best path to FI at 25 yrs old

6 Replies

Hey BP,

My husband and I are 25 years old. Just bought our first house back last year and on a clear path to purchasing our next by the end of this year/early next year.

We opened a Roth IRA but have yet to contribute. I just started a W2 job that will match 401(k) contributions up to 8%. My husband works as well but no 401(k) plan.

We also plan to start a family soon so I don’t know how long I will be working this job, I’d have to stay at least 3 years to keep 100% of contributions.

We are passionate about real estate and becoming FI by 35. We have clear goals and paths to achieve primarily through REI (focused on passive income). Our goal is to achieve FI as quickly as possible, not to work 9-5 until 60+.

As of right now, we feel it’s best to forgo my company’s 401(k) contributions and just focus on putting all of our money into rental properties right now. Especially because I’m not sure how long I’ll be working for the company.

Am I thinking through this the right way? Is there something I’m missing? I have yet to see how contributing to a 401(k) even with the employer contributions will help us achieve our ultimate goal faster.

I understand it’s “free money” however it’s tied up with in an account that we can’t access without penalty for ~40 years. And I have to contribute some of my own money to get that “free money”.

Let me know what you think! I’m open to any and all feedback. Thanks!

It's free money. What more do you need to understand? You do realize an 8% match is nearly double what most employers pay. My 9-5 matches 3%. 

It doesn't sound like you have money problems. You have a strategy, patience, and market research problem. You can't jump into rentals and think you'll strike it rich. Rental properties and cash-flow they generate is just one pillar of wealth building in REI.

I'm not trying to kill the vibes but patience is a virtue. Wealth building is NOT about today its about the future. The current prices in most markets are dictating whos buying and who's selling.

@Samantha Prince my wife and I reached FI a couple years ago in are early twenties through a mix of flipping Brrring STR's and LTR's. If you hate your job and don't get the match if you don't say 3 years it's not going to be worth it. That being said if you don't hate the job and stay 3 years that's a 6.4% raise (plus hopefully any gains) 8% match -10% for your part and the match in early withdraw penalties. The reason I say early withdraw is you want to FI at 35 than 401K is irrelevant and could actually slow that goal. You need to have a contingency fund and having a 401k that you can liquidate could help. Would you be able to stay 3 years then liquidate the 401K and use it as a down payment. I can't answer the question without knowing you and what your goals and disposition are. If it wasn't a 3 year vesting I would say do it and take it out as soon as it makes since to use it as down payment or you could use it as a contingent fund and only pull it out if you needed it and if you don't need it you get a good upside.

@Samantha Prince - this is a tough one that I am sure many folks have different perspectives on. In most situations, the best mathematical equation is that you have higher income now than you will have once you reach FI. That match is "free money", and you will have the flexibility to convert those traditional IRA dollars to Roth dollars at a very low tax rate when you hit FI. Once you hit the 5 year rule on your conversion, under current law you would be eligible to withdraw the conversion amount without any penalties. You could then use that "free money" to continue to build your real estate portfolio when you are FI.

There are many layers, and much of it probably depends on your opportunity cost with the 401k contributions now. Add to that the fact that you might not stay with the company through the vesting period. It likely wouldn't be a "bad idea" to contribute to a 401k, but there might be better paths forward that involve not contributing. Hope this helps!

Originally posted by @Zachary Beach :

@Samantha Prince my wife and I reached FI a couple years ago in are early twenties through a mix of flipping Brrring STR's and LTR's. If you hate your job and don't get the match if you don't say 3 years it's not going to be worth it. That being said if you don't hate the job and stay 3 years that's a 6.4% raise (plus hopefully any gains) 8% match -10% for your part and the match in early withdraw penalties. The reason I say early withdraw is you want to FI at 35 than 401K is irrelevant and could actually slow that goal. You need to have a contingency fund and having a 401k that you can liquidate could help. Would you be able to stay 3 years then liquidate the 401K and use it as a down payment. I can't answer the question without knowing you and what your goals and disposition are. If it wasn't a 3 year vesting I would say do it and take it out as soon as it makes since to use it as down payment or you could use it as a contingent fund and only pull it out if you needed it and if you don't need it you get a good upside.



Hey Zach, Thanks for responding to my forum question! I really appreciated your answer. That's impressive you and your wife achieved FI so young!I'm reaching out in response to your post. You mentioned "The reason I say early withdraw is you want to FI at 35 than 401K is irrelevant and could actually slow that goal. You need to have a contingency fund and having a 401k that you can liquidate could help."I'm curious what you mean by contingency fund? Do you mean some type of retirement account? We currently have a 6 month ER fund in a high yield savings account. Between both our incomes in one year, without accounting for 401(k) contributions, we will save enough for a nice down payment for our next househack. So using the 401(k)/IRA as a vehicle to save a downpayment doesn't seem necessary, especially accounting for the riskiness of the 401k account.

 

@Samantha Prince I gave you a bit of a quick answer before so I didn’t really explain the meaning very well. What i mean is that you need money for reserves with real estate I would personally be willing to have a little less cash if I knew even if it dropped in value and 10% fee I have X amount of money I could pull from 401K or get a loan from it. So rather than pulling the money having a little bit less so like having 5 month and some you could pull from 401K rather than 6 months because to me that’s an except-able risk. I will also say that it’s not for everyone. for me personally I like to keep lots of cash more than most would say is smart but use that cash position to get more money hard money, bank, or private so that I can get more leverage and still have security. Example would be by getting a private money 2nd so my all in for a property is say 5% rather than 20% for a brrrr type deal but I leverage the cash in the bank to have it. Or being able to give all cash or line of credit offers getting the same deal a cash buyers are gets and have the cash in the bank to show I could do all cash and then only use 5% of my own money so that my over all returns is much higher but I still have the safety of the contingency funds. I find the more money you can show the easer it is the get more money and often my best return is simply have more cash and being able to borrow twice as much as I would otherwise because I have the cash. It also actually makes the projects less risky despite having more leverage because I have the money to pay the extra costs and then some and I’m not worried if an extra cost comings in because I have the cash I need.

@Samantha Prince

First off, the 3 year vesting schedule and 8% match are definitely on the higher end for a 401K benefit. There are many 401k’s out there with 3% or 4% matches and 5-6 year vesting schedules. So, as a simple comparison of 401K’s, you have a pretty good deal.

The next consideration would be the selection of bond funds, mutual funds, index funds, etc. that your 401k plan offers. Optimize that based on expense ratios and your risk tolerance.

I’d say just stick with it for the 3 years if you can brave the W2 job for that long. You are likely making pre-tax contributions (some employers do offer Roth 401k options too), so this is lowering your taxable income each year as long as you are contributing. It’s not what you make but what you keep.

Continue to build up your ammo of cash savings along the side for getting into your next real estate deal. Remember to maintain some cash reserves for each investment property.

In three years from now, you may find yourself with at least a couple options in which to fund your next real estate deal:

1.) you may have built some equity up in your first and second house hacks, in which you can now either cash out refi some funds or take out a HELOC on one or both of those properties.

2.) you will have a fully vested 401k account, in which if you leave your employer at that time, you can roll over the 401k into a rollover IRA. Then you can convert the pre-tax rollover IRA into your Roth IRA in that same year or a future year where you may temporarily have lower income. This will lower your tax burden on the converted IRA funds. Once those funds land in your Roth IRA, you can withdraw those "contribution" funds shortly there after penalty free with no further taxes to pay.

If you really want to accelerate that 10-year plan to FI, you may need to play more offense and generate higher levels of income preferably through multiple complimentary income streams.