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For 99% of the population, 401K contributions are a no-brainer. The tax savings, investment growth, and employer match are difficult to make a case against. However, I do not contribute to my 401K. I am in the 1%, but only due to certain, specific conditions.
Lack of Longevity
Coincidentally, my company’s 401K match does not kick in until after one full year of employment. Whoops … looks like I’ll miss out on that.
However, the employer match is only a tiny piece of the puzzle. Even without the match, I could still realize tax savings and investment growth. So why do I choose not to contribute?
Invest in Yourself
The main reason I don’t contribute to my 401K is that I believe that I can earn far greater returns by investing in my entrepreneurial ventures. At my age, I have tremendous freedom to fail and take risks. If one venture doesn’t work out… Oh well!
“On to the next one” – Jay Z
Of course, I understand that sacrificing (nearly) guaranteed 7-9% returns over the long run in my 401K is a “risk”. However, as Scott Trench highlights in Set for Life, “risk” is a subjective word. In this book, he explains that (contrary to popular belief) bonds are riskier than stocks in the long run due to their vastly undersized returns.
Sure, bonds are great for smoothing the ride and hedging against market volatility in the short term, but take a look at someone invested in 100% bonds vs. someone invested in 100% stocks over any 20, 30, or 40-year period.
This is exactly the same mindset with which I approach my 401K contributions. I believe that in the long run, I can substantially outperform 7-9% returns in the stock market by investing in entrepreneurial ventures.
New ventures are notorious for exponential growth. If I were to open a lemonade stand and earn $1,000 in sales in Year 1, it’s highly unlikely that my sales will only increase to $1070 or $1090 in Year 2 (7-9% gain). It’s either going to be a boom or bust … hopefully a boom if I’m giving it my all.
A Look at the Numbers
I’m sure there are some readers thinking that I’m an absolute fool for not contributing to my 401K. So let’s take a look at the numbers.
If I contributed the full $18,500 my 401K this year, I would realize ~$4,000 in tax savings.
Since I would likely frontload my investment as much as possible, let’s assume that my 401K is maxed out by the end of April. I’ll project an 8% annual return (based on historical averages) for this scenario.
My estimated return for this year would be around 5% (calculated by multiplying the 8% annual return by 7/12 remaining months + a little boost for the interest compounding in the first four months).
At the end of this Year 1 scenario, my 401K balance would rise to $19,425, representing a $975 gain ($18,500 * 1.05). So, in total, I’m looking at approximately $4,975 ($4,000 + $975) between tax savings and investment gains.
Beating the Stock Market
With $18,500 in pre-tax dollars (around $15,000 post-tax) to deploy toward side hustles, real estate assets and other entrepreneurial investments, my potential is virtually unlimited. I no longer surrender my earnings to the ebbs and flows of the stock market, but instead to my own talents and hard work.
As of late, I’ve been particularly interested in real estate. Using an FHA loan, my minimum down payment is 3.5%. If I were to use the full $15,000 for a down payment, I could “afford” a $429,000 property. I would probably never actually do that because that leverage is insane, but you get the point.
In addition to the cash flow from tenants and (maybe) capital appreciation, real estate offers tremendous tax savings as well! Tax-deductible items include depreciation, mortgage interest, rental property taxes, rental property insurance, utilities, and repairs & maintenance … just to name a few (the list goes on).
If I’m strategic about my acquisitions, I can set myself up for perpetual wealth. I spent a considerable amount of time building a dynamic model to calculate thousands of real estate acquisition strategies if you’re interested in testing it out.
As long as I understand the market I’m competing in, execute strategies efficiently, and put in the time and effort, I’m confident that at least one of my entrepreneurial ventures will become successful.
I had to bore you guys with the numbers just so you know I’m legit, but life isn’t just about money! Sure, piles of money will allow me to design the lifestyle that I want to live, but that is because money is a tool. Nobody actually works for “money”. They work for the things that money can buy them.
Sorry for the rant… back to the point.
I have so much fun writing this blog, running the disc golf company, and working on other entrepreneurial ventures. It just doesn’t feel like “work”! Contrarily, I can’t say I’d have nearly as much fun contributing to my 401K…
Feel free to argue with me about making the wrong choice, but I’m quite certain that I’ve considered all the pros and cons. Are any of you readers in the same boat as me? Do you choose to not contribute to your 401K for similar reasons? I’d love to hear about it! Please share in the comments below 🙂
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