Though saving $1 million for retirement won't guarantee you financial security in your senior years, a nest egg of that size should be enough to allow you to approach them with confidence. Of course, building a $1 million 401(k) plan balance is easier said than done, but here are a few tips that will help you achieve that goal -- or perhaps even surpass it.
1. Start early
The more time you give your retirement savings to grow, the more wealth you're likely to end up with. It's really that simple. Imagine you contribute $300 a month to your 401(k), which may be doable even on an average salary. If you give yourself a 30-year savings window and your 401(k) investments deliver an average annualized 7% return -- a rate that's just below the stock market's average -- then you'll wind up with about $340,000.
Now, that is well shy of $1 million.
But watch what happens if you expand your savings window to 45 years. Assuming that same monthly contribution and return, you stand to retire with just over $1 million, and it's not just due to the additional $54,000 you'll end up putting in ($300 a month x 180 months). Rather, it will be a function of getting to enjoy compounding investment growth on that money for an additional decade and a half.
Of course, to save in a 401(k) over a period of 45 years generally would require a person to begin as soon as they get into the workforce. But if you're willing to make your long-term savings a priority, you may find that millionaire status at retirement is a goal within reach.
2. Always contribute enough to claim your full employer match
Getting free money in your 401(k) is a good way to help your wealth increase. To that end, always contribute at least enough of your paycheck to snag your employer match in full. Consider this scenario: If your employer contributes $1,500 a year to your 401(k) over 45 years, assuming the 7% annualized rate of return we used earlier, those extra matching dollars alone could add about $429,000 to your total balance.
3. Invest aggressively
Playing it too safe with your 401(k) could cost you. If you want a shot at that 7% average annualized return we keep referencing, you'll need to load up on stocks. Now you won't find individual stocks in a 401(k), so you'll need to choose funds that are stock-based.
But to highlight the difference between a stock-heavy strategy and a more conservative one, if you were to go the latter route, your 401(k) might be less volatile in the short term, but in the long term, deliver only a 4% average yearly return instead of 7%. Apply that to our example above in which you contribute $300 a month for 45 years, and you would accrue an ending balance of about $436,000 -- well shy of the just over $1 million you'd end up with by sticking largely to stock funds.
4. Avoid paying excessive fees
The mutual funds and exchange-traded funds you hold in your 401(k) will come with a number of annual fees. The combined cost of those fees is a measure called the expense ratio -- simply, the total percentage of the money you have in the fund that its managers extract in fees each year.
Because those costs will eat away at your returns, it's in your best interest to keep those fees to a minimum, and that generally means favoring index funds over actively managed mutual funds.
Index funds (as the name implies) track the performance of the market indexes they're tied to, whereas actively managed mutual funds aim to beat those benchmarks with strategic maneuvering. But more often than not, they don't. Actively managed funds -- which are run by fund managers who are highly paid (with your fee dollars) for their expertise -- are usually outperformed by index funds with lower expense ratios.
Now, this isn't to say that you won't do well with some actively managed mutual funds in your 401(k). The point, however, is that if you want to retire with $1 million, you should be careful about the fees you pay along the way. So before you pick which funds you want to invest in, check their expense ratios as well as their historic rates of return.
The strategies listed here can't guarantee you'll have a seven-figure nest egg by the time your career comes to an end. But with some sacrifice, careful planning, a clear eye on your goal, and commitment to steadily work toward it, the status of 401(k) millionaire could well be in your future.