Aiming to become a millionaire by retirement isn't a pipe dream for most people. It's actually quite an attainable goal, if you have a certain amount to invest regularly, a certain number of years before you retire (ideally a few decades), and can invest those dollars effectively.
Most of us are lucky enough to be able to save for retirement via an IRA account and/or a 401(k) account. IRAs are wonderful, with many benefits, but let's take a closer look at 401(k) accounts, because they may get you to millionairehood faster. (Note that most of us can, of course, save and invest via both.)
Image source: Getty Images.
401(k) basics
A key feature of 401(k) accounts is that they have generous contribution limits. In 2024, the contribution limit is $23,000 (up from $22,500 for 2023), plus an additional $7,500 "catch-up" contribution for those 50 or older. (The IRA contribution limit is a lot less: $7,000, plus a $1,000 catch-up contribution.)
These accounts are offered by employers. Once you set up your 401(k) account at your job, a certain portion of your paycheck will get automatically routed to your account. (This is a powerfully helpful feature for procrastinators.)
Another excellent feature of 401(k)s is that many employers offer matching contributions, adding extra dollars into your account along with your dollars. Aim to contribute enough to grab the maximum match, as it's free money.
Money in your 401(k) account grows in a tax-advantaged way. If it's a traditional IRA, you'll get an upfront tax break, as you can deduct your contribution each year from your taxable income. Later, when you're withdrawing money, it will count as taxable income. If you opt for a Roth 401(k) account (many employers offer these), there's no upfront taxbreak, but if you play by the rules, your future withdrawals can be tax-free!
A 401(k) isn't perfect in every way, but it can be a powerful wealth builder for you over many years.
Tips for becoming a 401(k) millionaire
Keep the following guidelines in mind and they can power your path to millionairehood.
1. Contribute generously to your account
The folks at Fidelity oversee millions of Americans' 401(k) accounts, and they've reported their findings regarding accounts worth more than a million dollars. One finding is that the average 401(k) millionaire is funneling 17.5% of their pay into their 401(k) account, and that's not including employer match dollars.
That's a lot more than the commonly recommended 10% you'll see bandied about. But 10% isn't enough for lots of people -- especially those who are starting to save and invest late. It's worth contributing as much as you can, whenever you can, if you're shooting for maximum growth.
2. Favor stocks for your long-term dollars
For your long-term dollars -- ones you can leave invested for at least five, if not 10-plus years, favor stocks over bonds or other possibilities. The table below shows the returns of various asset classes between 1802 and 2021, per Wharton Business School professor Jeremy Siegel.
|
Asset Class |
Annualized Nominal Return |
|---|---|
|
Stocks |
8.4% |
|
Bonds |
5% |
|
Bills |
4% |
|
Gold |
2.1% |
|
U.S. dollar |
1.4% |
Data source: Stocks for the Long Run, Jeremy Siegel.
Stocks outperform over shorter periods, too. For example, Siegel found that over the 75 years between 1946 and 2021, stocks grew at an average annual rate of 11.3%, versus 5.8% for long-term government bonds.
3. Understand that good returns are enough
You might be drooling over the stupendous growth of some stocks such as Nvidia or mutual funds with an amazing one-year performance. But it's far easier said than done to identify which stocks or funds of today will be tomorrow's stars, and there's always the chance of picking investments that will implode.
So consider just sticking with the tried and true: Invest in almost the entire U.S. stock market via a low-fee S&P 500 index fund and/or an even broader index fund. Here are some possibilities:
- Vanguard S&P 500 ETF (VOO 0.53%)
- SPDR S&P 500 ETF (SPY 0.53%)
- Vanguard Total Stock Market ETF (VTI 0.65%)
- Vanguard Total World Stock ETF (VT 1.16%)
The long-term annual average return of the S&P 500 is around 10%. So if you assume somewhat lower returns, just to be conservative, here's how your money might grow:
|
Growing at 8% for |
$7,500 invested annually |
$15,000 invested annually |
|---|---|---|
|
5 years |
$47,519 |
$95,039 |
|
10 years |
$117,341 |
$234,682 |
|
15 years |
$219,932 |
$439,864 |
|
20 years |
$370,672 |
$741,344 |
|
25 years |
$592,158 |
$1,184,316 |
|
30 years |
$917,594 |
$1,835,188 |
|
35 years |
$1,395,766 |
$2,791,532 |
|
40 years |
$2,098,358 |
$4,196,716 |
Source: Calculations by author.
See? Those are some hefty sums, and they didn't require a lot of risk-taking.
4. Minimize fees
Be sure to try to keep fees in check, too. You don't always get a lot of choice with 401(k) accounts. If your 401(k) plan's offerings feature some steep fees, you might opt to invest more heavily via IRA accounts.
Some higher-than-average fees can be acceptable if the investment's performance has been higher than average. So do a little digging before choosing your investments.
5. Stick to the plan
The last tip is the simplest and probably the hardest. You'll need to stick with your plan for years -- ideally many years. For most people, wealth is built over decades, not a year or two. So plan to keep contributing year in and year out, through market upturns and downturns. If and when you change jobs, know that you can roll your 401(k) over into an IRA. You may also be able to take it to your next employer. Cashing it out is usually a bad idea.
Aim to not borrow or withdraw early from your 401(k), too, as that can shortchange your future financial security.
A 401(k) account can be surprisingly powerful when used aggressively, so if you want to become a millionaire, consider putting these tips into action.
