22 year old about to start a new job with 401k match

65 Replies

Hello I am still new too investing, no deals. I am 22 and about to start a new job with 50% 401k match up to 6%. So I am able to gain “free money” but don’t know if I want to allocate that much money into the 401K when I’d like to start building an investing fund. I’m looking for opinions on the matter of 401k.

@Matthew Otto   It is free money, make the most of it while you can.

If this is your first job out of college, try opening a second account where every month a set amount of your pay cheque is automatically transferred over.  You won't miss it as you're probably used to living off less money and you can use that money to save for your first real estate deal.

@Matthew Otto I don't agree with the "free money" aspect of the 401k and the match. How long do you need to be at your company for the 50% (max of 3% of your paycheck if you contribute 6%)? 

It is true that your taxable income will be lower, but does that really matter? Think about how much you make and what it means for your bottom line.

This is the federal tax brackets for 2019.

12% - $9,701 to $39,475
22% - $39,476 to $84,200

6% of $50,000 is $3,000 and your company contributes $1,500. The $3,000 isn't enough to drop to the lower tax bracket.

If you saved it yourself, in 3 years you would have $9,000. That is nearly enough for 10% on a $100,000 property.

A good 401k is 6%, and 8% max. Real estate investments are averaged around 11% to 12% return.

This is just my opinion. I cashed out my 401k about 5 years ago after borrowing against it to buy my first house. What did I use the money for? To pay off as much debt as I could. The house I bought in 2010 has doubled in value. So much better than my 401k would have done. Even if the market crashes, I will still have the asset and people still need places to live. Oh, and I had about $8000 in my 401k when I cashed it out. I think I might have seen $5000 of it after tax penalty.

Run the numbers for yourself. 

I agree with the others, make sure you get that match.  Honestly, the first couple years you're employed, the more you can throw into it the better, as it will provide a long term safety net.  7% average stock market return over 40 years is 15x, so getting just 10k in there a year for 5 years will probably net out to $750k eventually.  Some of the best advice I ever received when starting out at work 18 years ago was to put the max allowed (16% at my company at the time, plus 6% matching) in.  I know on this board it's frowned upon to some degree to put money in a 401k, but early investing in that forms a pretty nice base to work with.

I disagree with Mark on the thoughts of not contributing the match and/or taking out the 401k to invest in real estate.  However, Mark makes a very good point on the amount of time you need to be at the company to receive the 50%.  Is there a vesting period at your company?  Do you anticipate being at the company long enough to be vested?

If the vesting period isn't too long, I agree with the consensus of contributing to your company sponsored 401k in order to receive the match.  Getting the money into the account (and receiving the match) at a younger age is a good strategy to give the money time to grow.  Also, I think it's smart to have different investments, outside of real estate.  Sure, I like real estate just like the next guy, however all eggs in one basket is not a good idea.

Priority is to pay off debts. 3% extra potential investment for profit/loss can be done incrementally. 1% first year, 2% 2nd year, etc. Until you have 2 year solid credit score, put all your savings in the bank for deposit of your own home (goal: 20%).

HI @Matthew Otto Take advantage of the company match.  Look at it as asset diversification.  You don't have all your eggs in one basket.  You will still need to find a property to live in and use that opportunity to find that first investment property.  Maybe find a fixer upper that you can live in for a few years and turn it into a rental down the road or maybe a 2-4 Multifamily you can live in 1 unit and see if you are cut out to be a landlord.  The great thing is you have time to figure out the best strategy for yourself.  Once you find what that is then, you can get a more narrow focus.   

@Matthew Otto I would say max it out because you can always borrow from that 401k when you think you are ready and well versed in REI.

For now, keep plugging along at your 9-5 and learning real estate on the side while growing that pot of money!

@Matthew Otto my husband and I both had old 401ks. We combined them after we left our jobs, and we rolled it into a checkbook401k where we buy properties with it. So that’s like the free money you receive from your now employer is helping you buy real estate in the future. If you roll your 401k to this type of 401k you pay no penalties and no fees for early withdrawal. You could invest in other things too but we did real estate. So when the tenants pay $600 over the cost of the mortgage, tax and insurances etc then they are putting $600 for me into our checkbook 401k for our retirement or eventually buy another property. They are also paying off our investment property. So the point is just get started and get the free money and you can do lots of things with it later. I heard that when a 20 yr old invests $1. It brings 88 friends to retirement. When a 30 year old invests $1 it only brings 23 friends to retirement. The point is start ASAP.

