I'm sure this question has been asked before but I can't seem to wrap my head around the answer.
A lot of popular personal finance advice - such as this Reddit post / flowchart on how to prioritize spending your money -
https://www.reddit.com/r/personalfinance/comments/4gdlu9/how_to_prioritize_spending_your_money_a_flowchart/ - recommends contributing to an employer-matched 401(k) and maxing out a Roth or Traditional IRA before accumulating savings outside of tax-advantaged accounts. I understand that the 401(k) employer match is basically free money and it rarely doesn't make sense to take it.
This all sounds well and good if you are planning to retire at 59 - but if you are planning to retire any earlier (say, at 40) and a significant portion of your funds are in these accounts, you will not be allowed to make withdrawals without paying a stiff penalty.
Let's say I'm 22 years old and choose to contribute $6,000 to my IRA and $4,000 to my 401(k) each year for the next 18 years. Let's also say my employer matches 401(k) contributions at 25%, so my annual retirement savings would be: $6000 + $4000 + $1000 = $11,000.
After contributing for 18 years at 7% annual interest, this amount would grow into roughly $382,319.85. However, I would not be allowed to start withdrawing without penalty until I turn 59 - 19 years later - at which point my nest egg would grow to $1,382,670.26 assuming I "retired" at 40 and didn't make any more retirement contributions.
If I didn't commit the $10,000/year to retirement accounts, I would have an extra $ 347,563.50 (less taxes) of liquid funds to help me retire at 40. If I didn't touch this money for the next 19 years and let it continue to grow at 7% without contributions, I would end up with $1,256,972.97 before taxes at age 59 - still probably around $1m after taxes without using retirement accounts at all.
I get that not using retirement accounts could mean paying an extra ~$250k in taxes over the next 37 years. I think where I'm getting stuck is that $250k will probably be a much smaller fraction of my overall net worth when I'm 59 compared to ~$300k when I'm 40.
For those of you who made it post-FIRE - did you contribute to your retirement accounts in your 20s knowing you wanted to retire early? How did you save enough money to retire young if you also contributed aggressively to your 401(k) and IRA? I'm curious to know if you were able to put money aside for the long-term while also saving for an aggressive medium-term goal.