401(k) Discussion


I was recently talking to my older brother about investing in our 401(k) and was hoping to encourage him to invest more in it. I am a finance blogger and employed in the field of finance so I figured I could offer some thoughts from the things I’d been writing about recently and convince him to increase his savings.

I didn’t realize that he would actually be the one encouraging me!

Always a Better Saver

My brother was always a better saver than me. There is something behavioral and linked to personality about our finances. And for whatever reason my brother has had an iron will when it comes to saving his money. I would always spend my money on candy bars and baseball cards. He would seem interested in those things too but would invariably decide to save his money. He often ended up amassing large amounts for various goals.

One that sticks out in my mind was his goal of buying a new bike. When we were young, having a nice bike was everything. We spent almost all of our free time riding our bikes so it made a lot of sense to buy a nice one. Unfortunately, my desire for candy bars and baseball cards was always too much and I couldn’t deal with delayed gratification.  Hey I was 3 1/2 years younger at the time!

He saved and saved for months and finally went to the store and bought his new bike. It was incredible. Not only did it look cool but the brakes worked perfectly and the tires were white. The bike was so nice that it seemed “new” to me for about two years. I was astounded as a young boy that my brother had saved over $100 to buy such a nice bike.

So the fact that my brother is still saving more than me really shouldn’t have been a surprise.  But hey, I am still 3 1/2 years younger so maybe that’s it?

The Match!

When I asked him about his 401(k) I was very surprised that he was putting away 16% in total. This blew me away. I had been putting in a total of 8% but that included 3% provided by my employer. I felt like I was doing pretty well.  So when he told me the total was 16%, I was astounded. I actually didn’t believe him and started to ask him some questions as I thought we might not be talking about the same thing.

Come to find out he was only contributing 8% of his own money and his employer was contributing another 8%! I couldn’t believe that his organization automatically contributes 8%. Naturally, I figured that his employer would match, dollar-for-dollar, all contributions up to 8%. This seemed like a great deal and one I would love to have.

However, he told me that his organization contributes 8% no matter what he does.

So even if he contributed nothing, he would still get 8% sent to his 401(k) by his employer. That’s not a situation that you will find at most employers but if you can get it you should take advantage of it. Actually, you wouldn’t have to do anything to take advantage of it – so just be thankful if you have it.

The Impact

But here is the best thing about what my brother is doing. Instead of being lazy and just getting the 8% from his company, he is adding another 8% of his own. So he’s doubling the benefit by being a disciplined saver and delaying gratification. Check out the difference between 8% and 16% over 45 years:

401k match
Contributing an extra 8% makes a big difference

My Decision

I always hesitated to contribute more than the minimum necessary to get the full employer match. Because I use leverage in my personal brokerage account, I figured I can get higher returns investing after-tax outside of the 401(k). Additionally, I don’t trust government rules and don’t like the lack of flexibility with accessing funds.

But now I am leaning more towards getting the tax benefits which are a sure thing rather than taking paying the tax and putting the money in riskier investments in my brokerage account. If I do that, I sacrifice the flexibility of having ready access to my funds. But on the other hand there are benefits.

I really like the “forced savings” factor of having money taken out of my paycheck and put into an account that I can’t get to! In other words having the money in a restricted account is better than frittering it away eating out.

Much the same way that when I was younger I spent money on baseball cards and candy, I now struggle with spending money on eating out and other things that don’t help me reach my Net Worth goal. But by taking money directly out of my paycheck and contributing to my 401(k), I force myself to save, reduce my taxes, and am still investing for my future.

Since discussing this with my brother I have now increased my total contribution to 10%, of which 3% is contributed my employer. I plan to increase my contribution 1% per year until I get to a total of 20% or so. This shouldn’t be a problem if I do it each year at the same time I get my raise. My parents also suggested that I use my raise each year to save and invest so I know this is a good idea.

What are your thoughts on 401(k) contributions? Would you rather contribute to your 401(k) or invest in your personal brokerage account or pay down your mortgage? 

Author: Patient Wealth Builder

I live in the Mid Atlantic region with my wife and children. I am a finance manager for a Fortune 100 Company with over 10 years experience and have an MBA and CPA - but my true passion is investing!

4 thoughts on “401(k) Discussion”

  1. I’m a big fan of maxing out my 401k. Every dollar that I can avoid being taxed by the Government now and grown tax free is a win in my book.

    At one point I thought I was smarter than my 401k but at this point I don’t have the same amount of time to trade my brokerage account due to being married and having a baby.

    Therefore since my 401k has really low fees and mimics that of the S&P 500 I decided this is the best option for me right now given my time constraints.
    Mustard Seed Money recently posted…Donating Money to Your CollegeMy Profile

    1. I agree. Much of our financial success depends on our behavior not on our trading acumen. I generally do the same type of thing in my brokerage that I do in my 401(k). The only benefit is that I invest in a leveraged fund which returns 3x the index in my brokerage account. While in my 401(k) they don’t have a product like that and probably never will. So that seems like the only downside to me. However, having done the math, it seems like the tax benefit almost makes up for the fact that I don’t get to use leverage. In addition, I do like having a portion of my investments to not be leveraged so highly.
      Thanks for the comment. I would encourage everyone to get a brokerage account and learn as much as possible about different products and strategies but to keep the majority of their holdings in index funds and invest steadily month by month.

  2. Good for you for ratcheting up the savings! I’ve gone back and forth a number of times as to whether I should be investing more to max out my 401k or putting it in my personal investment account (for better and easier access). But I’ve decided to keep maxing the 401k because the power of the tax benefits is just far too great.
    The Green Swan recently posted…The Green Condor: Clearing Growth HurdlesMy Profile

    1. Between 1) automatic saving 2) tax benefits) and 3) difficult access the benefits of contributing to your 401(k) are hard to beat. Yes – the difficult access is a downside and an upside. For most people that difficult access keeps them from spending their savings!

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