You don't have to be some sort of investing genius to retire with $1 million to your name. If you consistently invest in the stock market over a long time, you can easily find yourself with a sizable nest egg by the time you hit retirement age.
And the simplest, most realistic path to reaching that million-dollar retirement goal is by contributing to your employer's 401(k) plan.
Why a 401(k)?
81% of full-time W-2 employees have access to an employer-sponsored retirement plan, according to data from the U.S. Census Bureau. Meanwhile, fewer than half of employees contribute.
If you're in the majority of employees not participating, consider that a 401(k) account can be one of the simplest and easiest ways to set yourself on a path toward $1 million.
It has several important benefits that can fast-track your savings account growth:
- Employer contributions. Many employers offer a matching contribution -- either dollar-for-dollar or $0.50 on the dollar -- up to a certain percentage of employee compensation. Typically, employees can earn a 3% or 4% bonus just for saving for retirement.
- Tax-advantaged savings. Contributions to a traditional 401(k) are not included in your taxable wages in the year they're made. You can defer taxes until you withdraw funds in retirement. That may allow you to save more money every year. Alternatively, you may be able to contribute to a Roth 401(k), which requires you to pay taxes now, but withdrawals are tax-free.
- High contribution limits. A 401(k) will let you contribute up to $20,500, and you can contribute an additional $6,500 in catch-up contributions if you're 50 years of age or older.
- Direct contributions from payroll. Your 401(k) contributions come out of your paycheck before you even see the money. This can be a psychological advantage and ease the friction of saving and funding an investment account. You may also be able to set up a program to save a slightly greater percentage of your paycheck in future years to slowly ease your way into greater retirement savings contributions over time.
Let's see how these advantages can help put you on a path to a million-dollar retirement.
Simply meet the match
If you've just started your first job in your early-to-mid 20s, you don't have to save a lot to get to a million dollars by retirement. If your employer offers a matching contribution of 3% of your salary, and you contribute 6% to your 401(k), a median earner can easily hit $1 million by retirement age without doing anything else.
Over a 40-year career, maxed-out employer contributions of 3% will total more than $50,000 for the median earner. More importantly, they'll add an expected value of about $325,000 to a 401(k) balance in that time, compounding at an average rate of 7% per year.
Granted, results are sure to deviate from expectations. A few good years in the market near the end of your career could send your portfolio balance well past $1 million. A few good years at the start of your career will have minimal impact.
Catch up quickly
If you're getting a late start, a 401(k) can also help you catch up quickly. Thanks to its high contribution limits, you can sock away a lot of money fast. If you don't start saving anything until age 50, for example, you may still be able to reach $1 million by the time you're ready to retire.
Maxing out the employee contribution of $20,500, plus the catch-up contribution of $6,500, plus an employer match of 3% every year starting in the year you turn 50 may be enough to get you to $1 million in retirement savings by the time you get to full retirement age at 67. That would be 18 years of maxed-out contributions.
The sequence of returns can have an even bigger impact on a compressed retirement savings timeline. That's why it's better to save over longer periods, as you're more likely to have built up substantial savings by the time strong market returns roll around. So, if you can save now, don't wait until you're about to turn 50 to start saving.