The million dollar mistake that 20-somethings make wrote this great article about the number of 20-30 year old’s who are abandoning their 401K plans at work because of the turmoil in the markets.  This is unfortunate.  I don’t know when the stock market will turn around but I am willing to bet my life savings that by the time I am ready to retire (in 20+ years) the market will have returned and appreciated many fold.

Here’s why NOT participating in a retirement plan during your early years can become a million dollar mistake:

Let’s compare a person who starts at the age of 23 versus 33.  We’ll assume they’re each able to save $200 per month, will retire at 65, and will earn a 10% return on their investments.

By the time they each reach the age of 65 here are the results:

Started at 23: $1,561,776

Started at 33: $561,667

Those 10 years cost the latter individual over $1,000,000.  OUCH!

Lesson: Don’t be discouraged by market fluctuations, sign up for your companies 401K and forget about it!

Roth 401K: Tax Me Now

Our company recently changed 401K providers which offered me the opportunity to evaluate not only the standard 401K but also the Roth 401K.  I had read about the Roth 401K back in December of 2007 and was pleased to see that these options were beginning to work their way into employers’ offerings. 

It also created a new decision that I had not encountered before.  Do I invest my 401K contributions into a standard 401K and take the immediate benefit of the income tax deduction? or do I allocate my contributions into Roth 401K where I pay income tax on my contributions but am able to access the money tax-free in retirement? 

After talking with my investment advisor (who I highly recommend- let me know if you’d like his information by emailing me) he convinced me to put a portion of my monthly contribution into each so that I would have two buckets to play with when I hit retirement. 

If you’re coming across a similar decision in the future I’d encourage you to read this article which explains the 401k & the Roth provision as well as talk with your financial advisor.