If you're aiming to build a millionaire retirement, you have quite a few options to choose from. However, the 401(k) offers unique benefits that make it a bit easier to reach your goals. In fact, Fidelity recently reported a record number of 401(k) millionaires, with 485,000 customers having $1 million or more in their 401(k) accounts as of Q1 2024. If you work for a company that offers a compelling 401(k) plan, you may be in a good spot to start building your seven-figure portfolio.
Here are a few 401(k) millionaire secrets you might want to consider on your journey.
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1. They make the most of contributions
With a 401(k), your employer makes it easy to automate your savings since contributions are deducted from your paycheck before it hits your bank account. Your main tasks are to decide how much to contribute and choose your investments. Then, your employer takes care of the rest.
When it comes to 401(k) contributions, there's a limit to how much you can contribute each year. For 2024, the contribution cap for employees is $23,000, with an additional $7,500 catch-up contribution for those aged 50 and over. It's not necessary to contribute the maximum amount every year, but you should aim to save more than the bare minimum. Remember, the amount you accumulate in your 401(k) over the long term will largely depend on the percentage of your income you're able to save each year.
Another benefit of contributing to a 401(k) on a pre-tax basis is that your contributions lower your taxable income. So, if you're trying to save money on taxes, increasing your 401(k) contributions can help.
Let's say your salary is $100,000 in 2024, and you plan to increase your contributions to 15% of your income. By the end of the year, you would have contributed $15,000 to your 401(k), reducing your taxable income to $85,000.
2. They don't leave money on the table
One advantage that a 401(k) provides over an individual retirement account is the possibility of an employer match. This is essentially free money from your employer to help you beef up your retirement savings. However, you'll need to contribute a certain amount to your 401(k) to receive the full match your employer is willing to give you.
For example, an employer might offer to match 50% of employee contributions up to the first 6% of your salary. This means if you earn $100,000 a year and contribute 6% of your paycheck to your retirement plan, or $6,000, your employer would add another $3,000. That's extra money that goes straight into your retirement account. If you consistently take full advantage of your employer match over the next three or four decades and earn a decent stock market return, you'll have a strong chance of building a million-dollar 401(k) because you won't be doing all the saving on your own.
3. They are in it for the long-term
While you may have the option to withdraw money or take out a loan from your 401(k), doing so can hinder your chances of building a million-dollar retirement fund. 401(k) millionaires understand the importance of maintaining a long-term investment horizon, especially for retirement savings. The longer you can stay invested, even during market downturns, the more you can harness the power of compounding to your advantage. Even when headlines are filled with news about a stock market crash, 401(k) millionaires remain committed to their contributions.
Since you're investing for the long term, it's crucial that your investment choices align with this strategy. In a 401(k), you'll typically have options like target date funds and index funds. If you're a younger investor, say 30 years old, you might want to consider investing primarily in stocks to maximize growth potential. While stocks do come with more risk, having a longer time horizon allows you to recover from market fluctuations and potentially achieve greater returns.
Becoming a 401(k) millionaire won't happen overnight, so you'll need to be consistent, disciplined, and patient. If this is your goal, keep a close eye on your company's 401(k) plan and develop a strategy that works best for you. When your salary increases, consider upping your contributions. If your employer offers a match, make sure you're taking full advantage of it. Additionally, do your research to understand how fees work and review your investment selections regularly.
Even if you change jobs or the economy faces downturns, stay committed to your investments. By staying focused and tuning out the noise, you'll get closer to achieving your 401(k) goals.
