How do you become a 401(k) millionaire?

Senior Asian couple

The number of 401(k) and IRA millionaires hit an all-time high in the first quarter of 2021, according to Fidelity Investments. Retirement account balances have been steadily recovering in the year since COVID first emerged, even surpassing pre-pandemic levels. Today, more than 365,000 Fidelity investors have 7-digit 401(k) balances, along with more than 307,600 IRA millionaires. A well-funded retirement account can provide you with the financial security you need after your career ends. But to become a 401(k) millionaire, there are several steps you need to follow.

A Financial Advisor can help you manage your 401(k) to maximize your investment returns.

There are 10 important steps a 401(k) investor must take to maximize his or her chance of retiring as a 401(k) millionaire. Of course, there is no guarantee that you will become a millionaire by following these steps, but it is unlikely that you will reach such a level without making some of the following moves.

Start early

One of the most important factors for your retirement account — or any investment for that matter — is time. The sooner you start contributing to your 401(k) savings account, the longer your money has to grow and the greater your returns can be link (or multiply).

By starting retirement savings as early as possible, you increase your chances of becoming a 401(k) millionaire and successfully fund your future. But what if you start late with your retirement savings? Do you still have a chance to reach your goal?

The answer to that depends in part on how much you save each year from this point on and how your retirement savings are invested. However, starting today is still better than starting tomorrow (or a year from now), especially if you can save as aggressively as possible now.

Calculate what you need

Saving a million dollars for retirement is an exciting goal to set… but is it the right goal to fund the future lifestyle you have in mind?

Chances are, your current spending habits and budget are different from those of your co-workers, your best friend, and even your siblings. Your retirement plans probably differ as well. Some people plan to retire debt free , for example, spending their years gardening and visiting the grandchildren. Others want to finally travel the world in retirement or buy their dream beachfront home.

It’s important that you spend some time deciding what you want your retirement to look like and how much that lifestyle will realistically cost.

In some cases, you may not even need a million dollars, especially if you have other assets to pull from. However, for others, having a million dollars in a 401(k) isn’t enough to last. Set your retirement savings goals accordingly, to properly fund the future you are looking at.

Contribute regularly

A major benefit of a workplace sponsored 401(k) is that your contributions can be automated. Your employer can take the money from your paycheck before the down payment is ever in your account so that you “pay yourself first” each month and achieve your goals.

However, in some cases, your retirement savings may not be automated. For example, if you are a small business owner, you may need a SIMPLE 401(k) or a 401(k) only. In that case, you are responsible for setting up your own contributions and achieving your own savings goals.

Whatever retirement savings you choose, make sure you contribute regularly and consistently.

Invest maximum

The more you save today, the more your retirement savings will grow and the better your chances of achieving your goals. Whether you want to become a 401(k) millionaire, you aspire to early retirement, or just want to be financially independent, and save the maximum you can afford each month, you will get there.

The IRS limits the amount you can save in your 401(k) each year; for 2021, this limit is $19,500 (if you are over 50, you can deposit an additional $6,500 as a catch-up fee). If your budget allows, try to maximize your contributions to increase your chances of savings.

If $19,500 per year isn’t feasible for you, just invest the maximum you can afford. Strive for save at least 10% to 15% of your income, and watch your balance grow.

Benefit from an employer match

Older African American couple in a country club

Older African American couple in a country club

A employer match on your retirement contributions is an excellent way to increase your savings efforts. This is essentially free money, and you should avoid leaving it on the table if at all possible. If your employer offers to match a portion of your contribution to your retirement savings, make sure you deposit at least enough to maximize this match. The maximum is usually a percentage of your salary (often between 3% and 5%).

Also keep in mind that the funds “established.” This means that you will only get the full match amount if you stay with your employer for a minimum amount of time; if you quit your job early waiting period ends, you will not get the full match.

Maximize your investment potential

Your employer may offer multiple investment options for your 401(k). If so, spend some time researching each option so you have the best chance of maximizing your returns.

To consider your risk tolerance and when you plan to retire. The further you are from retirement, the more risk you can afford and the higher your potential return. Also, be sure to weigh each fund option in terms of costs.

Limit your costs

Your 401(k) includes: various fees and charges, which will vary from plan to plan. While these costs may seem small (often a fraction of a percentage point), they can add up significantly over time.

The cost on your 401(k) is automatically deducted, so you may not even know how much your plan will cost you. However, every dollar you spend on retirement plan expenses is a dollar that cannot grow and can be compounded for your future. Do your best to balance the expected return with the subscription cost and consider switching plans if there is an opportunity to cut costs.

New job? Rollover funds

Each employer offers its own pension plans. When you change jobs, you may be offered a managed plan with your new employer, which may be better than the one currently holding your money.

You have three primary options for your existing 401(k) savings when you change jobs. You can:

  • leave it where it is (at your old employer)

  • transfer it to your new employer

  • roll the money in an IRA

If you have enough money in that 401(k) — usually $5,000 or more — most plans leave you alone, which can be a good decision if you get great returns there and are happy with the plan’s cost.

However, if you have less than $5,000, are not yet moving to a new job, or are otherwise unhappy with the plan’s management or fees, a rollover is a better idea.

The first route to consider is your money to a traditional IRA. This may be the best choice if your new employer doesn’t offer a 401(k), if you don’t have another employer, or if you just want more flexibility with your account options. IRAs are offered by almost every brokerage and offer you a variety of options for your money.

The second option is to roll your savings into your new employer’s 401(k). If they offer better funds or lower plan fees and expenses, it’s probably the best move.

Leave the money alone

Whether you’re trying to achieve 401(k) millionaire status or just want a successful retirement, there’s one important rule to keep in mind throughout your decades of saving: Don’t touch the money.

Whatever life throws at you, avoid the temptation to quit retirement accounts. Early admissions can not only derail your progress exponentially, but will also expose you to fines and fees. In most cases, it’s not worth the extra cost.

If an unexpected situation arises, consider the alternative options available before withdrawing from your retirement funds earlier. In many cases, a personal loan or home equity line of credit (HELOC) might as well meet your needs.

Don’t forget other retirement savingspar

While a 401(k) is the most popular retirement account option, it’s not the only one. Depending on your savings strategy and how much you need to save, consider spreading your retirement efforts across several savings options.

A traditional or Roth IRA can be another great option for retirement savings, especially if you’re already maximizing your 401(k) contributions. You can also choose to focus on a personal investment portfolio. There you can invest in funds that your employer does not offer or even in individual company stocks.

You can also use real estate investments – such as rental properties or REITs – to strengthen your pension cash flow. They won’t have the same tax benefits as 401(k)s or IRAs, but can be a great addition to any well-funded retirement strategy.

It comes down to

Retired couple in their own private jet

Retired couple in their own private jet

Saving for retirement is a decades-long journey, whether you’re aiming for a seven-figure balance or comfortable security. Of course, there is no guarantee that following these 10 steps will make you a 401(k) millionaire. But by following them, you will increase your chances of achieving your retirement goals and feel financially secure after you retire.

Tips for Retiring

  • Consider working with a financial advisor to maximize the return on your tax-advantaged accounts. Finding a financial advisor doesn’t have to be difficult. The SmartAsset matching tool can put you in touch with several financial advisors near you in minutes at no cost. When you’re done, start now.

  • If your investments are profitable, you may owe capital gains tax. Find out how much you pay when you sell your property with our capital gains tax calculator.

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