Before we get started Hookers and Blow (or H&B) is the generic term given to any spending that is considered wasteful, and for some, a lot of fun. This notion of 401(k) OR H&B is one that most of the conservative financial sites throw at us constantly, of course, they don’t think about what they are saying, so I have to bring out the hooker card.
How many charts have you read showing the power of saving for retirement early vs late? They are lauded as being groundbreaking concepts that everyone must understand, and to an extent I think people should – but we should also learn to move through such concepts, absorbing, refining and evolving. What all these articles focus on is concept of Compound Interest – certainly an important concept that should be taught to all high school students. But what these articles are really promoting (perhaps without always knowing it) is the bigger concept of a Forced Savings Plan.
Sure, there is value in company matching to 401(k)s – huge value, but that isn’t the message, the message is do it sooner, and you will have so much more money.
Compared to whom?
Compared to the Clown to the left of you, who spends his weekends flying to Vegas for a binge filled H&B session, yeah, you’ll probably have more money in your 401(k) than him. But what about the Joker to the right of you who is a landlord by 30? Loading money into retirement accounts reduces monthly cash flow, and also reduces non retirement savings. So while Tom has a nice 401(k) balance that he can touch in 40 years, Jerry might have the opportunity to buy an investment property. Compound those two paths over a lifetime, and it is a lot less clear who the winner will be, though Jerry certainly has the advantage in that his investments are not restricted by his age.
So kids – don’t do too much H&B and think about saving, though the 401(k) isn’t the only route.