Early retirement can be a dream come true, but it's also an expensive goal. The earlier you retire, the more you'll need in savings to live comfortably -- and the less time you'll have to prepare.
Retirement could easily cost at least $1 million, especially if you plan to retire early at age 60. While it's not easy to become a millionaire at a relatively young age, it is possible. And the good news is that you don't need to be an expert investor to achieve this goal. All you need is a 401(k) and the right strategy.
The 401(k) is a powerful investing tool, and there are a few ways to maximize it so that you can reach millionaire status.
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1. Earn the full employer match
Employer matching contributions are one of the biggest advantages of investing in a 401(k) over an IRA or other type of retirement account. Matching contributions are basically free money, so it's wise to make sure you're contributing enough to earn the full amount you're entitled to receive.
While matching contributions may not seem significant, they can add up over time. The average 401(k) match is 3.5% of a worker's wages, according to data from the Bureau of Labor Statistics. In addition, the median salary in the U.S. is around $48,000 per year. If you're earning $48,000 per year and your employer will match 3.5% of that, that amounts to $1,680 per year in matching contributions.
Say you're receiving $1,680 per year in matching contributions. If you're earning, say, an 8% average annual return on your investments, that $1,680 per year can amount to nearly $290,000 over 35 years -- and that's not even including your own 401(k) contributions.
2. Max out your contributions
In 2021, the maximum amount you can contribute to your 401(k) is $19,500 per year (plus an additional $6,500 per year for those age 50 or older). If you can afford it, maxing out your 401(k) contributions can put you on the fast track to becoming a millionaire.
Say you're investing $19,500 per year in your 401(k). That comes out to around $1,625 per month. If you're earning a modest 8% average annual rate of return on your investments, you'd reach $1 million in savings within roughly 22 years. In 30 years, you'd have more than $2.2 million accumulated.
If you're aiming to retire by age 60, your best bet is to ramp up your savings rate. The more you can sock away each month, the easier it will be to reach your goal.
3. Regularly increase your contribution rate
Not everyone can afford to max out their 401(k), and that's OK. But it's still important to try to increase the amount you're saving on a consistent basis.
You don't need to boost your savings significantly to see a major difference, either. In fact, according to research from Fidelity Investments, a 35-year-old earning $60,000 per year can save an additional $85,000 by age 67 simply by increasing his or her savings rate by just 1%.
Saving money is tough, but small changes can make it a little easier. By trying to save just a little more every month, you can gradually get closer to your goal. Over time, those small adjustments can make a bigger difference than you may think.
Retiring a millionaire isn't easy, and it's even more challenging if you plan to retire by age 60. It is possible, though. By making the most of your 401(k), you can give yourself the best chance of retiring a millionaire.
