The Costly Mistake You Might Be Making With Your First 401(k)

12 4 minutes read

In your 20s, it’s easy to make retirement planning a “future you” problem.

With housing costs, student loans and entry-level salaries, a 401(k) can feel more like a nice-to-have, rather than a need-to-have. But the truth may be surprising: Your first retirement account matters more than any other for your future wealth.

Retirement planning is a long-term game where timing changes everything. Starting just a few years earlier can amount to thousands of dollars more in your accounts by retirement.

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Here’s why your first job’s 401(k) (or starting an IRA yourself) deserves your attention now:

Time is more valuable than money

When it comes to your retirement, time is your greatest asset.

Consider two college graduates with different approaches: Alyssa and Jamie. Both contribute to 401(k) accounts throughout different points in their career. In both scenarios, the market returns an illustrative 5% yearly (note that an investment can go down as well as up):

Alyssa starts early and contributes $300 a month immediately after graduation at age 22. She stops contributing at age 37 and keeps her money invested until retirement at 67.

Total contributions: $54,000 (over 15 years)
Retirement balance: $346,562

Jamie starts later and begins contributing $300 a month at age 37 and continues until age 67.

Total contributions: $108,000 (over 30 years)
Retirement balance: $249,678

By the time they retire, there’s a roughly 32% difference in their balances. Despite contributing twice as much money, Jamie ends up with nearly $100,000 less than Alyssa at retirement.

The power of compound interest

While Jamie contributes twice as much over twice as long a time frame, it’s Alyssa who ends up better off. It all comes down to two words: compound interest.

Compound interest is like a snowball rolling down a hill. As your investments generate returns, those returns generate additional returns. Over time, this creates an accelerating growth cycle. That’s the secret power of your first 401(k).

Save today to save less

The dollars saved in your 20s have the potential to be the most valuable retirement dollars you’ll ever save. Yet a growing number of Gen Z feel they may never retire, and only 1 in 5 are actively saving for retirement. It’s not hard to see why, but the reality is that starting to save early may make saving for retirement more affordable.

In the Jamie and Alyssa example, delaying contributions by just 15 years cost Jamie roughly $150,000. She ended up saving an extra $54,000, but still retired with $100,000 less than Alyssa.

Taking control of your retirement early allows your money to work harder for longer.

How to start: Your first 401(k) or IRA

Opting into your first employer-sponsored 401(k) plan is one of the easiest ways to leverage the time value of money. If your employer offers matching contributions, make sure to take advantage. It’s essentially extra money that will continue to grow in your retirement account.

For example, an employer might match 100% of your contributions up to a certain percentage of your annual income. On a $50,000 salary, a 4% contribution is an extra $2,000 toward your retirement each year.

While 401(k) accounts are the most popular retirement benefit, you may find yourself in an internship, fellowship or part-time work directly out of college. If you don’t get access to an employer-sponsored plan, you can still open an IRA.

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Unlike a 401(k), which is managed by your employer, an IRA offers certain tax advantages and is tied directly to you, no matter where you go next.

There are two kinds of IRAs:

Traditional IRAs offer tax-deductible contributions now, with taxes paid when you withdraw in retirement
Roth IRAs use after-tax dollars but allow tax-free growth and withdrawals in retirement

Take control

Most Americans wait until mid to late career to prioritize saving for retirement. That delay can be costly. With less time to grow, contributions in your 40s and 50s may never go as far as those invested in your 20s.

Time in the market is one of the most important factors in building your nest egg. And once you’re behind, catching up can feel nearly impossible. Starting early, even with small contributions, can put you significantly ahead.

Your first job’s 401(k) isn’t just another benefit. It’s a financial opportunity no young investor should overlook.

This theoretic analysis is provided solely for informational and educational purposes. PensionBee Inc. does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to PensionBee Inc.’s website or incorporated herein, and takes no responsibility therefore. Nothing presented here constitutes tax, legal, financial or investment advice. This theoretic analysis does not take into account the specific financial, legal or tax situation, objectives, risk tolerance, or investment needs of any individual investor. All information provided is based on publicly available data and research at the time of posting. Any data, statistics, or third-party sources referenced are for educational purposes only and should not be relied upon as sole decision-making tools. This information, and any associated customer testimonial or third party endorsement does not constitute an offer, solicitation, or recommendation to buy or sell any securities or investments. Your investment is at risk. Past performance is no guarantee of future results.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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