Retirement Series: FAQs

Retirement Series: FAQs

Table of Contents

  1. Why Should I Contribute to Retirement?
  2. Should I Pick Stocks in My Retirement Account?
  3. If I Plan to Retire Early, Why Would I Invest in a 401k or IRA?
  4. Starting a New Job in the Middle of the Year, Roth or Traditional?

Why Should I Contribute to Retirement?

In short, you should contribute to retirement via 401k and IRA because it (1) is free money with employer matching (2) reduces taxes, your BIGGEST expense as a higher earner (3) leverages compounding interest over a meaningful timeframe (4) provides several means of legal protection (when you get sues, declare bankruptcy, etc)

What is not as simple is deciding the amount you should contribute to retirement. This largely depends on your existing expenses: student loans, rent, bills, car payments, credit card debt, etc. This is beyond the scope of this FAQ. However, as a high earner in the tech industry, you will likely accumulate significant savings within your first two years after all expenses. A meaningful way to make use of these funds, is to max out retirement (via MEGA backdoor for 401k and backdoor Roth IRA [1][2]).

For example, when I graduated, I worked at MANGA/FAANG, and my total compensation was $230k. After 1 full year of income, I paid $30k in federal taxes, contributed $52,500 in 401k, contributed 7k in IRA, and had over $50k in savings.

Should I Pick Stocks in My Retirement Account?

You should not pick stocks in your retirement account. Focus on diversified funds and let the US economy and compound interest work for you. Retirement will take many decades for you, so take advantage of the time. If you have speculation in the market, you should have enough funds to open a separate brokerage.

 

If I Plan to Retire Early, Why Would I Invest in a 401k or IRA?

If you plan to live to 59 ½ (penalty-free withdrawal rate), you will still want to use a standard retirement plan to draw from since they have tax-breaks; taxes are perhaps THE biggest investment expense. If you are capable of retiring early, you should still have plenty of cash remaining after maxing out retirement accounts, which you can invest however you want for early retirement

Starting a New Job in the Middle of the Year, Roth or Traditional?

If you start work in the middle of the year, your tax bracket will be artificially low. This means you will be better off contributing to a Roth retirement bucket rather than a traditional bucket (for both IRA and 401k).

References

[1] 401k Article here 

[2] IRA Article here