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Millennials and Generation Z start investing now. It is too easy to justify not investing by saying that there is still time on your side. Your time is running out to become a self-made millionaire. Investing using tax-advantaged investing options is one of the best ways to become a millionaire in your lifetime.

This is week 8 of our 9-week Financial Challenge series. We recommend starting the series with our Week 1 article on Achieving Your Financial Bucket List and getting the free Financial Workbook to help on the path to financial independence.

Start saving for retirement using these tax-advantaged investing account - 401K and HSA. #savingforretirement #earlyretirement #401K #HSA #taxadvantagedinvesting
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Millennials and Generation Z are not investing

According to a Gallup poll, only 37% of those 35 years old and under own stocks. Ugh. These are the generations that talk about the FIRE movement, but most will end up working until their old. Let’s change that discussion.

Why is Investing in the Stock Market Important?

6-month US Treasury Bills are selling near 1.5% in 2020. The SP 500 index returned 9.39% in 2016, 19% in 2017, -5% in 2018, and 30% in 2019.

Exposure to the stock market makes sense if you want to have a higher rate of return.

Is there a risk? Of course…look at the 2018 return.

Let’s look at this from a simple math perspective. Assuming a 7% return on the stock market vs. 2.5% in a money market account (which would be a great money market account right now). Investing $5,200 to start and $5,200/per year for the next 10 years ($100/week) using compounding annually and monthly contributions.

The result is an additional $17K in your pocket.

See the math below.

YearsFuture Value (2.50%)Total Contributions
Year 0$5,200.00$5,200.00
Year 1$10,526.00$10,396.00
Year 2$15,985.15$15,592.00
Year 3$21,580.78$20,788.00
Year 4$27,316.30$25,984.00
Year 5$33,195.21$31,180.00
Year 6$39,221.09$36,376.00
Year 7$45,397.61$41,572.00
Year 8$51,728.55$46,768.00
Year 9$58,217.77$51,964.00
Year 10$64,869.21$57,160.00
YearsFuture Value (7.00%)Total Contributions
Year 0$5,200.00$5,200.00
Year 1$10,760.00$10,396.00
Year 2$16,709.20$15,592.00
Year 3$23,074.84$20,788.00
Year 4$29,886.08$25,984.00
Year 5$37,174.11$31,180.00
Year 6$44,972.30$36,376.00
Year 7$53,316.36$41,572.00
Year 8$62,244.50$46,768.00
Year 9$71,797.62$51,964.00
Year 10$82,019.45$57,160.00

This is the power of compounding and utilizing a higher rate of return.

Does it mean that you will need to save and invest significant money, particularly in your 20s? Yes, there is no way around. If you want to play around with a good compounding calculator, visit the US Securities and Exchange Commission site.

Why are tax-advantaged investing options more important than having a taxed portfolio? 

There is a certain allure of having your own portfolio that you completely control and operate with no penalty for early withdrawal, etc., but there is a heavy monetary loss associated with taxes. 

Let’s look at a simple example using the same parameters above for $5,200 saved yearly at 7% rate of return in a pre-tax investing vs. after-tax investing assuming a 25% tax rate.

We know from the above calculation that the pre-tax $5,200 will yield $82,019.45 after year 10. Applying a 25% tax rate upfront makes the annual contribution only $3,900/year.

The tax-account will have $61,556 after 10 years, a lost opportunity cost of over $20,000.

Keep your hard-earned money instead of giving it to the government and first use all the tax-advantaged investing options available. 

Using taxed money versus tax-protected money sets you back years in savings.

Pre-Tax Investing is Critical

Where to invest?   The best place to start is tax-advantaged investing options like a 401K or HSA. Why? Simple, it keeps more money in your pocket. There are other similar pre-tax efficient investing options, but we will focus on 401K and HSA.

Where do we start first?

  • The first assumption is that we will earn more money and pay a higher tax rate during our working years than in retirement.  If that sounds like a reasonable assumption, you will want to invest with pre-tax money (money that is not taxed now) before investing with after-tax money. 

