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3 Strategies 401(k) Investors Use to Make Millions

By Katie Brockman – Oct 4, 2020 at 10:45AM

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Dreaming of retiring a millionaire? Here's how.

The 401(k) millionaires club is one of the most exclusive clubs you can join. At the end of 2019, there were nearly 250,000 Americans with at least $1 million in their 401(k)s, according to Fidelity Investments.

Saving at least $1 million may sound like a lofty goal, but it's more achievable than you might think. To reach millionaire status by retirement, start with these three 401(k) strategies.

Young man holding hundred dollar bills in front of his face

Image source: Getty Images.

1. Contribute enough to earn the full employer match

Employer matching contributions are essentially free money, so it's wise to take full advantage of them. The average employer match is around 3.5% of a worker's salary, according to the Bureau of Labor Statistics, so if you're earning $50,000, that's $1,750 per year in free money.

An extra couple of thousand dollars per year in matching contributions may not sound like a lot when your goal is to save at least $1 million, but once you consider how compound interest works, that money is worth more than you think. If you invested just $1,750 per year for 40 years earning a 7% annual rate of return, you'd have nearly $350,000 saved -- and that's not even including your own contributions.

2. Take advantage of catch-up contributions

As of 2020, investors are able to contribute up to $19,500 per year to their 401(k)s. But if you're 50 or older, you're eligible for catch-up contributions, which enable you to save an additional $6,500 per year.

If you're falling behind on your savings but are determined to retire a millionaire, catch-up contributions can help you achieve that goal. Maxing out your 401(k) isn't easy, and it may not be feasible for everyone. But if you can swing it, contributing a whopping $26,000 per year to your 401(k) can help you save at least $1 million in a relatively short time.

3. Start saving as early as possible

Every investor should take advantage of this, no matter how much someone's trying to save. The earlier you start saving, the easier it is to build a robust retirement fund.

Say, for example, you want to save $1 million by 65, and you're earning a 7% annual rate of return on your investments. If you started saving at age 25, you'd need to contribute just over $400 per month to reach that goal. But if you'd waited until age 40 to begin saving, you'd have to contribute nearly $1,400 per month.

This isn't to say you can't achieve your savings goal if you're off to a late start. If you make financial sacrifices to put more money toward your retirement fund, you may be able to reach your target even if you haven't saved a dime yet. But starting as early as possible makes it much easier.

Retiring with at least $1 million in your 401(k) isn't easy, but it's not impossible. These three strategies can give you the best chance to join the 401(k) millionaires club.

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