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For 99% of the population, 401K contributions are a no-brainer. The tax savings, investment growth, and employer match are difficult to make a case against. However, I do not contribute to my 401K. I am in the 1%, but only due to certain, specific conditions.
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Lack of Longevity
For those of you following my journey closely, you’ll remember that I only worked in corporate America for a short seven months.
Coincidentally, my company’s 401K match does not kick in until after one full year of employment. Whoops … looks like I’ll miss out on that.
However, the employer match is only a tiny piece of the puzzle. Even without the match, I could still realize tax savings and investment growth. So why do I choose not to contribute?
Invest in Yourself
The main reason I don’t contribute to my 401K is that I believe that I can earn far greater returns by investing in my entrepreneurial ventures. At my age, I have tremendous freedom to fail and take risks. If one venture doesn’t work out… Oh well!
“On to the next one” – Jay Z
Of course, I understand that sacrificing (nearly) guaranteed 7-9% returns over the long run in my 401K is a “risk”. However, as Scott Trench highlights in Set for Life
Sure, bonds are great for smoothing the ride and hedging against market volatility in the short term, but take a look at someone invested in 100% bonds vs. someone invested in 100% stocks over any 20, 30, or 40-year period.
This is exactly the same mindset with which I approach my 401K contributions. I believe that in the long run, I can substantially outperform 7-9% returns in the stock market by investing in entrepreneurial ventures.
New ventures are notorious for exponential growth. If I were to open a lemonade stand and earn $1,000 in sales in Year 1, it’s highly unlikely that my sales will only increase to $1070 or $1090 in Year 2 (7-9% gain). It’s either going to be a boom or bust … hopefully a boom if I’m giving it my all.
A Look at the Numbers
I’m sure there are some readers thinking that I’m an absolute fool for not contributing to my 401K. So let’s take a look at the numbers.
If I contributed the full $18,500 my 401K this year, I would realize ~$4,000 in tax savings.
Since I would likely frontload my investment as much as possible, let’s assume that my 401K is maxed out by the end of April. I’ll project an 8% annual return (based on historical averages) for this scenario.
My estimated return for this year would be around 5% (calculated by multiplying the 8% annual return by 7/12 remaining months + a little boost for the interest compounding in the first four months).
At the end of this Year 1 scenario, my 401K balance would rise to $19,425, representing a $975 gain ($18,500 * 1.05). So, in total, I’m looking at approximately $4,975 ($4,000 + $975) between tax savings and investment gains.
Beating the Stock Market
With $18,500 in pre-tax dollars (around $15,000 post-tax) to deploy toward side hustles, real estate assets and other entrepreneurial investments, my potential is virtually unlimited. I no longer surrender my earnings to the ebbs and flows of the stock market, but instead to my own talents and hard work.
As of late, I’ve been particularly interested in real estate. Using an FHA loan, my minimum down payment is 3.5%. If I were to use the full $15,000 for a down payment, I could “afford” a $429,000 property. I would probably never actually do that because that leverage is insane, but you get the point.
In addition to the cash flow from tenants and (maybe) capital appreciation, real estate offers tremendous tax savings as well! Tax-deductible items include depreciation, mortgage interest, rental property taxes, rental property insurance, utilities, and repairs & maintenance … just to name a few (the list goes on).
If I’m strategic about my acquisitions, I can set myself up for perpetual wealth. I spent a considerable amount of time building a dynamic model to calculate thousands of real estate acquisition strategies if you’re interested in testing it out.
As long as I understand the market I’m competing in, execute strategies efficiently, and put in the time and effort, I’m confident that at least one of my entrepreneurial ventures will become successful.
Having Fun!
I had to bore you guys with the numbers just so you know I’m legit, but life isn’t just about money! Sure, piles of money will allow me to design the lifestyle that I want to live, but that is because money is a tool. Nobody actually works for “money”. They work for the things that money can buy them.
Sorry for the rant… back to the point.
