Life insurance is a pretty useless investment if you don’t have any dependents (most 23-year-olds don’t.)
I certainly agree about the 401(k), for all the reasons mentioned by everybody above.
Very true and I didn’t allow for the initial tax savings when I threw together those numbers above.
If the employer’s portion is substantial, then you do still come out ahead even if you withdraw. If the employer’s portion is a very small portion (as it will be, if someone is maxing out their contributions and exceeding the match-able amount, it’s not as likely.
Also if your tax bracket is higher when you withdraw, vs. when you put the money in, that really kills you.
Let’s say 1100 dollars. 1000 is yours, 100 is the employer’s.
Tax rate is 25% when you make the contribution and 25% when you withdraw
If you contribute nothing, you’ve got 750 (1000 minus the 25%).
If you contribute, then withdraw and pay penalty, you’ve got
1100, minus 275, minus 110, which is 715 which is less than 750. So you’re behind.
Tax rate is 15% when you contribute, and 25% when you withdraw.
If you contribute nothing, you’ve got 850.
If you contribute, then withdraw at 25%, you’ve got the same 715 as above. So you’re really behind.
Going back to the 1600 scenario, if you contribute when the rate is 15% and withdraw when it’s 25%:
If you contribute nothing, you’ve got 850.
If you contribute, then withdraw at 25%, you’ve got $1040. That’s still more, but if you hadn’t withdrawn anything, you’d have 1600.
A traditional deductible 401(k) really bets that you’ll be in a lower tax bracket when you withdraw. For most of us, this is likely. But it’s pretty punitive (as it should be!) if you take it early.
Personally, if we didn’t need the deductions right now, I’d dump all my savings into a Roth 401(k). Same as a Roth IRA, only through the workspace. You never pay any taxes on withdrawals. Your employer’s contributions get treated like regular 401(k) though, taxed upon withdrawal.
For someone who doesn’t need the deductions, like someone who’s early in their career and is presumably in a lower tax bracket, I’d definitely recommend a Roth-type plan if you have the option. In fact if employer matching weren’t a concern, I’d start with the IRA vs. the 401k.
This seems to be the standard advice you get from financial columnists:
- do what you have to to get the most “free money” from the employer.
- fund the Roth IRA with what you’ve got left
- Increase the 401k contributions with what you’ve got left, if any.
Back to the OP: I’ll add to the pile-on of saying “do it now, you’ll never regret it!”.
Agreed… unless you happen to own a crystal ball and you know that you’ll be developing something debilitating, that will leave you uninsurable and/or dead, at some point in, say, your 40s 
(in which case, definitely get it now while it’s cheap and don’t let those insurers see that crystal ball!!).
Typo Knig and I actually have very small whole-life policies (like 10,000 each) that our parents got us at various points. The nice thing about them is that they’re so old, the rates are quite low and at some point, I suppose they’ll be paid up. But they won’t do anything except pay for the funeral.
I also have a whole-life policy for a bit more that I took when my company got bought, and the new company’s life insurance wouldn’t cover me due to an existing medical condition :eek:. I was able to convert a very small portion of the old company’s policy to an individual one, but only as a whole-life policy which cost a fortune. Had I converted the full value, it would be costing me about 10,000 a year in premiums. The group term life (which I eventually did get accepted into) is about a tenth of that. I’m keeping the whole-life policy because the term life ones will go away when we turn 70, and we have unique financial needs (special needs kid who will need some financial support even as an adult).
Anyway - the OP likely doesn’t need whole-life at this point, and really only needs term life if there’s a family member who’s relying on his being around to provide support.
So, what are you going to do when you retire, rely on Obama to take care of you? You think you’re going to live high on the hog on Social Security? Fergit it. For Christ’s sake, grow up. No one (and I mean NO ONE) is going to magically give you a pension when you retire. You have to do it yourself.
At least you understand that it’s free money. But it’s more than that; it’s tax-free. So that adds (depending on your tax bracket) anywhere from 10-25%.
It’s the best deal going. For God’s sake, get your head out of the sand and start contributing…
Another thing is, as long as you are still employed, you can take out a loan against the money in your 401K. It’s at a low interest rate, and less hassle than trying to get a personal loan from a bank. IIRC all I had to do was mail in a form and they sent me a check - no awkward interview at the bank - and the payments were taken out of my check automatically.
If you’re not at least maximizing your employer’s matching, then you’re getting paid less than you could be.
That’s very risky though - if you change jobs, you have to pay it all back immediately. Or the unpaid loan is treated as an early withdrawal, with penalties. Ouch. I’m terrified to touch my 401k even as a loan.
