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After realizing that Mr. FAF and I will become millionaires by doing just one thing – maxing out our 401(k) and 403(b), I have been wondering why many people don’t pursue this route.
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.
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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.
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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.
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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
Conclusion
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.
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I would swoon at #3 haha. For a lot of people I know it’s the “locked up” factor that causes the trip out. They have to wait until they’re 60 and the next thing I hear is…”what if I don’t live that long!” Well geez, what are you gonna do if you do live that long?
I feel like if the guy says “real estate,” the girl might be like “wooo” lol. I think I might fall into that trap too. Real estate just sounds so much sexier than retirement, but ppl might not know there’s a ton of work and headache going into it.
I’m with Lily on this one – someone who has their life together and is heavily investing is awesome, haha.
They may not be flashy but I like the security and peace-of-mind they bring. Sure it may take years and everyone loves an overnight-millionaire story, but that doesn’t mean I will forego it – just that it might take me a long time to get there. I’d much rather be a two-decade millionaire than not a millionaire at all! 🙂
Yes! Maybe we can try to be a two-decade millionaire and an overnight success at the same time. 😀
Yep yep yep! Haha, I’ll stick to my not-so-sexy investing, even if it is boring 😉
Me too! I’d prefer not-so-sexy but safe investing than sexy and super risky investing hehe.
It’s definitely not as sexy as the investment du jour — Bitcoin. Just the mere fact that it’s tied to your
J-O-B also makes it unsexy. I’ll take substance over flash any day. And I’m pretty confident you’ll be a millionaire way before you turn 55.
Thank you so much for your kind words, Mrs. Groovy! I think I’ll try to stay away from the sexy Bitcoin and stick with my boring unsexy 403b retirement too 😀
I think the biggest reason people don’t like the 401k is that you’re not supposed to touch it until you’re 59. Once people hear there is an early withdrawal penalty, they just don’t like it. If they dig into it a bit more, they’d know there are ways around that. Anyway, I think 401k is a sexy investment, but I’m a PF nerd. 🙂
I think the #1 reason people don’t max out their 401k is because they cannot afford it. At a very healthy savings rate of 20%, one would need to make $90k a year…How many Americans make that? Maxxing out your 401k is great, but I think people should focus more on savings rate. If you put in $10k per year on a $50k salary, it is just as significant as $18k on a $90k salary. I think the personal finance community sometimes forgets how well we have it, myself included.
Boring is the way to go. Mrs. Groovy and I built our wealth on real estate and retirement accounts. We do have one “sexy” investment, though. We invested a nice chunk of change in a Canadian lithium concern. Last year it was up over $100K. I was a freakin’ genius. This year it’s down $60K. Now I’m boring Mr. Groovy again. Great post, Mrs. FAF.
Hmmm… Interesting, I agree with the wiser ones here. Although unglamourous, it is definitely a good work horse. Mainly for the tax benefits. However current entrepreneurial pursuits have definitely outstripped any traditional sources.
However, with things going the way they are… Especially with the erosion of the healthcare pensions I do think about how much is it really worth? With the NHS it’s now based on average life time earnings, whereas my Dad’s NHS pension was final salary. Aside from the match, I’m not really seeing a huge benefit, at least in my “special circumstances”. Honestly, my cynical nature is that pensions will be phased out. Even now, we’re going to have 6% “pay rise”, spread over numerous years… which will not cover inflation… So there will be even less to place into the pension plan.
My mantra, the more sources of income the better. Salary, rental, stock market, dividends, patents, and entrepreneurial pursuits! 😅
I agree with Will, above. I also live in England and I don’t trust pension funds. I work for the local government and have a company pension scheme where the employer contributes and my contribution is taken from my wages every month. I don’t think the employer contributes more if I do, although I can add voluntary contributions to the pension. The problem is that you don’t know how the pension fund is being invested and you have no control over what it is being invested in. Also it is actively managed so there is a fee for the fund manager. You hear so many times that pension funds do not perform as expected or governments change their policies and people end up with no pension or very very little. That’s why I can’t understand why most financial bloggers are in such favour of the pension funds. To me they seem very risky indeed. I would rather invest myself through Vanguard and then at least know what I am investing in and maintain control of what is happening. Perhaps the pension funds work differently in the States??? It just feels like throwing money into a black hole without having any control over it.
I think for young people the 401k seems super boring. You can’t touch it for decades, and even worse, it makes your paychecks way smaller! Lame. Thankfully, the employer match swayed me to contribute, and after seeing results, it just compels me to keep saving. I think 401k contributions should be mandatory. That way no one has to think about it, and they still end up saving.
Another reason is people feel like their money is locked into an account until their retirement age. They like to have the freedom to withdraw their money whenever they want it need it.
It is boring, but good boring! OTOH, I think it is something like only 14% (it’s not many) of Americans even have access to a work related retirement plan? If more had access, guessing more would use it and even max it out – at least would hope so.
Gahh…everytime I talk to someone about personal finance (who isn’t already planning) they’d get anxious about waiting almost half their life to get the big chunk of money. #2 point hits home, because it’s what separates those who will actually live financially free, and those who stay nearsighted and look for a quick victory.
Yeah, retirement accounts are boring. But stuffing that company retirement plan is about as good as it gets. If I could advise a 20-year old, it would be to defer funds into the plan as much as possible, invest moderately in low-expense funds, and don’t open your statements for 40 years. Little bit facetious on the last one, but the point is to not get too emotional during the process. Slow and steady wins the race.