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Want to Be a Millionaire By 55? Here's How Your 401(k) Can Get You There

By Selena Maranjian - Feb 25, 2021 at 6:22AM

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Amassing a million dollars may be much more achievable than you thought.

"What's keeping you from being rich? In most cases it's simply a lack of belief. In order to become rich, you must believe you can do it, and you must take the actions necessary to achieve your goal." -- Suze Orman 

Orman has a point there. Many of us just assume we can't build real wealth, and many leave our retirements up to chance, contributing some sums to 401(k) accounts and/or IRAs and hoping for the best. Don't be one of those people. Here's how you can amass a hefty nest egg.

A suited man with a white beard and a cigar is in a leather chair.

Image source: Getty Images.

The three factors of wealth building

The key to amassing large (or small) sums of money through investing involves the interplay of three factors: How much you can invest regularly, how rapidly that money can grow, and how long it's left to grow. If any of those factors for you is very large, you can achieve millionairehood very easily:

  • If you're socking away, say, $500,000 per year, boom -- you may be a millionaire by year two.
  • If your money is growing at, say, 300% per year, voila -- even modest sums can total a million dollars in short order.
  • If your money can grow for 100 years, you can amass a million dollars despite modest regular contributions and a sluggish growth rate.

That won't work for most of us, though. So let's focus on what's a lot more possible for average people -- after a quick review of 401(k) accounts and how they can help you build wealth.

The ABCs of 401(k)s

Like IRAs, 401(k)s come in two flavors -- traditional and Roth. Traditional 401(k)s give you an upfront tax break, reducing your taxable income for the year of the contribution, while Roth 401(k)s offer tax-free withdrawals in retirement.

401(k) plans also sport generous contribution limits: $19,500 for 2021, plus an additional $6,500 for those 50 and older, totaling $26,000 for them. Contribution deadlines are Dec. 31 of each year.

One of the best features of 401(k)s is that they typically come with available matching funds from your employer. Be sure to at least contribute enough to your 401(k) account to max out any matching available -- as that's free money. A common match is 50% of your contributions, up to 6% of your salary -- meaning that if you earn, say, $60,000 per year and contribute $3,600 (6% of your salary) to your 401(k), your company would chip in an additional $1,800 in free money.

Getting to a million dollars

So how will your 401(k) get you to a million dollars? Well, for starters, you'll want to be investing effectively. If you leave all your contributions in a very conservative default investment, they just won't grow rapidly. For long-term money, it's generally best to have most, if not all, of your assets in stocks, and a low-fee broad-market index fund (such as one that tracks the S&P 500) will serve you best for that.

After that, focus on how much to invest each year (or month or quarter) -- which will depend partly on how much time you have before you want to retire and how much you can afford to sock away regularly. You might not be able to quite reach a million dollars, but you might come a lot closer than you ever thought possible.

The table below will give you a rough idea of what's possible, using an average annual growth rate of 8%. The stock market has averaged close to 10% over very long periods, but you can't assume it will do so over your own investing time frame.

Growing at 8% for

$12,000 invested annually

$15,000 invested annually

$20,000 invested annually

5 years

$76,031

$95,039

$126,718

10 years

$187,746

$234,862

$312,910

15 years

$351,891

$439,864

$586,486

20 years

$593,075

$741,344

$988,458

25 years

$947,453

$1.2 million

$1.6 million

30 years

$1.5 million

$1.8 million

$2.4 million

Data source: Calculations by author.

So if you (perhaps with your spouse) can sock away $20,000 annually, you might achieve about a million dollars in your nest egg in only about 20 years -- or, if you can only save and invest $1,000 per month, it could take around 25 or more years. You might get there faster, though, if you're favored with rapid stock market growth, or if you can afford to save and invest even heftier sums each year. If you're 30 years old now, you have 25 years before you reach 55 -- and if you're willing to retire at 60 instead of a very early 55, you can start saving and investing in earnest as late as age 40, if you can invest about $20,000 annually. (Again, these examples assume an average annual growth rate of 8%.)

Whatever you do, just don't leave your retirement and your future financial security up to chance. Have a plan and stick with it. Have goals. Have strategies. You'll thank yourself for that later.

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