When it comes to saving for retirement, there's one strategy that stands out as both amazingly simple and tremendously powerful. It's such a potent tool for your retirement plan that it might be enough to make you a millionaire by the time you retire all by itself.
Best of all, you can probably get set up with everything you need for success in under 15 minutes. And after that one-time, brief investment of your time, you could go years without thinking about it again while it's working on your behalf to build your nest egg.
That strategy? Sign up to contribute to your 401(k) and invest it in stock-based index funds for their long-term growth prospects. Once you see the balance build over time, you'll realize that it really is a ridiculously simple retirement savings hack that you'd wish you had known sooner.
Image source: Getty Images
Why it's so powerful
Your 401(k) has a lot going for it when it comes to helping you build wealth. First and foremost, your contributions come directly out of your paycheck. Once you set them up, they'll continue automatically without you having to think about them. When it comes to building wealth, making regular and consistent investments is one of the most important tools at most people's disposal.
Next, many employers offer a match. While those matches vary, a common one is 50% of your contribution, up to 6% of your salary. If you get a match, contributing enough into your plan to maximize that match is far and away the first investment you should make. This is because that money can compound just as well over time as the money you're directly investing, making the amount you sock away work even harder for you.
In addition, 401(k) plans have decently high annual limits, offering you the chance to make major progress toward your retirement savings goals. In 2023, people under age 50 can potentially invest as much as $22,500, while those age 50 and up can see that limit rise to $30,000. The more you sock away -- particularly early in your career -- the larger your nest egg can grow.
Finally, there are the tax benefits. 401(k) plans come in two types: traditional and Roth. In both kinds of plans, the money you invest grows tax-deferred while it stays in your account. The difference is in the way money is contributed and withdrawn from each plan, once you qualify.
With a traditional 401(k), you get an immediate tax deduction for contributing to the plan, but the money is treated like ordinary income when you withdraw it in retirement. With a Roth 401(k), you pay income taxes on the money before you contribute to the plan, but the qualifying withdrawals are completely tax-free in retirement.
That combination of factors is what make a typical 401(k) plan such a powerful tool for your retirement savings.
Why you should get started now
The table below shows how much you need to save each month to have a $1 million nest egg by the time you retire, depending on what rate of return you earn and how long you have until you get there. As you can see, the sooner you get started, the less you have to sock away each month to get to that goal. That holds true whether you earn returns in line with the market's long-term historical average (around 10%) or don't quite keep up with that pace.
|
Years to Go |
10% Annual Returns |
8% Annual Returns |
6% Annual Returns |
4% Annual Returns |
|---|---|---|---|---|
|
45 |
$95.40 |
$189.59 |
$362.85 |
$662.48 |
|
40 |
$158.13 |
$286.45 |
$502.14 |
$846.05 |
|
35 |
$263.39 |
$435.94 |
$701.90 |
$1,094.41 |
|
30 |
$442.38 |
$670.98 |
$995.51 |
$1,440.82 |
|
25 |
$753.67 |
$1,051.50 |
$1,443.01 |
$1,945.04 |
|
20 |
$1,316.88 |
$1,697.73 |
$2,164.31 |
$2,726.47 |
|
15 |
$2,412.72 |
$2,889.85 |
$3,438.57 |
$4,063.55 |
Table and calculations by author.
Put it all together -- the power of a 401(k) and the benefits of starting early -- and the case is clear. Contributing to your 401(k) is a ridiculously simple retirement savings hack.
The reality is that you'll never again have more time before you retire than you do right now. So if you haven't started contributing to your 401(k) yet, make today the day you fill out the forms at your job to make it a reality.