Contribute to the 401(k) up to the limit of the match so you get the 100% return on your money. Then open another account outside of your company to have automatic deductions, either a % or $, to create savings for your RE investments. If the money doesn't go into your normal account, you will learn to live without it. You will have a good amount saved very quickly.

@Matthew Otto It is all about vesting period. If you plan to stay in the company until you are 100% vested, then yes. Take an advantage of free money. Most of the companies ask you to work for 4 years to release it all.

If you don't plan to stay in the company until you earn that 6%, then I wouldn't recommend it. There are plenty of other areas to invest and grow your $.

Good luck

Cheers

Ozzie

Investing in the 401k is a absolute YES when you get employer match.  That 6% contribution shouldnt impact your real estate endeavors much.  And then as others said there can be opportunities down the line to borrow from your 401K.

@Matthew Otto Welcome to BP. I’m just up the road from you in Bloomington. I’ve always taken advantage of the company match. Now I’m 35 and using a loan against the 401(k) to purchase another rental property. You can probably accomplish that far sooner than I did to be honest.

I’m also at a point where I’m giving lots of thought towards the self directed 401(k) type program that someone else mentioned.

My point is, take advantage of the match whenever you can and know that it really doesn’t limit you in the future. Diversity is also a good thing.

Originally posted by @Mark Pipkin:

@Matthew Otto I don't agree with the "free money" aspect of the 401k and the match. How long do you need to be at your company for the 50% (max of 3% of your paycheck if you contribute 6%)? 

It is true that your taxable income will be lower, but does that really matter? Think about how much you make and what it means for your bottom line.

This is the federal tax brackets for 2019.

12% - $9,701 to $39,475
22% - $39,476 to $84,200

6% of $50,000 is $3,000 and your company contributes $1,500. The $3,000 isn't enough to drop to the lower tax bracket.

If you saved it yourself, in 3 years you would have $9,000. That is nearly enough for 10% on a $100,000 property.

A good 401k is 6%, and 8% max. Real estate investments are averaged around 11% to 12% return.

This is just my opinion. I cashed out my 401k about 5 years ago after borrowing against it to buy my first house. What did I use the money for? To pay off as much debt as I could. The house I bought in 2010 has doubled in value. So much better than my 401k would have done. Even if the market crashes, I will still have the asset and people still need places to live. Oh, and I had about $8000 in my 401k when I cashed it out. I think I might have seen $5000 of it after tax penalty.

Run the numbers for yourself. 



 

>The house I bought in 2010 has doubled in value. So much better than my 401k would have done.

If you had invested in S&P500 July 6, 2019 the value would have almost tripled (7/6/10: 1,028, 9/6/19: 2,979). I do not know what you had your 401K invested in but most people who invested into a 401K in 2010 have done better than double their money.

Of course, RE allows easy leverage so a double in market value could present a 10X return on investment.

My point is your comment is likely factually flawed (assuming you did not have it invested stupidly). It is possible that the intent of your comment is that your RE investment returned greater than you would have achieved in a standard (not stupidly invested) 401K due to the RE leverage combined with the RE market appreciation.

As for the question posed by the OP, I am with the majority. I would put in the amount matched by employer (like getting paid more than your salary) and save additional for my RE investments. Other replies note that if it is taken out of the paycheck before you see it then the money is not missed as much. I have a similar trick for saving for RE investing. Young workers typically receive raises that are above cost of living increases. Each time you get a raise, increase the amount that you are saving for your RE investing. Do not save all of the increase or even all of the increase above cost of living (you deserve some rewards for you hard work), Example if you get a 5% raise at the end of year one and the inflation rate is 2.5% would imply the raise above 2.5% is money beyond your previous year's expenditures. If you reserve half of the 2.5% for going into your RE investment fund it is a start. You do this for a few years in a row and it adds up. You may be allocating 5% of pay to your RE investment fund.

@Matthew Otto you'd be stupid not to max out that employer contribution. Thats absolutely free money that no other investment will ever give you. You can always buy reits in your 401k to have exposure to real estate that way. Outside the 401k save whatever you have left and do your RE with that, but do not leave free m9ney on the table.

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