Becoming a millionaire is right up there with owning a home as part of the American dream. Unfortunately, it's a dream too few people realize. Less than 9% of Americans have a net worth of at least $1 million.
However, if you wish to join the ranks of those millionaire Americans, a retirement account such as a 401(k) plan can be the most straightforward path to success. Getting there boils down to leaning on a few open secrets that can help you end up with a nest egg big enough to enjoy truly golden retirement years.
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1. Millionaires live on less than they make
While the above picture might look like what being a millionaire is like, it's often not reality. Most millionaires featured in the media are celebrities and athletes who make so much money they have the disposable income to flaunt jewelry, sports cars, and yachts. But most millionaires in America are everyday people who lived modestly and invested their way to a high net worth.
That means you need to live on less than you make and invest the difference to make real financial progress in life. So before you spend big on that new car with more options and features than you can shake a stick at, consider what you truly need. It's usually far less than your impulses tell you.
2. They start early
At the end of the day, investing is simple math. The more you make the numbers work for you, the better you'll do, and starting early is how you do that when it comes to compounding. You've probably read or heard how powerful compounding is, but it's usually better appreciated once you see it work.
Suppose you start investing in a 401(k) on your 30th birthday. You make $75,000 and contribute 5% of your gross salary each year to your 401(k) (contributions that are tax-deferred). Averaging 8% annual returns -- and assuming zero change to your salary or savings rate -- you'd still have $1 million by age 67.
Now, leave everything the same, but wait just five years meaning you start contributing to your 401(k) on your 35th birthday. At 67, your account would have just $655,000. In other words, waiting only five years (or $18,750 in contributions) to start costs you $345,000. The lesson? Get started!
3. They take the free money
Most employers offer a 401(k) company match to help you save for retirement. A match is money your employer will also contribute to your 401(k) up to a stated amount, usually a percentage of your salary. So in the example above, a one-to-one match on 5% of your salary would mean your employer is kicking in $3,750 of their own each year. The catch is that you only get the match if you contribute.
Think of this as free money because it guarantees you a 100% return on every dollar you put in -- before factoring in any investment growth. In the example above, this match would double your retirement nest egg in both scenarios without any additional effort or money on your part.
4. They have discipline
Retirement plans like a 401(k) are named that way for a reason. You're not supposed to touch them until you're retired. That said, you can withdraw from your 401(k) early or take loans against your savings. This is almost always a bad idea. If you withdraw early, you're going to face a 10% penalty plus taxes on the amount you take out.
There are rules in place that save you from the penalty if the withdrawals are made in certain situations, like to pay medical bills or during financial hardship. However, even if you don't get penalized, you're still hurting your progress by interrupting the compounding process. Try your hardest not to touch that money.
5. They accept some risk
Lastly, you need to invest your money so it grows. Most 401(k) plans offer a menu of investment options suited for varying goals and risk appetites. Even if you're averse to potential losses, try to avoid being overly conservative. If you're 30 and putting all your money into income-only funds, you're cutting your future self short.
The stock market, represented here by the S&P 500, frequently goes up and down. That's normal. You can see below just how volatile the market can be.
Data by YCharts.
But look below, and you can also see that it's always recovered to reach new heights when given enough time. Remember the S&P 500 represents the largest U.S. companies that make up a massive part of the economy. The stock market is set to climb higher long term as humankind continues making progress and achieving economic growth.
Data by YCharts.
Follow these steps year after year, and you give yourself the best shot at becoming a millionaire.
