Retirement Planning

The $1.2 million mistake sitting in Dave's inbox

Dave was 28, working as a software developer in Austin, making $95,000. His company offered a 401(k) with a 100% employer match up to 6% of his salary. For three years, Dave hadn't signed up. Not because he couldn't afford it — because the enrollment form felt complicated and he kept saying "I'll do it next month."

That procrastination cost him. His employer would have matched $5,700 per year — free money. Over three years, Dave left $17,100 in employer contributions on the table. But the real damage was worse: accounting for compound growth over the 37 years until retirement, that missed match alone would have grown to roughly $450,000.

Multiply that pattern across a full career of not contributing? Dave was on track to retire with approximately $1.2 million less than he could have had — just because a form felt annoying.

What you'll walk away with: By the end of this module, you'll understand 401(k)s, IRAs, and the Roth vs Traditional decision, know how to calculate your personal retirement number using the 4% rule, and have a clear priority order for where every dollar should go. You'll also know exactly how much free money your employer is offering — and whether you're leaving any on the table.

The retirement account cheat sheet

Retirement accounts aren't complicated — there are really only a few types that matter, and they each have one job: help you save for retirement with tax advantages. And as you learned in the compound interest module, the earlier you start, the more time those tax-advantaged dollars have to compound.

(Contribution limits are for 2025 tax year; they increase periodically — check IRS.gov for current limits)

Roth vs Traditional: the $200,000 decision

Let's make this concrete. Assume you invest $500/month for 30 years at 10% average returns:

The Roth advantage: $248,654 more in your pocket. And this is conservative — if tax rates increase by the time you retire (many economists expect they will, given government debt levels), the Roth advantage grows even larger.

There Are No Dumb Questions

"What if my employer only offers a Traditional 401(k), not Roth?"

Many employers now offer both — check with HR. If yours only offers Traditional, contribute enough to get the full employer match, then open a Roth IRA on your own (at Fidelity, Schwab, or Vanguard — takes 15 minutes) and contribute up to $7,000/year there.

"Can I contribute to both a 401(k) and an IRA?"

Yes. The $23,500 401(k) limit and $7,000 IRA limit are separate. If you can max both, that's $30,500/year in tax-advantaged retirement savings. Most people can't max both early in their careers — start with the 401(k) match, then fund a Roth IRA, then go back and increase 401(k) contributions.

Employer matching: the only guaranteed 100% return

If your employer matches 401(k) contributions, not contributing enough to get the full match is leaving free money on the table. There is no investment on Earth that guarantees a 100% return. An employer match does.

Common match structures:

How much do you actually need to retire?

The most common question — and the most anxiety-inducing. Here's a straightforward framework.

The 4% Rule

The 4% rule (from the 1998 Trinity Study, updated with subsequent research) says: if you withdraw 4% of your retirement portfolio in your first year, then adjust for inflation each year after, your money has historically lasted at least 30 years about 95% of the time.

Working backwards:

There Are No Dumb Questions

"A million dollars?! I'll never save that much."

Remember compound interest. If you invest $500/month starting at age 25 with 10% average returns, you'll have about $1.13 million by 65 — and you only contributed $240,000 of that. Compound growth does the heavy lifting. The million-dollar number sounds intimidating, but $500/month is achievable for many professionals.

"Can I count on Social Security?"

Social Security is projected to be solvent through approximately 2033, after which the trust fund reserves may be depleted and benefits could be reduced to roughly 77% of scheduled amounts if Congress takes no action (Social Security Board of Trustees, 2024 report). It will almost certainly exist in some form, but planning to rely on it fully is risky. Treat it as a supplement, not your plan.

The priority order: where to put your money

Dave finally filled out that form

Three years late, Dave enrolled in his company's 401(k) and set his contribution to 6% — enough to get the full employer match. He chose a target-date fund (low effort, automatic rebalancing) and set up auto-escalation to increase his contribution by 1% each year. He also opened a Roth IRA at Vanguard and started putting $250/month into VTI. He couldn't get back the $450,000 in lost compound growth from those three years of procrastination. But every dollar he invested from that point forward would compound for the next 34 years. The best time to start was three years ago. The second-best time was the day he finally clicked "Enroll."

Key takeaways

• Not contributing enough to get your employer's full 401(k) match is the most expensive mistake in personal finance. It's a guaranteed 100% return.
• Traditional = tax break now, pay taxes later. Roth = pay taxes now, withdrawals are tax-free. Most young professionals should lean Roth.
• 2025 contribution limits: 401(k): $23,500. IRA: $7,000. Both limits are separate — you can contribute to both.
• The 4% rule tells you how much you need: multiply your annual retirement spending (minus Social Security) by 25. That's your target.
• Priority order: employer match → emergency fund → pay off high-interest debt → Roth IRA → max 401(k) → taxable brokerage.
• Compound growth does the heavy lifting. $500/month at 10% for 40 years = $2.6M, of which you only contributed $240K.

Next up: For many people, the biggest financial decision isn't an index fund — it's a house. The next module breaks down the real math on buying vs renting, how mortgages actually work, and when renting is the smarter play — Real Estate Basics.