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I talk a lot about investing — where to put capital, how to get asymmetric upside, how to think like an allocator.
But the truth is, the “best” investment depends on where you are in life.
Some of you are early in your careers and feel locked out of deals.
Some are in peak earning years trying to be efficient.
Some are nearing retirement and thinking about stability and drawdown.
But there’s one opportunity that applies to almost everyone earning a paycheck — and it’s so common most people overlook it:
Your 401(k).
Yeah, yeah. Boring. Old news.
But when you compare it to investing in a regular brokerage account, the math gets very interesting.
Three Big Reasons 401(k)s Matter
1. Employer Match = Instant Return
If your employer matches contributions — even something like “dollar-for-dollar on the first 3%” — that’s a 100% return on your money, instantly. There aren’t many investments that give you that.
2. Tax Savings Now = More Money Compounding
Traditional 401(k) contributions come out of your pay before income tax is calculated. That means:
You reduce your taxable income today
You pay less in taxes this year
More of your money stays invested and compounding
This is one of the most reliable ways to improve your effective savings rate.
3. Behavioral Benefit: Harder to Touch
401(k) funds are designed to be long-term savings. It’s not a high-yield savings account — it’s not meant to be tapped for discretionary spending. That’s a feature, not a bug. The forced savings helps you stick with your long-term plan.
401(k) vs Taxable Account — A Simple Example
Let’s assume you’re in:
22% federal tax bracket
4.25% Michigan state tax
Total marginal tax rate = 26.25%
If you invest in a taxable account:
For every $1 you earn, you pay 26.25% in taxes.
You only keep:
$1.00 × (1 − 0.2625) = $0.7375
So you can invest about $0.74.
If you invest in a 401(k):
That same $1 goes into your account before taxes.
You invest the full $1.00.
🔥 The Key Insight
To invest $1 in a taxable account, you’d need to earn:
$1 ÷ 0.7375 ≈ $1.36
So:
A $1 contribution to a 401(k) is like investing $1.36 in a taxable account.
That’s 36% more money compounding from day one — before any market returns even happen.
And yes, when you incorporate an employer match, it supercharges the return even more.
Your “Return” Depends on Your Tax Bracket
This effect gets stronger as your tax rate rises.
Here’s what that boost looks like at different marginal tax rates (federal + Michigan):
Fed Bracket | MI Tax | Total Marginal Tax | After-Tax $ from $1 Earned | 401(k) Boost vs Taxable |
|---|---|---|---|---|
10% | 4.25% | 14.25% | $0.86 | +17% |
12% | 4.25% | 16.25% | $0.84 | +19% |
22% | 4.25% | 26.25% | $0.74 | +36% |
24% | 4.25% | 28.25% | $0.72 | +39% |
32% | 4.25% | 36.25% | $0.64 | +57% |
The higher your marginal tax rate, the more powerful pre-tax investing becomes.
Important (But Honest) Note
Yes — you’ll pay taxes when you withdraw from a traditional 401(k) in retirement.
But many people withdraw at lower tax rates than during their peak earning years. That creates a second advantage: potential tax-rate arbitrage on top of the upfront compounding boost.
Ending — Tie Back to the Bigger Theme
If you’re early in your career, it may feel like the best investments are “out there” somewhere — real estate deals, private businesses, special opportunities.
But one of the highest-return moves available to you might already be sitting inside your HR benefits portal.
Before you chase exotic returns, make sure you’re capturing the guaranteed compounding advantage of investing pre-tax income.
Sometimes the most powerful wealth-building tools aren’t exciting — they’re just mathematically unfair.
PS — If you increased your 401(k) contribution by just 1% of salary, would you even notice… and how much extra would that turn into over 20 years?
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