Building a million-dollar retirement fund is a lofty goal, but as costs continue to surge, it's a realistic target for many people. The average worker expects to need around $1.8 million to retire, according to a 2023 survey from Charles Schwab, so it's wise to start maximizing your savings now.
While there's no easy way to make a lot of money quickly, the right strategy can make reaching $1 million far more attainable. If your goal is to become a 401(k) millionaire, there are three secrets to help you get there.
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1. Time is your best friend
Time is your most valuable resource when saving for retirement. Thanks to compound earnings, your money will grow exponentially faster the longer it has to build. The more time you have to save, the less you'll need to contribute each month to reach your $1 million goal.
For example, say you're earning a modest 8% average annual return on your investments, and you have a target of $1 million by retirement age. Here's approximately how much you'd need to contribute each month depending on how many years you have to save:
| Number of Years | Amount Invested per Month | Total Portfolio Value |
|---|---|---|
| 20 | $1,900 | $1.043 million |
| 25 | $1,200 | $1.053 million |
| 30 | $750 | $1.020 million |
| 35 | $500 | $1.034 million |
| 40 | $350 | $1.088 million |
Data source: Author's calculations via investor.gov.
Even if you can't afford to save hundreds of dollars per month right now, contributing whatever you can is still better than putting it off. The longer you wait, the harder it will be to catch up later.
2. Avoid tapping your savings if at all possible
It's possible to pull money from your 401(k) through a withdrawal or a loan. Withdrawing your savings is more damaging, as you'll often incur taxes and penalties if you're under age 59 1/2. But even if you borrow from your 401(k), that could make it harder to reach $1 million.
For instance, say you currently have a balance of $100,000 in your 401(k), and you're contributing $300 per month. In one scenario, say you take a loan of $5,000, while still contributing $300 monthly. In another scenario, say you avoid the loan entirely and continue saving at your normal rate.
Assuming you're earning an 8% average annual return on your investments, here's approximately how your savings would add up over time in both scenarios:
| Number of Years | Total Savings (With $5,000 Loan) | Total Savings (Without $5,000 Loan) |
|---|---|---|
| 0 (Today) | $95,000 | $100,000 |
| 10 | $257,000 | $268,000 |
| 15 | $399,000 | $415,000 |
| 20 | $608,000 | $631,000 |
| 25 | $914,000 | $948,000 |
Data source: Author's calculations via investor.gov.
In other words, that single $5,000 loan -- even if you paid it back quickly -- could ultimately cost you roughly $34,000 in missed potential earnings over 25 years. If you end up making repeated withdrawals, it could cost you even more.
Of course, sometimes emergencies happen, and you can't always avoid tapping your savings. But if at all possible, it's best to pull from an emergency fund so that you can leave your 401(k) untouched.
3. Take full advantage of the employer match
Some 401(k) plans offer matching contributions from the employer, where a company will match a worker's contributions up to a certain limit. If your plan offers this perk, it's wise to take full advantage of it. The employer match is essentially free money, and you could instantly double your savings with next to no effort.
The average match is 3.5% of a worker's wages, according to data from the U.S. Bureau of Labor Statistics. If you're earning, say, $60,000 per year, that amounts $2,100 per year in matching contributions. That may not sound like much, but at an 8% average annual return, $2,100 per year would add up to around $238,000 over 30 years -- and that's not even including your own contributions.
Also, most workers tend to see their wages increase over time. Because many 401(k) plans offer the employer match as a percentage of a worker's salary, the more you earn, the more you can receive from your employer.
Retiring a millionaire isn't necessarily easy, but it's possible with the right strategy. By getting started early and contributing consistently, you'll be on your way to building a nest egg worth $1 million or more.
