Question: Does anyone want to become a 401(k) millionaire? It’s easy and you don’t have to draw a lifeline and call your friends. Answer: Everyone.
What about the prey? Collecting a seven-figure nest egg is not that easy. Life happens. There are bills to pay. Groceries to buy. Children need to go to college, elderly parents need to be taken care of, and home improvements need to be made. In fact, 61% of Americans need to delay retirement due to life events (and lack of adequate savings), according to Goldman Sachs Asset Management’s just-released Retirement Research & Insights Report 2024. The answer is yes.
Become a 401(k) millionaire
Fortunately, 401(k) millionaires do exist. According to Fidelity Investment’s 2024 Q2 Retirement Analysis Report, there were 497,000 401(k) millionaires as of the end of June. So it turns out that with a little planning, a lot of savings, and a few bull markets along the way, it’s possible to join the billionaire’s club.
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Many workers believe that reaching the magical $1 million goal is virtually impossible. are they right?
“Is it impossible? Or is it difficult? Yes, you’re right,” said Daniel Noonan, senior investment writer at Morningstar. “As with many things in life, the real answer is, it depends.”
So what does it take to turn all those payroll deductions and 401(k) contributions into a $1 million account balance decades later?
Noonan says the biggest factor is being disciplined and consistently saving. It may sound sexy, but it will help you grow your savings balance with every paycheck, every month, every year, and every decade.
But it’s also about mastering the key components of wealth. Just like a house needs a solid foundation, so too does a 401(k) saver investment plan. Here are some essential savings and investment tips to increase your chances of reaching your $1 million goal.
1. Invest early
The longer your money works for you while you sleep, the more likely you are to grow your wealth in a meaningful way. If there’s one thing that works in your favor, it’s compound interest, meaning you earn money on both your contributions and your previous gains. Therefore, the sooner you start saving, the better. A report from Goldman Sachs Asset Management found that delaying the start of saving, or at least a 10-year delay, is the biggest contributor to declining retirement account balances.
For example, if a 25-year-old who wants to retire at age 65 starts with zero balances, all he has to do to accumulate a 401(k) is $416 a month, or $5,000 a year, at a 7.5% annual rate. You can get a return of According to the Retirement Savings Calculator, your nest egg is $1,265,772.
In contrast, a 35-year-old who started with zero savings would need to save $833 a month at 7.5%, or $10,000 a year, to reach a balance of $1,129,437 at age 65. For your 401(k) to have $1,068,136 in savings by age 65, you would need to max out your 401(k) and save $1,917 a month, or $23,000 a year. Additionally, if a 401(k) plan participant starts saving at age 55, or just 10 years before retirement, they can save $455,126 with catch-up contributions of $2,542 per month, or You need to save $30,500 per year. If you’re over 50 and haven’t reached your savings goals, it’s important to take advantage of catch-up contributions.
It’s never too late to start saving and reach the $1 million milestone, but delaying your savings can make it more difficult.
“At 35, there’s still time,” Noonan says. “If you’re 45, you still have time, but it’s getting harder and harder. And when you’re 55, math becomes, frankly, very difficult.”
2. Invest as much as you can
There is only so much you can do with asset valuation and compounding when it comes to building wealth. Saving money is the key to turning a small nest egg into a big one. The goal is to save 15% of your paycheck, says Lindsay Theodore, a certified financial planner and senior manager of thought leadership at T. Rowe Price. To reach your goals, “it’s important to save aggressively,” says Theodore.
The key to saving more money is to spend less. More importantly, don’t rack up so many monthly bills that you drain your savings or go into debt. “The key is to manage your budget and be selective about the types of things you add to your fixed costs,” says Theodore. In fact, research from T. Rowe Price shows that if you cut your expenses to save $550 per month and invest that money at 7% annually, you could increase your savings by about $445,000 over 25 years.
It’s important to stay on top of your savings and see if you’re making enough profit to reach the $1 million endzone in a few years. T. Rowe Price provides salary-related savings benchmarks that can keep you on the right track. For example, it is recommended that you save 1 to 1.5 times your salary by age 35. The ratio of savings to salary increases with age. By age 45, you should be able to save 2.5 to 4 times your salary, but by age 55, your salary jumps to 4.5 to 8 times. According to T. Rowe Price, you should have between 7.5 and 13.5 times your salary saved in a 401(k) by the official retirement age of 65.
In fact, the amount you save can have a big impact on the final size of your nest egg. Let’s say you’re 35 and starting to save in a 401(k). Assuming a 7.5% annual return, contributing $5,000 per year would result in an estimated balance of $564,041 at age 65, well short of $1 million. But if you increase your savings to $10,000 a year, your 401(k) balance will grow to $1,129,437 by the time you retire. And if you max out your plan and contribute $23,000 a year, your balance will grow to $2,599,197.
As your career progresses and you earn more money, it’s important to run the numbers to see if your savings goals are within reach. “You’ll want to understand your current savings progress,” Theodore says, adding that you can also ask yourself or your financial advisor, “Are you on track with your current savings?” For example, if you want to retire earlier than age 65, you may need to increase your savings, Theodore says.
The good news is that diligent savers who save 15% of their paychecks are on the right track and have a chance of reaching the $1 million mark, Theodore added. “If you’re going to retire at 65, you have to be in good health,” Theodore says.
3. Choose stocks over bonds
Let’s move towards growth. That’s the advice from Morningstar’s Noonan. Stocks have historically returned 10% each year, which doubles your money approximately every seven years. In contrast, U.S. Treasuries return just over 5%.
“All 401(k) success comes over decades, and stocks are the ultimate compounding machine over that time,” Noonan said.
This doesn’t mean you shouldn’t have exposure to fixed-income assets such as bonds in your portfolio to provide stability, stability, and income during stock market fluctuations. Just don’t overdo it. “Don’t rely too much on bonds,” said Mike Dixon, head of research and quantitative strategy at Horizon Investments. “We would certainly caution against that because you could be left with a lot of money.” Dixon added that he also wanted to make sure the money could outpace inflation, increasing the purchasing power of the money. Masu.
Investing in different types of stocks provides an important layer of diversification, he adds. So invest in mutual funds that hold large and small U.S., international, and emerging market stocks.
“Different asset classes work at different times,” Noonan says. “Diversification gets you into the game.”
Playing too safe with your 401(k) investments can be just as risky as putting your 401(k) in a single stock, such as your own company stock.
“If you invest too conservatively in cash or other sources, you won’t get the returns you need,” Theodore says.
4. Let time heal.
By long-term investing, we mean long-term investing, such as saving for 20, 30, or 40 years, and letting compound interest do much of the complicated work is the final piece of the puzzle.
“If you get it out of the way, the formula will work,” Noonan says. “If enough time passes, you’ll be surprised by the results.”
A final piece of advice: Try to avoid mistakes that can reduce your 401(k) growth potential. According to Goldman Sachs Asset Management, the main factors that can deplete account balances include cashing out a 401(k) when changing jobs, receiving too low investment returns, and retiring early.
Other mistakes, Noonan said, include taking out loans with 401(k)s, not taking full advantage of company matching, and not increasing contributions when you get a raise. Don’t try to time the market or sell out in a panic.
“It’s absolutely possible to save $1 million in your 401(k),” Theodore said. “But it’s important to stress that investing is important. It’s important to be diverse. And it’s also very important to be disciplined and not sell out just because the market is a little volatile.”
