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According to a 2017 Vanguard study, only 10% of Americans maxed out their 401(k) contribution.
When I was the breadwinner before Mr. FAF got a full-time job, we allocated $0 to our retirement accounts.
Our priority at the time was to have enough cash to pay the monthly mortgage, adding extra money to the principle, and save for emergencies.
We had to plan for the worst (i.e. Mr. FAF not being able to get a job, me getting laid off, both of us being unemployed).
After Mr. FAF started bringing in more income, however, we changed our priorities and started maxing out our retirement investment.
If we continue doing this over the next 25 years, I will become a millionaire when I’m 55, and Mr. FAF will reach his one-million milestone at the age of 60. (I’m currently 30, and Mr. FAF is 35).
We all might have already heard of or seen the power of the 401(k). But why doesn’t everyone max out their 401(k)?
There are many reasons, and I won’t go into all of them. In this post, I will discuss three reasons why investing in 401(k) might not sound sexy and thus discourage people from taking advantage of this tax-deferred plan.
These observations below are based on my own experience.
1. It takes time.
Investing in 401(k) is not a get-rich-quick scheme. In our cases, it will take us 25 years of our life for us to build wealth gradually but surely. With patience, we will become millionaires one day.
However, the truth is that not everyone wants to wait until they are in their 50s or 60s to be called a millionaire. Many of us are impatient. And when it comes to money, the impatience seems to intensify.
Many young people are naturally entrepreneurial and want to grow their next best idea and business. Getting rich to them is one way to show the world that they have succeeded.
Some just like the sound of being a millionaire in their 20s or 30s and are willing to do whatever it takes to make that happen. And contributing their disposable income to a retirement account they can’t touch until they’re 59.5 is not something that appeals to them.
They want to get rich quick. And they don’t want to lock up their capital in an account that will penalize them for taking out their own money.
2. People want to be adventurous.
When I think about how Mr. FAF and I can just work hard at our jobs for the rest of our lives and retire in our 50s and 60s, life can sound tedious. It’s the grind of working a 9-5 job, contributing to our 401(k) every month, and waiting until we can retire.
Mr. FAF and I make enough income so that we can max out our retirement accounts and have disposable income. However, if our income were much lower, I would face the question of whether if I want to save some or most of our disposable income to start our own business or max out our 401(k).
I’m more likely to say that I would like to use some of our disposable income to explore my potential and try my luck at running a business.
I might be a millionaire when I’m 55. But I might regret all the business opportunities that I missed out on because I wanted to save my income for retirement instead.
Having lots of money is great. But not knowing the true purpose of my life is going to haunt me for the rest of my life.
Related: Blogging As A Side Business
3. 401(k) investment might not wow people.
Imagine you are at a party, especially one with a lot of cool entrepreneurs. Someone asks what you invest in primarily. If it were me, I’d say 401(k). I’m not sure about you, but I can hear crickets in the background.
Maybe it’s just me being insecure about myself. But even if 401(k) can make me a millionaire in 25 years, I am not worth a million right now. Although 401(k) is a sure way to stable and secure wealth, it might not impress many people the first time they hear it.
Now image you’re on a date with a girl you like. The conversation can go like this:
Girl: What do you like to invest in the most?
Guy: My 401(k) retirement account.
If the girl is a big fan of personal finance, you might just have found your dream girl. If she’s not and has no interest in talking about retirement, I think I can hear crickets in the background again.
Related: How To Find A Frugal Husband
Sometimes we overlook the simple and sure things in life that can help us build wealth such as increasing our retirement investment or simply paying off debt.
We might chase after the shiny things that we think will impress other people, such as investment in hedge funds that comes with high management fees and purchasing things we can’t afford on our credit card.
However, at the end of the day, we are the only people who care whether we will lose or gain our own money on such investments.
When someone is impressed with our portfolio, we don’t get a higher return to our investment. It might give us a confidence boost, but our gains won’t change because someone thinks our investment sounds sexy and cool.