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Want a Million-Dollar 401(k)? Here’s How to Get It

By Matthew Frankel, CFP® - Oct 28, 2017 at 6:47AM

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How much do you need to save, and how should you invest your money?

The average American's 401(k) balance is $92,500, which is by no means enough to support a comfortable retirement. The most common answer given by 401(k) participants when asked "how much will you need for retirement?" is $1 million, which isn't a one-size-fits-all ideal number, but is certainly better than the average.

With that in mind, if you're one of the many Americans who dreams of retiring with a million-dollar 401(k), here's a quick guide on how to get it.

Person putting a quarter into piggy bank, in front of chalkboard with 401k written on it.

Image Source: Getty Images.

What returns should you expect from your 401(k)?

As I've written before, returns on stocks and bonds can be quite volatile over short periods of time. However, over the long run, returns on these investments are remarkably predictable.

Over the long run, stock-based funds tend to average 9%-10% annualized returns, while bond funds tend to average 4%-5%. For a properly allocated 401(k) -- more on that later -- it's reasonable to expect returns in the 7% ballpark over a period of a few decades.

How much do you need to save to reach $1 million?

There are four main factors that determine how much your 401(k) will be worth when you're ready to retire: the time until you retire, how much your 401(k) is worth now, the returns generated by your investments, and the amount of money you contribute to your account. Of these factors, the only one that you can control is the amount of money you contribute.

Assuming a 7% average annual investment return, the chart below can tell you how much you'll need to contribute to your 401(k) each month in order to give yourself a good chance of ending with a million-dollar balance, based on certain time frames and current 401(k) balances.

Time until retirement

$0 Current Balance

$100,000 Balance

$250,000 Balance

5 Years

$14,490

$13,042

$10,868

10 Years

$6,031

$5,428

$4,523

15 Years

$3,316

$2,984

$2,487

20 Years

$2,033

$1,830

$1,525

25 Years

$1,318

$1,186

$989

30 Years

$882

$794

$662

35 Years

$603

$543

$452

40 Years

$417

$375

$313

Data Source: Author's own calculations.

How to allocate your 401(k) investments

Your ideal asset allocation depends on a few things, specifically your risk tolerance and your age. One good rule of thumb is to subtract your age from 110 to determine the percentage of your 401(k) assets that belong in stock-based funds, with the rest allocated to bond funds. Then, adjust this allocation to fit your particular risk tolerance.

As an example, I'm 35, so this implies that 75% of my assets should be in stocks, with 25% in bonds. I consider myself to have a slightly higher-than-average risk tolerance, so my actual allocation is closer to 80%/20%.

In addition, not all 401(k) funds are equal. Many 401(k) plans offer a dozen or more stock funds and a wide selection of bond funds. The best 401(k) funds for you are those that achieve your ideal allocation, diversify your holdings, and have the lowest possible fees.

Will $1 million be enough?

Here's the million-dollar question (pun intended): Will $1 million be enough to provide the income you need throughout your entire retirement, even if you live until 90 years old, or even longer?

The answer may surprise you. Many experts suggest that, at most, you can expect to safely withdraw 4% of your retirement assets during your first year of retirement, increasing this amount annually to compensate for rising costs of living, without being in danger of running out of money. This means that a million-dollar 401(k) should generate $40,000 per year. When combined with Social Security, will this be enough?

Also consider inflation. Forty-thousand dollars per year today is not what $40,000 will be worth when you retire. Historically, inflation rates have averaged about 3%, so this means that if you retire in 30 years, $40,000 in annual income could be expected to have just $16,537 in today's purchasing power.

To be clear, if both you and your spouse retire with well-funded 401(k)s and both have decent Social Security benefits, this can certainly be enough for many people. The point is that, before you decide how much you should be saving for retirement, you first need to determine your (inflation-adjusted) retirement number.

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