I have so much fun writing this blog, running the disc golf company, and working on other entrepreneurial ventures. It just doesn’t feel like “work”! Contrarily, I can’t say I’d have nearly as much fun contributing to my 401K…
Feel free to argue with me about making the wrong choice, but I’m quite certain that I’ve considered all the pros and cons. Are any of you readers in the same boat as me? Do you choose to not contribute to your 401K for similar reasons? I’d love to hear about it! Please share in the comments below 🙂
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That sucks that the company match is delayed/deferred like that… My sister had a 3 year deferral period and just *happened* to be let go at 2.75 years with the company.
I would still take advantage of the pre-tax savings opportunity. Also, just wanted to point out that your $18,500 wouldn’t be post-tax in the sentence after “Beating the Stock Market”. It’s more likely to be in the $14-16k range, depending on your marginal tax rate. Just so you’re comparing apples to apples
Hey Josh, thanks for stopping by! Yeah, it definitely sucks that there’s no match for the first year. If there was then I’d definitely contribute up to it. I’ve certainly weighed the pros and cons of the tax savings associated with 401K contributions, but I think I can deploy my capital better elsewhere. I’ve been seriously looking into some investment properties lately and the tax-savings associated with real estate are quite powerful as well. Guess we’ll just have to wait and see where I end up in a year from now!
Thanks for pointing that out. I totally meant to write “pre-tax”. Just fixed that 🙂
This is blasphemy Cody! You just wait till Mr Money Mustache finds out! haha
I’m definitely going to hold you to that 1 year career time line. I think that may be a record retirement age in the FI community…. right?
I think MMM would approve of my plan 😉 And you can definitely hold me to my word! In fact, I’d be happy if you did. And I definitely want to steer away from saying that I’m “retiring” next year… just “retiring” a life of sitting behind a computer screen inside all day and feeling unfulfilled lol. I’ll still be working, but just on entrepreneurial ventures and things that I’m super passionate about!!
It’s interesting… I have 35,000 in my 401k, and I wish I could get it all out now because I’m wanting to scale things up on the side hustle game.
While I’m not going to leave work in a year (or maybe I will), I’m torn. I don’t think the stock market will continue to go up in the long run (though that’s a debate I’m having on my blog currently), but the tax deferred goodness is solid…
What you are doing is sound and logical. At the end of the day though, I think it’s a good thing to use a 401k, but with your situation it makes sense to not do it.
Side hustles are certainly addicting. Would love to see what you decide in a year’s time… maybe you’ll go rogue and quit!
I agree, the stock market can’t go up forever. Tax deference is a great perk of pre-tax investment vehicles, but I think that I can achieve near-equivalent tax savings through investment properties and other capital-intensive ventures.
Glad you can see the situation from my point of view. I’m definitely in the 1% where a 401K doesn’t make sense.
i always said if i saved any more of our money the risk would be in not enjoying life to it’s full potential. i’ll have that next drink and a bunch of fun WITH the saving and investing. good luck.
Hey Freddy, thanks for reading! I’m all about enjoying life to its full potential. Every day I waste working in a job I’m not completely passionate about is torture… I’m still saving and investing. Just looking at entrepreneurial ventures instead of the typical 401K. Cheers and thank you!
I think a lot depends on how much you are making. If maxing out a 401k is comparatively not a lot of money to you, then I think you still should opt to putting that in because of what it will grow to over time. However, if you $18.5k is significant or you can’t max it out AND you have goals that are entrepreneurial or real estate focused then I certainly think your plan has some valid points.
I struggle with this a bit right now. I set a pretty large stretch goal for myself this year on a dollar amount to invest and I am tracking in the right direction and should honestly be a few thousand over that amount. But I have been increasingly wanting to use that money to start building up a real estate portfolio. I’ve done some work in that industry before but sold out when a few uncertainties in my career situation came along. I’m feeling the itch to get back in though!
Luckily I have some side money that comes in monthly that I can start with (without having stop 401k investing) and have the side hustle ramping up as well.
I’m definitely interested to follow your progress buddy. Hey, and if you are ever in the DFW area I know of a great disc course nearby!
Hey Cooper, as always thanks for stopping by and checking out the article! I am confident that I can outperform the ~8% returns in the market through real estate and other entrepreneurial ventures. I think my money wouldn’t be put to its best use sitting in a 401K account.
Your goal lists have been quite impressive from what I’ve seen! I’m definitely rooting for you to hit those milestones. I’m definitely feeling the real estate itch as well! Which happens to also be related to my W2 job.
