Consulting

I dont think max out 401k is the best advice. Yes it is easy and intuitive for general public who tend to spend all their income but I think some of us are not in that mindset. My approach is to put

likefunny
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works at

You work for McKinsey?

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likefunnysmart
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No one cares if you have a yacht or not - such things are just that. If anyone does care, be weary

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It’s still tax advantaged relative to any other invest vehicle, so if you’re sure you can exceed an index fund by 15-20% then it go for it, but if you’re comfortable saying you can consistently beat an index fund by 20%, I don’t want you touching my money

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This question is missing key dimensions (McK1 nailed it), it's a question of taxes. If you avoid city/state income taxes via 401k and they're 10% of net, like in NYC or SF, and then retire in a low income tax state, it's fundamentally adding 10% higher returns net.

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These don’t have to be mutually exclusive strategies

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whatever match you get from your firm to 401k (so I put $0 to 401k since the Firm doesnt require my contribution) and invest certain percentage of income - I build down payments with xx% of my salary every month and invest in real estate/others. What do you think? I just wanted to post this since whenever there is a question on 401k, everybody shouts "max it out" but wanted to point out that maxing it out isn't a universally best approach.

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SM1 destroying this thread. Nice work

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And, sorry if this has been previously mentioned, but my 401k doesn’t call me on a Sunday asking for a new refrigerator. Nor does it need repainting or a new roof. I’ve invested in real estate, along with a full 401k approach, but it involves buying decrepit properties, fixing, moving in, then selling. Rinse and repeat.

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My tenants call the property manager, who I pay and deduct it from my income tax. I fix the roof of my property and deduct it from my income tax and the property price goes up. I visit the property and hang around? I deduct it as business trip and deduct it from my income tax. Mortgage interest? I deduct it from my income tax (not applicable to new loans - grandfathered in) Yet, I constantly beat the market in return with tax advantage and freedom of my fund and definitely beat the tax advantage of 401k. It is a economy of scale game and 20k to 40k per year can change a lot. Housing market will crash? I will buy couple more and wait it out. Tax is complicated? my tax attorney takes care of it. I get that 401k is easy but you can do so much better as long as you are smart. Thats what I wanted to say.

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What?

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I feel like I have two words for this Compound interest

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So a real estate only portfolio? Sounds very... cyclical. It’s not an either/or. Spouse and I max 401k (actually max the 415c limit), have a rental, a primary residence which will become a rental (ie house hack), and are currently exploring the best way to get into angel investing

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Thank you all for your response. I just sold a condo for 50% more than what I paid 4 years ago. Mortgage was paid by rent and also had tax deduction. I have a couple more condos in Bay Area and NYC with same investment structure. I think real estate in tier 1 city will always beat the stock in a long run as long as you pick the right area. There are huge tax deductions so my RE income is basically tax free too. I plan to invest this money to buy 2 more properties and plan to keep some properties as passive income after the mortgage is paid off. I understand that there is compound aspect of it and current tax break, that money can also be used as down payment and generate income/appreciation/tax break.

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Old-timer here with a reality check. I bought a condo on the Bay Area that lost 66% of its value in the bust of ‘07. It’s back up above that now but that’s more than 10 years later. Real estate increases are not guaranteed, even if you live in a ‘hot’ market.

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Anyone else finding this thread to be a weird flex?

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likesmartfunny
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I agree. Max out the Match, then invest separately. Why tie up money you can't really control

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?? If your income is over 100k, your investment would need to earn 28% or more to even get back to pre-tax income levels. This doesn't consider company matching and compounded growth of that investment over the year. I don't know where you're investing in real estate, but opps like that aren't really available around here.

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M1, simple math here. I cannot believe you are a manager 😁1+2=2+1. Captial gains tax is not that huge and you dont even pay them if you use RE tax deduction. I expect my reitrment income pretty high as well and don't like the uncertainty/locking in the money.

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This is all well and good - RE will generally get better returns than throwing money into a broad index fund, but it should be noted that: 1. It takes a lot more work 2. There is a lot more risk, especially if you don’t know what you’re doing 3. If it takes 3 years to get a down payment before you can invest (as OP has said in numerous posts), that’s 3 years your money is only making 2% in a high yield savings account vs. being in the market where returns have are much higher. Putting money in your 401k is the standard of advice because it is never a bad idea and it takes no skill

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You could just invest the money for 3 years and pull it out when you have enough (after tax) for the down payment

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You're comparing leveraged (RE) vs unleveraged (401k) returns without adjusting for risk. You could get the same results juicing your investments with options or even just borrowing money to invest, it's no more risky or less profitable, the pitfalls are just more obvious. RE as an asset class doesn't outperform the market.

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OP asked a very valid question. Obviously it’s important to max employer contribution- no asset class can replicate that. Beyond that this is not as simple 1) it is not tax advantaged. It is tax deferred. So when you take it out, it will incur taxes 2) compound interest argument does not work either because that happens even when you put it outside of 401K Net it boils down to one thing - whether the tax rate when you are 60 years old will be higher or lower than right now. If you think that after Trump, Bernie will raise the tax rates and it will remain high, you should not contribute beyond employer match. If however, your income when you are 60+ years old is going to be interest income and accruing capital gains taxes, you should max out 401K

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This is incorrect. In a traditional IRA/401K income tax on wages is deferred, but you don’t pay capital gains. Any other investment vehicle you pay ~30% on the wages before you invest, and then 15-20% on the gains when you sell. In a 401K you only pay the former, not the capital gains tax, hence tax-advantaged

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Please note that some of us riff raff don't get our company match unless we put our own $ in 😬

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funnylike
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Yeah so just put what the company matches. Then invest better than putting it an inaccessible account for 30+ years.

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I had the same thought as you OP. Instead of 401k max i put in minimum to get the company match and reinvest the rest of savings into rentals. tbh there is no other investment vehicle to get such a leverage at a low interest rate. IMO RE beats 401k return hands down depending on location and some luck.

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I manage all my philly properties while living in ny. Ive used a few property management firms but they are just slow af in reacting. I do like making the occassional weekend trip to philly and meeting my neighbors and clients

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I don’t put any thing in my 401k cause I might die before I even can take it out.

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funny
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Agree with OP 100%

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Where’s the model with the detailed assumptions?

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