Will 2022 be the year you make progress on your goal to retire as a millionaire? The answer is yes -- if you can do two things. First, keep reading. You'll learn four easy, essential steps for building wealth in your 401(k). Second, implement what you learn. If you take action, results will follow.
1. Set smaller retirement savings milestones to reach your goal
The goal to amass $1 million in your 401(k) is a long-term one. If you're just starting that journey, the endpoint can seem unattainable at times. To avoid feeling discouraged, try breaking up that big goal into several smaller milestones. You'll see faster progress toward reaching those initial milestones, and that stokes your motivation.
More modest goals work best if you focus on factors you can control. For example, you can set a goal of contributing a certain dollar amount to your 401(k) this year. Or, you can commit to using 50% of your next raise to increase your retirement contribution. These are more effective goals than, say, targeting 12% growth in your portfolio over the next 12 months.
It's alright, too, if you're not sure how your smaller goals roll up into the larger one. Say you feel comfortable contributing $600 monthly to your 401(k) over the next six months. But a savings goal calculator recommends a long-term contribution of $750 monthly to reach the millionaire finish line.
Accept the smaller contribution as a temporary situation, and then reassess your contribution budget regularly. That's a better approach than not saving at all. Trust that if you keep moving in the right direction, the exact path to $1 million will present itself in time.
2. Raise your contributions
Challenge yourself in 2022 to find new opportunities to raise your retirement contributions. Here are some ideas:
- Seek pay increases. Every raise is a chance to save more for retirement.
- Pay off credit accounts. Eliminate a monthly payment from your budget and you free up cash for higher 401(k) contributions.
- Cancel unused subscriptions. Done with Apple TV? Cancel it and save an extra $5 monthly to your 401(k).
- Shop around for cheaper insurance premiums. If you can lower your insurance bill by $400 annually, you can redirect those funds into your retirement account.
Challenge yourself to raise your retirement contributions at least twice in the next 12 months. Even if the increases are small, you're building financial discipline -- and long-term discipline is the key to becoming a 401(k) millionaire.
3. Get familiar with compound earnings calculators
A compound earnings calculator like this one can help you quantify your retirement account's growth potential. You can crunch the numbers every six or 12 months to see how you're tracking toward your $1 million goal.
To use a compound earnings calculator, you need to project your portfolio's growth rate. A good starting point is 7%. This is the long-term average annual growth of the stock market after inflation. It's an appropriate to plan for 7% annual growth under two conditions:
- You are invested mostly in stocks. If you invest more conservatively in bond funds, you may not achieve that 7% growth. Your growth rate may vary from 2% to 5%, depending on the bond securities you own and whether they comprise all or some of your portfolio.
- You aren't retiring for at least 10 years. The stock market shows average growth of 7% only over longer periods. In shorter time frames, market performance can be much higher or lower than 7%.
4. Keep learning about investing
It's possible to grow a 401(k) balance without a high level of investing skill and expertise. But improving your investing know-how in 2022 could be the difference-maker in your retirement plan. At a minimum, you'll make more confident decisions. You're also likely to manage your risk better and have more realistic expectations about the future.
Some helpful topics to research this year are:
- Expense ratios. A fund's expense ratio influences your returns.
- How to invest in index funds. Index funds give you access to market-level returns.
- Asset allocation by age. Maximize growth in your younger years, and moderate risk as you near retirement.
- Buy-and-hold investing. When you buy and hold, you can worry less about short-term market volatility.
- Growth vs. value investing. You may have growth funds and value funds on your 401(k) investment menu. Learn how they're different from one another.
Commit to 401(k) saving in 2022
This year, commit to retiring with $1 million in your 401(k). You can act on that commitment now by setting realistic goals and raising your contributions at every opportunity. Get comfortable using compound interest calculators so you can plan ahead and monitor your progress.
Make those moves while expanding investing expertise in 2022, and you're sure to carry your 401(k) balance to new heights.