With the key question of whether to invest in a 401k retirement account or real estate, the choice is clear for most people just starting their careers. 401ks provide higher returns over the long run, lower costs, less hassle, and better diversification. With employer matches, tax advantages, easy access to investments, and historically higher returns than housing, prioritizing maxing out 401k contributions early on can set someone up for a comfortable retirement.
401k Returns Beat Housing Returns Historically
Based on historical data, the stock market represented by the S&P 500 has returned about 10% annually over the past 90 years. In comparison, national average housing price appreciation hovered around 3-4% annually over the similar long-term periods. So 401ks invested in stock index funds enjoy a significant performance advantage over housing.
401k Offers Employer Matching and Tax Benefits
Many employers offer to match employee 401k contributions up to 5% of salary or more. This equals an immediate 100% return on that matched portion. 401k balances also grow tax-deferred, meaning no taxes are paid until retirement, enabling faster compound growth over decades.
401ks Provide Passive Investing and Diversification
Simply having paycheck contributions automatically invested into low-cost index funds means hands-off investing without much work. And those index funds provide instant diversification across hundreds of stocks. Managing real estate investments takes significantly more effort and concentration in a single volatile asset.
Real Estate Has Higher Costs and Lower Liquidity
Owning investment real estate involves property taxes, maintenance, insurance, property management fees, closing costs from buying/selling, and major expenses when issues arise. And selling off pieces of property for cash is much more difficult than simply selling shares of index funds.
For early career individuals focused on retirement savings, contributing sufficiently to 401k accounts before considering other investments like real estate should be the top priority. Maxing out annual 401k contributions gives the best chance for building long-term wealth thanks to employer matching contributions, deferred tax benefits for compound growth, diversified passive investing in the stock market, and avoiding hassles and costs from direct real estate ownership.