so i (M23) am starting my career as an engineer here soon in a pretty high cost of living area, and will be making a modest salary. my question is as follows:
Should I invest every dollar i don't reasonably need (leaving enough for food,rent,hobbies,phone bill,emergency savings account) into my 401k, or should I instead invest it in my individual brokerage and eat the additional couple thousand in tax burden. It seems to me that although i would be saving quite comfortably, and lowering my tax burden, that by putting all of that money behind the retirement bars is quite restricting and irreversible. Right now the numbers work out to being able to comfortably save about 30k/year between my IRA, and 401k with company match, and still have plenty to live comfortably on. Worth noting that i will also be receiving atleast 10k/yr additional in equity in my company.
Would really appreciate any testimonials/opinions on how others see this situation.
savings rate for retirement…
byu/Agile-Frosting-6045 inpersonalfinance
Posted by Agile-Frosting-6045
4 Comments
Start here: https://www.reddit.com/r/personalfinance/wiki/commontopics.
Retirement. You’ll thank me in about 40 years.
Depends on your goals.
The more you put into retirement at a younger age the quicker you will be Financially Independent and able to either retire or do something you enjoy more for less money.
That said, if you want to buy a house, tying it all up in retirement accounts could make it hard for you to afford a down payment if you overdo it. A paid off house also goes a long way in retirement, so just because you choose a house doesn’t mean you aren’t also choosing retirement.
Also, you’re 23, don’t forget to live life now instead of just planning to live it later when you have less time and energy.
Ultimately, I’d say to essentially follow the guide and split it up by funding retirement at least up to employer match, max your IRA/HSA, and put the rest in brokerage and HYSA for house/living; then eventually shift from brokerage/HYSA once you have paid your wedding/house to max retirement.
Any money you may want/need within the next 5 years should be in a HYSA. That includes saving up for big ticket purchases like vacation or a car purchase but also saving for an Emergency Fund.
Balance those shorter term savings with long term investments for long term (retirement, etc…). Contribute at least enough in your 401k to get the company match.
A couple thoughts for your longer term investments:
If you’re in low tax bracket and believe your tax bracket could be higher in the future, then it may be worth considering making 401k and/IRA into the Roth versions of those accounts. In addition to Roth IRA profits bring tax free for retirement, an added bonus to contributing to a Roth IRA is that 5 years after you’ve made a contribution, that contribute could be removed without penalty. This can make a Roth IRA a strong secondary Emergency Fund in case of a larger emergency , such as job loss.
Another vehicle to consider for long term investment funds is a Taxable Brokerage Account. Investments in a Taxable Brokerage Account may qualify lower tax rates for Long Term Capital Gains. Those federal tax rates can be as low as 0%. A Taxable Brokerage Account has more flexibility for withdrawals than a 401k or IRA, making it a good option for investments that you may want to tap in the distant future but before age 59.5, such as a house purchase or early retirement.
I hope this helps!