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In response to
"When I started working out of grad school, my father was like "you should max your contributions to your 401k while you are young""
by
ty97
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That advice should always come with a big caveat: "After you have saved everything you need first."
Posted by
Max
Apr 12 '23, 07:47
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Your typical 20s compared to financial lifespan:
* Shortest credit history
* Lowest credit availability
* Lowest salary and discretionary income
* Inexperience with budgeting for real world expenses
* High volatility in new and unexpected expenses (moving for jobs, wedding/vacation travel, car, insurance, home, dependents)
Risk of contributing to 401k given the above
* Low actual gains on minimal investments for the first couple decades
* Locking up money possibly needed for emergencies
* Late fees, overdraft, and interest on debt cancel any benefit from unrealized investment gains
* Damage to credit rating leads to higher rates on debt, particularly on mortgages - which will counter any investment gains
My advice to my nieces will be wait until your 30s unless you have saved your annual salary in cash, then first invest in HSA and Roth so you can pull out principal without penalty if you need it. Then when you can comfortably max out a 401k with company matching the growth you'll get on those contributions at the height of your stable earning power from 30-60 should easily reach your target.
Locking up a small contribution that you can't touch for decades won't be as effective as a single year of average investment growth on a maximum contribution
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