If you're someone with a reasonable awareness of how Social Security works, then you probably know that those benefits aren't enough to live on in retirement. Sure, they might provide you with a nice paycheck. But you should expect to need supplemental income to be able to maintain a decent standard of living.
That's where your 401(k) plan comes in. The combination of 401(k) withdrawals and Social Security could be a winning one. This especially holds true if you're sitting on millions of dollars on top of those monthly benefits.
Image source: Getty Images.
You might think that retiring as a 401(k) millionaire is impossible. But there are plenty of people who do it.
And here's something you may not realize: A lot of those folks who retire with millions of dollars in their 401(k)s aren't super-high earners. Many are people with modest salaries who make smart savings decisions throughout their careers.
Eager to know their secrets? Here's what you need to do to become a 401(k) millionaire yourself.
1. Start funding a 401(k) from a young age
In an ideal world, you'd be able to max out your 401(k) from the moment you start collecting a steady paycheck. But let's be real: Most people who begin working full-time in their early 20s can't afford to part with upward of $20,000 per year for retirement savings purposes.
There's no need to sweat it if your first few years of 401(k) contributions are modest. The key, rather, is to start early.
The more time you give your 401(k) to grow, the greater your chance of accumulating millions for retirement. So if need be, start with $50 monthly contributions, or whatever number you can afford, and work your way up from there.
2. Claim your full workplace match
A lot of 401(k) savers are fortunate enough to work for employers that offer matching contributions. This is money you really do not want to pass up.
When you forgo an employer match, you don't just give up that exact sum of money. You also give up the opportunity to invest it.
Imagine your employer will match up to $3,000 in 401(k) contributions per year. You might think giving up that match one year is no big deal if it's tough to find the money for your retirement savings.
But imagine you're 30 years away from retirement and your 401(k) plan normally generates an 8% yearly return, which is a bit shy of the stock market's average. In that case, giving up $3,000 one year could mean shorting yourself roughly $30,000 by the time retirement rolls around. That's a much bigger loss.
3. Focus on investments with growth potential that don't cost a lot
Keeping your 401(k) in cash is not a good idea. You need that money to grow so it can outpace inflation.
The stock market is a great place for your 401(k). But that doesn't mean you should load up on costly mutual funds with large expense ratios.
Instead, consider putting your 401(k) into broad market index funds that are passively managed. Those tend to come with lower fees that shouldn't erode your savings nearly as much.
It can be done
You might think that retiring with millions in your 401(k) is only possible if you earn big bucks from the start or get super lucky. In reality, it's more doable than you think.
The key is to start young, claim your free money every year, and make sure you're investing strategically without exposing yourself to needlessly high fees. If you commit to these steps, you may one day join the ranks of savers who get to call themselves 401(k) millionaires.