Back to one point in the OP: using money for school. Nobody’s commented on that and actually, it is a good idea to use some of your current income for school, if that’s something that you want to do. That might be an argument for keeping the 401(k) contributions lower, right now, and funnelling money into tuition. For example contributing only a couple percent, or contributing just enough to get the matching money from the employer. You just have to look at what’s best both short-term and long-term.
The long term average annual interest rate for the stock market is about 6% or so. $1 invested now at 6% APY is worth about $10.25 forty years from now.
Correct, and that’s a big downside. However, also remember that when you pay back the loan, you are paying interest back to your own 401(k), so it’s a good deal. But I generally recommend against borrowing money for anything except home, car, college, starting a business.
I think many people have succinctly captured the magic of compound interest. So I won’t harp on the math.
Correct. And it’s “short-sighted”
Let’s see now. You are going to bet that you die young. So if you win, you’re dead. Hmmm. Rethink that one.
If you wake up one day at 45 with no significant savings and wish you had started at 23, that’s when you say, “What a colossal waste. :smack:”
So if you are like me, who doesn’t have an employer who will match anything you contribute, when is it not worth it? Because in my mind, I have a $9,000 vehicle loan and $20,000 in student loans, each at about an 8% interest rate. Shouldn’t I pay those off early and stop that interest from building rather than toss money into an account that, from what I can see, gains less than 8% interest?
There’s something to be said for that, although you need to take the tax benefits of the 401k into account when you’re doing the calculation.
Dude, google “savings calculator” and go nuts. You’ll learn a lot. Some calculators have options for “this is a taxable account” or “this is a 401(k),” so you can see the difference investing in a 401(k) makes. Looking at these calculators will make you mad at your grandparents for not putting a measly thousand bucks in a bank account for you 100 years ago.
Not to confuse you too much at this point, but see whether your 401(k) has a Roth option and read up on that.
Where did you get that figure (and to nitpick, it’s really a “rate of return” or something, not “interest rate”). The number I see most often for the long-term annual return from the broad stock market is 10% (and I’ve also seen it said (and I’ve posted it here before)) that the stock market has returned at least 10% annually in every rolling 20-year period since 1929.
One note on this–I believe you have to pay the loan back in full if you quit or are fired.
There are two reasons to consider it but you need to do some projections to figure out what works best for you.
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Your contributions to your 401(k) are automatically subtracted from your income for purposes of calculating income tax. You do not need to itemize, or deal with it at all on your tax return–your W-2 shows your income already adjusted by this amount.
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Taxes on the gains are deferred.
You will eventually pay taxes when you start to take money out of the account, but the assumption is that you will be retired and in a lower tax bracket and so pay less tax then than you would now.
I haven’t run any numbers but often in a dilemma like yours a good solution is to go hybrid–put half of your money into the 401(k) and the other half into paying off loans.
Paying off the loans would definitely be preferable to any conventional investment that offers *no *tax deferral.
I’m 56, and I’m damn glad I maxed out my 401K as soon as I started working. Now I theoretically lost more money last month than lots of people make in a year, but it will come back. (I hope). But the main reason to start young is that you won’t miss it. Learn to budget without the 401K money. Given the employer match, there is no better investment you can make, and it is worth not going out to eat quote so often or getting a slightly cheaper car. Plus, when your income increases so will your contribution.
Social Security, assuming I put off officially retiring long enough, will be a good adder. Another plus for 401 Ks - if you want to effectively retire at 62, say, you can use some of the 401K money to live on, and put off taking money out of Social Security until you can get a decent amount, which is 66 now, I think. My father is still around at 93, so I’m planning on using it. It is not enough to live on, but it is a significant check every month. And there is effectively zero chance it will go away.
Yes, unless you have an investment which you think could earn more than 8%. A lot of people did that in the 90s though - leveraging themselves (that means borrowing) so they could throw money into the stock market. It ended…badly for many of them.
This link nicely sums it all up.
http://www.cccs-inc.org/tools/saving_early_chart.html
Consuela saves $2000 an year between the ages of 24 and 35, and never saves again.
Jack starts saving late at age 36, saves $2000 an year and saves $2000 every year thereafter.
When they hit age 67, Consuela has more than twice the money of Jack and is a few thousand shy of a millionaire.
If that’s not enough to convince you to save early – I don’t know what to tell you.
Something else I don’t think was mentioned yet: Since the deductions are pre-tax, they effectively lower your taxable income, and depending on your tax bracket, you may see little to no difference in your paycheck. As a matter of fact, when I first started contributing to my 401(k) 19 years ago, my check actually increased slightly. So I was saving for my future with no impact on my monthly income. Sweet. (YMMV.)