the finance before the correction. She got 2 condo and they live in one and rent the other so at least they can pay the bills. My dad is still self employed – selling diamonds/antique and what ever deal he can. He never had trouble making money…
@retire by 40, Thanks! The general response to my dilemma, is about the same, no one really has much experience in Europe, so I think it’s an interesting arena for everyone. That’s kind of the eventual direction I’m thinking about taking the blog in….trying to bridge the personal finance gap between US lifestyle and the lifestyle in Europe. I’ll keep you all posted and feel free to drop by!
Sadly about 20-30% of people with 401k matches at work do not contribute to their 401k. That 401k match is an instant & guaranteed 50-100% return on your money. Everyone should take advantage of that.
Solid advice. I’m surprised how many people don’t max out their 401k’s because they’re literally throwing money out the window. I think the best advice I ever got was “there’s no such thing as a secure job” from my dad, which inspired me to work for myself and save for rainy days.
I agree with Crystal, I shed a tear every time I hear of somebody throwing away free money by not taking advantage of the company matching. So sad
I’m not sure if the 401K is considered free money. Yes it’s free money but you get penalized if you withdraw from it. People tell me u still make out better even if you withdraw it early, but that smells like BS… there’s NO such thing as a free lunch. Contributing a lot to the 401K is contributing to the attitude that u should delay living your life until you’re old. Why not use your money in your youth to start a business or something sustaining rather than rely on stocks/funds/bonds and pray they’ll beat inflation? Take matters in your own hands.. that’s why I ignore the 401K -it’s a mentality I want to avoid
When I would hiring a new employee I would sit them down and tell them in detail about the matching Roth IRA the company offered. In fact when I brought over an employee from my old company I ‘insisted’ he contribute to the fund. I knew if he didn’t do it from the beginning he might never do it.
This is so true. When I moved to the US, my stepfather told me – no matter how much you make, try to max out your 401K. I didn’t like it back then because I didn’t like the idea of putting away money into an account where I cannot touch it till who knows when. Ten years later, it was the best advice I could have heard. Great post!
@Dr. Natura
Do you get company matching on your 401k contribution? If they do and you don’t contribute to 401k, you are leaving FREE MONEY on the table. Let’s say you contribute $1,000 and company match $1,000, that’s 100% return right there. I can’t see a down side to that.
If you want to start a business, then you can withdraw and pay some penalty. Or better yet, save up more fund to start the business.
The 401(k) is among the major reasons that young qualified men and women trying to find work and are not able to do so. Those who must be retired by now, creating work places for fresh employees, are not able to afford to do this.
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