Today about 55% of the entire adult population in the United States own stock, compared with 62% of the adult population before the 2008 financial crisis. The percentage of young adults holding equities today is even lower compared to the young adults of the early 2000’s:
In the last two years, an average of 49% of millennials (ages 23 to 38) held stock directly or through mutual funds, exchange-traded funds or retirement plans such as 401(k)s at any given time… down sharply from an average of 61% of Americans in the same age range in the 2001-08 period, before markets were hammered by the financial crisis of 2008-09.
https://www.latimes.com/business/story/2019-12-27/millennials-miss-out-stock-market-record-year
Unless your employer offers some sort of retirement plan like a 401k or 403b, you’re probably part of the 45% of adults who don’t own any stock, which means you’re missing out on one of the more reliable ways to increase your wealth over the long term.
If you do work for an employer who offers a 401k, for the average American who doesn’t have a plan for financial independence yet, I would not recommend contributing to it unless the employer offers a matching contribution.1 If your employer does offer a matching contribution, then it’s imperative to contribute to your 401k if you want to be elite with your money. The most common employer match is 50 percent, which is great, but some companies have 100% matching or more. Not contributing to a 401k that offers a match is essentially committing financial self-immolation and you are unequivocally destroying your wealth. I made this crucial mistake early in my career and the money I lost out on is tormenting.
When I started working at CNA Insurance in 2008, the company offered a match on employee 401k contributions2 but I decided against contributing to the 401k because it would have meant I would have $150 less every paycheck, or about $3,600 less every year. At that time, I just remember thinking I would much rather have the $3,600/year now because I was recently married, my wife was in college and we had bought a condo. So without fully understanding the costs and benefits of that decision, I just figured it wouldn’t make much of a difference.
It wasn’t until October 2012 that I started contributing to my 401k and continued making contributions until I left in April 2014. I didn’t make contributions for a little over 4 years while I was at CNA, but when I left after about 6 years, I still had about $25,995 in my account. In the chart below, the portion of the graph highlighted orange shows the amounts I had in my 401k while I was at my various employers. The part of the graph highlighted green is the amount the 401k has increased in value since I left my employer.
The one thing that stands out is that the value of my first 401k when I was at CNA has grown considerably since I left that employer. It went from $25,995 in 2014 to $59,584 in December 2019, an increase of 129% or $33,589 during those 5½ years. My 401k from CNA has obviously had the most amount of time to grow compared to the other two 401k’s, but here comes the bad part.
I downloaded all the transactions in my 401k before I left CNA, so I took that spreadsheet earlier today and calculated how much I would have had if I contributed from the start and based on the 70% match they were providing at that time, I’m estimating that the total amount I would have had in my 401k when I left would have been around $50,275 instead of the $25,995 I actually had. I’m calculating that the additional $24,000 or so that I would’ve had would’ve been comprised of about $14,000 of my own money and $10,000 would’ve been from the company match.
What this essentially means is that if the value of my 401k when I left CNA was about double the $25,000 at around $50,000, then the $33,589 growth since then would have also doubled by now to about $67,178.
This means I lost out on the $10,000 match from the company plus an additional $33,589 from the doubled growth. So I essentially destroyed about $43,589 of my wealth.
I’m not sure if if that amount of money is a lot to you, but realizing I vaporized $43,000+ is mentally excruciating and physically nauseating whenever I dwell on it. And that’s not the worst part. The $43,589 or so I obliterated will likely only get alot bigger over time. tHaNk YoU cOmPoUnDiNg InTeReSt? 🙃
There’s not really much you can say after something like that except just don’t make the same mistakes I made and if your employer offers matching contributions then you need to understand the ramifications of declining that match.
- If you are not getting any employer match, then for the average person who probably doesn’t have the best money habits yet, I see very little value in putting your own savings in a 401k or even your own Individual Retirement Account (IRA) which restricts access to your money until retirement (unless you pay a penalty). In my opinion, for the average American, you’re much better off opening a brokerage account yourself and buying stocks that way so you wouldn’t have any restrictions on when you could withdraw your money from your investment account. Yes, you would give up tax advantages of a 401k/IRA by using a brokerage account, but for the average American family, I think it is much more important to be able to quickly access the money you saved, without penalty and for any reason, than to qualify for a tax deduction or pay less taxes on earnings.
- CNA offered a 70% match on 401k contributions from employees, up to 6% of an employee’s salary. Besides that matching offer, the company also automatically deposited 3% of an employee’s salary into a 401k regardless of whether you contributed or not, which was a really nice benefit and is what primarily built up my 401k when I worked there.
