Want to retire a millionaire? Investing in your 401(k) account could be the best and easiest approach to get there. That's because a 401(k) offers some significant advantages other accounts don't -- including the ability to invest with pre-tax dollars as well as the chance to earn an employer match if your company offers one.
So, how can you ensure your 401(k) makes you a millionaire by age 62 (one of the most popular ages to retire). Here are the steps you need to take.
1. Set a monthly investment goal based on your age
If you want to become a millionaire by retirement, you need to put enough money into your 401(k) to do that. How much is enough? It depends on your age when you start investing.
If you begin making 401(k) contributions at the age of 20 and make them consistently for 42 years, investing a little over $230 per month would make you a millionaire by your target date (assuming an 8% average annual rate of return). But if you don't start contributing until 55, you'd need to put around $8,500 per month aside to become a millionaire on schedule.
There are lots of retirement calculators you can find online that will tell you how much you need to invest to save $1 million by 62 depending on how old you are now. Find one and figure out what your monthly goal should be.
2. Find out about your employer's matching rules
Many employees with 401(k) plans are entitled to an employer match. That means the company you work for makes contributions when you do. The rules for how this works vary. For example, some employers will match 50% of contributions up to a certain percentage of your salary, while others will match 100%.
If your employer match vests immediately -- which means the money is yours to keep as soon as your employer deposits it -- you can factor that amount in when determining how much you personally need to invest each month.
However, in some cases, the money doesn't immediately vest. If that's the case, you can't necessarily count on getting to keep the money because there's always a chance you'll have to leave before your employer's contributions become yours permanently. You may want to increase your own savings goals in these circumstances so you don't end up with a shortfall if it turns out you don't end up vesting.
3. Set up automatic contributions
It's generally pretty easy to sign up to have contributions taken directly out of your paycheck and put into your 401(k). Talk to your plan administrator or the HR department at your company to find out how to do that.
In most cases, contributions are made as a percentage of your income (such as 10%). This can be better than setting a lump sum amount because your contributions will automatically go up as your income does. But you want to make sure, whatever percent of your income you're contributing, that the dollar amount is enough to hit a $1 million target by your desired age of 62 (you should have figured out what that amount is in step 1).
4. Invest wisely
Most 401(k) accounts provide a limited pool of investment options -- usually consisting of index funds. Research the options carefully to make sure you're choosing investments with minimal fees that are appropriate to your life stage.
As you get older, you'll want to make your portfolio more conservative. But don't start out too overcautious and put too little of your money into the stock market, or becoming a millionaire will become really difficult.
If you contribute enough money, take advantage of your employer match, and make smart investment choices, it's very likely your 401(k) can make you a millionaire -- especially as the contributions you make are made with pre-tax dollars, so the government is essentially subsidizing your efforts to save.