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How to Go From Broke to $1 Million in Only 20 Years

By Chuck Saletta – Oct 14, 2020 at 12:01PM

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You just might be able to make that work by taking advantage of your 401(k).

One million dollars is still a lot of money. As crazy as it may seem if you don't have anything saved at the moment, you may have a path to reaching a net worth that high within the next two decades. In fact, getting there could be more straightforward than you realize.

If you've got a decent 401(k) or similar employer-sponsored retirement plan at work, that plan may be the key for how you can go from broke to having $1 million in assets in only 20 years. That's because qualified employer-sponsored retirement plans like 401(k)s have many key features that make them great tools to use to build a decent nest egg for your future.

Smiling man with lots of cash and a piggy bank

Image source: Getty Images.

How 401(k) investing can get you there

If you invest $1,500 per month and earn 9% annualized returns on that money, in 20 years, it will grow to be just over $1 million. Over the long haul, the market has delivered returns around that level. While there are no guarantees that the market's future performance will match its past, history suggests returns around that level can be feasible.

From a funding perspective, $1,500 per month works out to $18,000 per year, which is below the $19,500 limit that most individuals under 50 can contribute to their 401(k) plans in 2020. That makes the $1,500 monthly contribution amount achievable entirely within a 401(k), with no investments needed outside of that plan.

Additionally, money inside a 401(k) plan compounds tax-deferred, meaning there will generally be no taxes on any gains or dividends seen by investments while they're held within that plan. That removes a major source of potential friction that could otherwise get in the way of your money compounding efficiently on your behalf.

It could cost you far less than that $1,500 per month

Boss handing employee an envelope

Image source: Getty Images.

Although that $1,500 per month may be the target total that needs to be invested on your behalf to hit that trajectory, chances are that you don't have to come up with all of it on your own. Your boss, Uncle Sam, and your state may be willing to help share the burden.

Your boss may kick in a matching contribution. A common 401(k) match is 50% of your contribution, up to 6% of your salary. Say you make $50,000 a year and get a match like that. If you contribute 6% of your salary -- or $3,000 -- your boss will throw in another $1,500, for a total contribution on your behalf of $4,500. You can typically contribute above that matching cap, which you'd likely have to do if you're looking for the chance to reach millionaire status within 20 years.

Uncle Sam gives you a choice -- as long as your employer offers both options -- between a traditional 401(k) and a Roth 401(k). In the traditional plan, you get a tax deduction for contributing your money, but pay taxes upon withdrawal. That means the money you contribute will have less of an impact on your otherwise spendable take-home income. For instance, if you're in the 22% federal tax bracket, every $1,000 you contribute would only feel like $780 out of your pocket after considering federal taxes.

Your state may also offer you the opportunity to deduct your contributions to a traditional 401(k). If you're in a 5% state tax bracket, then that's potentially another $50 improvement to the impact to your pocket for every $1,000 you contribute to your plan.

Between your boss, Uncle Sam, and your state, you could get significant help in your quest to build that $1 million nest egg, which would make it more achievable than you might otherwise believe. Do note, though, that should you choose to contribute to the Roth style 401(k) instead of the traditional one, the tax treatment is different. In the Roth plan, money gets contributed after tax, but it can be withdrawn at a standard retirement age completely free from taxes.

Can't get there all at once? Make progress anyway!

Of course, going from $0 to $1,500 per month in contributions is a pretty steep hill to climb. If you can't get there all at once -- even with that available help -- any amount you can contribute still gets you closer to your goal. It may add time to your journey to $1 million, but even slower progress forward beats no progress forward.

Every dollar you contribute can still start working on your behalf, helping you build toward that million-dollar nest egg. If the gap between your income and your outgo improves over time, you can continue to increase your contributions until you're on track with where you need to be. So get started now, and celebrate that important first step on your journey to a more comfortable financial future.

Chuck Saletta has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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