Becoming a retirement millionaire isn't easy, but as costs continue to soar, it's a realistic goal for many people. While it can be daunting, you don't have to be wealthy to retire rich -- as long as you have the right strategy.
The 401(k) can be an incredibly powerful tool, and if you have access to one, it's wise to take full advantage of it. Although there's no single correct way to save for retirement, there are three tips that can make it easier to build long-term wealth.
1. Small amounts will add up
If you don't have a lot to invest right now, it can be tempting to put off saving until you can afford to contribute more. But even small amounts can add up to more than you might think. In some cases, saving a little now could amount to more than if you were to save more per month later.
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For example, say you can afford to save $100 per month in your 401(k) now, and you're 35 years away from retirement. If you're earning a modest 8% average annual return on your investments, that would add up to around $207,000 after 35 years.
On the other hand, say you wait 10 years to begin saving, but at that point, you're able to contribute $200 per month. Assuming you're still earning an 8% average annual return, you'd have around $175,000 after 25 years. In other words, even though you've doubled your monthly contributions, you'd still have around $32,000 less than if you'd started saving earlier.
If you're aiming to become a retirement millionaire, time is your most valuable asset. You can always increase your savings later, but you won't get this time back.
2. Matching contributions can go a long way
One of the biggest advantages of saving in a 401(k) is the potential to earn employer matching contributions. Not all plans offer this perk, but if yours does, take full advantage of it. The employer match is essentially free money, and it could boost your savings by hundreds of thousands of dollars over time.
As of 2022, the median wage among U.S. adults is roughly $55,000 per year, according to data from the Bureau of Labor Statistics. Also, the average 401(k) employer match is 3.5% of a worker's salary, which amounts to $1,925 per year in this scenario.
If you're receiving $1,925 per year (or around $160 per month) in matching contributions while earning an 8% average annual return on your investments, here's approximately how that would add up over time:
| Number of Years | Total Savings |
|---|---|
| 20 | $88,000 |
| 25 | $140,000 |
| 30 | $218,000 |
| 35 | $331,000 |
| 40 | $497,000 |
Data source: Author's calculations via investor.gov.
Keep in mind, too, that these calculations only account for the employer match. Once you factor in your own contributions as well, you'd have at least double these amounts.
Also, most people experience wage increases over time. Because the 401(k) match is often a percentage of your salary, the more you're earning from your job, the more you can potentially earn in matching contributions.
3. Your savings will grow faster over time
It takes time to build a robust retirement fund, and if your savings are off to a slow start, that's normal. Thanks to compound growth, your investments will grow faster the more time they have to build.
With compound growth, you're earning returns on your entire account balance rather than just the amount you've contributed. The more your balance grows, the more you'll earn -- and the cycle continues. Once you've been investing for a couple of decades, your savings will grow exponentially.
Do your best, then, to avoid getting discouraged if you're not seeing significant growth at first. Keep saving consistently and stay focused on the long term.
Contributing to a 401(k) is a fantastic way to build long-term wealth, and it could even make you a retirement millionaire. By getting started saving now, taking advantage of perks like the employer match, and being patient as your money grows, you could earn more than you might think.