I’m just shy of breaching six-figure gross earnings this year, so the $18,500 is a reasonable portion of that income. I’ll definitely be keeping everyone update on my progress through the blog.
If I do find myself in the DFW area I’ll definitely reach out. I love connecting with people from the blog. Disc golf would be a blast! Maybe we could get a workout session in too lol. I saw that you had a quite a few lifting goals for this coming year!
Disc golf and a killer workout always sound good to me!
I’m one of those mythical 401K millionaires, in fact I amassed a lot more than that in just that one account so you’d probably think I’m here to criticize your decision. But I’m not, investing in yourself is worth a hundred 401k’s, it not only pays back $’s but it pays back in dreams! I was a high earner in a high tech field so I did not need to take any risks to get fairly wealthy but for most people they won’t get where I did without betting on themselves. I think your attitude is world class and is the way to go! It will be fun following your progress.
Hey Steve! Thanks for checking in and I really appreciate the kind words. I certainly appreciate the power of the 401K, I just think there are more optimal options at this stage of my life. I’ll certainly keep everyone updated on the blog and I hope that my story will be fun to follow! Glad to hear that you’re sitting on a sizable 401K… that definitely makes life a lot less stressful 🙂
As far as the company not contributing until you are there one year, odds are even if they did, you wouldn’t be fully vested until a few years in anyway. That means you’d lose the contributions if you left after a year anyway.
Definitely Joe… yet another reason why contributing isn’t the best option for me!
Hey Cody, this completely makes sense for someone in your situation. I know it doesn’t mean much, but you have my support and I look forward to seeing your plans unfold.
It is quite interesting as I took a completely different approach since I plan to stay with my employer even after I reach FI. The only thing I don’t like about my employer is that they also make me wait 1 year until I am eligible to contribute to their 401k plan. So, I sought out a PRN gig that allowed my to contribute immediately upon hire though this company doesn’t match, I was excited to fill up my tax deferred retirement bucket.
By the way, I applied for Flexoffers and M1finance and got approved for their affiliate programs! Thanks for your advice. My site is coming along.
Hey Mr. Flexcents, first of all… your support means A LOT. If I didn’t have anyone reading or supporting me I’d just be some random guy typing words onto a website.
I think it is amazing that you enjoy working at your current job. Unfortunately, 85% of Americans are not in your boat. Great 401K too by the way!
I am so glad that my site inspired you to take action! AFfiliates are definitely a useful way for both the writer and reader to benefit. As long as you promote something that you truly believe in, both sides win! It’s when people start promoting garbage just to make money that really pisses me off. Enough of the rant lol. Cheers!
Interesting perspective! I have always thought of the 401(k) as a no-brainer but it makes sense in your situation to hold back. Everybody has their own path to FI – no judgment here!
Hey Yellow Brick Freedom! Thanks for reading. I’m definitely in a very unique situation, and I’m glad you see my point of view. Everyone’s situation is completely different!
Allow me to throw out an alternate idea for you to consider, not saying the right path but something to consider. Invest in the 401k this year. When your first starting out next year with low entrepreneurial income do a conversion to an ira or Roth for your business that allows self direction. Then still use it to buy real estate . Obviously taxes laws limit the physical labor you can do here as you can’t commingle with your other money, but you can use a 401k for many other passive investments other then the stock market after you seperate employment. It’s important to remember once you leave an employer 401k doesn’t have to mean stocks.
Thank you for the suggestion, FTF. I definitley considered that as an option, but I think that since im planning on using that capital to purchase an investment property before I leave my job, it wouldn’t make sense. Otherwise, that strategy is genius!
Good luck on you ventures! You’re right, investing in yourself could bring much higher returns! And if you can get a profitable business going, the skies the limit on what you can earn. It’s definitely a good idea to invest as young as possible though and if you did max out your 401k a couple times when you’re this young, you’ll be a millionaire in no time!
Thanks for reading MD! I’m in a very unique circumstance where it doesn’t make sense for me to invest in my 401K, however, that choice is a no-brainer for 99% of the population. Compound interest is your best friend! But putting money, blood (hopefully not), sweat, and tears into a business or venture might be even better!