  • We want to get all the compensation offered by our employer including starter money for your HSA and matching contribution to your 401K. 

Reasons Why the First Tax-Advantaged Retirement Investment is the Popular 401K

  • High Contribution Limits of Pre-tax Money
    • The contribution limit in 2020 is $19,500.  This is a pretty nice limit to allow you to sock away tons of money and the government won’t be able to tax it right now.
  • Company Match 
    • Most companies offer a company match for a certain dollar amount (or %) that an individual invests in their 401K.  Always invest enough to get the company match.  It is part of your compensation and you earned the money!
  • Caveats
    • All this goodness does come with strings attached.  There is no withdrawing this money without a penalty until you are 59.5 years old.   This is not the place for short-term savings.  This is investing for your retirement. Want to read more on starting a 401K? Consider reading Five Senses Living article on 401K for Beginners.
  • NEVER, EVER take out a 401K loan. 
    • It is a trap and it will cost you gobs of money in taxes and penalties.  Repeat again – No 401K loan.  If you take nothing else away from this article, take that sage advice. 
Picture of ocean and starfish with the writing "are you ready to retire early? Learn the smart way to invest" #taxadvantagedinvesting #investingforbeginners
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Second Retirement Investment Depends More on Your Situation

We will discuss the HSA as an option, but it is not for everyone. If the HSA is not offered by your company or your health is not great, there are good after tax-advantaged investing options like the popular Roth IRA to consider.

HSA (Health Savings Plan) Overview

  • It can only be funded if you have a high-deductible medical plan. 
    • Many companies will offer an annual contribution to help fund the plan as an incentive for choosing a high-deductible medical plan.
    • The program uses pre-tax money, grows tax-free, and can be withdrawn for medical purposes tax-free.  It is considered the trifecta in avoiding taxes.
    • So how does this fit into a retirement plan?
      • It can be withdrawn at 65 years old with no penalty and the money used for anything.
      • Early retirees can use the money to pay for insurance or medical expenses in those gap years.
      • There are some other tricks that can be used for those who are very creative and organized to pay out-of-pocket for medical and submit the receipts later when you need money.
    • The maximum contribution in 2019 is $3,500 for individuals and $7,000 for families.

Is an HSA a good option for you?

How is your health and how limiting is the high deductible plan at your company? 

  • If you are in poor health or expecting a large medical bill soon, this is not the savings avenue for you.  Remember to be eligible for an HSA, an individual must have a high deductible medical plan.
  • High deductible medical plans do not always equate to crappy coverage.  Some high deductible plan covers preventive care and preventive drugs, so not too bad. 

Are you planning to retire early and not have access to health care? 

  • This is the perfect reason to invest in an HSA as you will be able to tap these funds tax-free to pay for medical coverage.
  • Also, remember at 65, an individual can withdraw their HSA savings for anything with no penalty.  Yes, anything.  The reason does not need to be related to medical.

Again, the HSA is not for everyone. It is not a good option for those with significant health issues. However, if you are serious about retiring early, it is definitely something to consider.


There are a lot of tax-advantaged investing options to consider. If you would like to read more articles on tax-advantaged investing, visit the Whippersnapper Finance Pinterest Board.

If you are serious about achieving financial independence, participate in our 9 Week Financial Challenge series.

It is our blog’s goal is to provide meaningful savings, investing, and career insights to those who are serious about achieving financial independence.  Please feel free to search our website for more articles.

We always appreciate people sharing our articles and hearing back from our readers. Let us know how you are doing on your financial independence journey. You got this!

Good Luck, Whippersnapper Finance


How to become a self made millionaire from nothing to achieve financial independence #selfmademillionaire #financialindependence
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This website is for educational, entertainment and informational purposes only.  Please consult with your financial advisor to determine the best financial options for your unique situation.

Retain more of your hard-earned money by utilizing these 4 great tax-advantaged investing options. Let's achieve financial independence!
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