12 Steps to a Million-Dollar 401(k)

Just about anyone who's ever had a less-than-perfect job has dreamed about the possibility of retiring early. When you're just starting out in your career, 50 seems really old, but retiring at 50 gives you a realistic chance at 30 to 50 years of retirement living. It takes a lot of effort to put yourself in position financially to retire that early.

As hard as it is, retiring early isn't impossible, and the sooner you get started planning for it, the more likely you are to achieve it. Follow these strategies, and you'll give yourself the best shot possible at quitting by 50.

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Most people have at least some debt when they're first starting out in their careers, and that's not always a bad thing. Debt like a home mortgage or federal student loans usually comes with relatively low interest rates and terms that let you pay off your balance comfortably over time. But if you have credit card debt or other high-interest obligations, making a plan to get that bad debt paid off sooner rather than later is a vital first step toward a million-dollar retirement. 

Once you've taken care of bad debt, it's important to have a source of funds for the unplanned expenses that inevitably come up. In the long run, having three to six months' worth of expenses in an emergency fund can help you avoid financial catastrophes if you suddenly lose your job or become disabled. You don't have to save that much before starting to build up your 401(k), but having at least enough to cover an unexpected car or home repair bill will keep you from having to start carrying a credit card balance and pay large finance charges. 

Not all jobs offer 401(k) or similar plans. IRAs and other types of retirement savings accounts are available, but with lower contribution limits, it's harder to reach your financial goals solely with IRAs than it is if you have a 401(k). Your ideal employer will offer a 401(k) with both regular and Roth options and a healthy employer match, along with good investment options at your disposal.

Many employers now offer automatic enrollment into their 401(k) plans. That ensures that new workers always participate unless they specifically opt out, but the amount that the default option has new workers save is typically small -- often just 3%. That's not enough to get you to $1 million, so take the extra step to boost your 401(k) contribution percentage above the default amount.

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One of the best features of great 401(k) plans is when employers make matching contributions to supplement your own retirement saving. Most employers set a limit on the amount they'll match, such as making a dollar-for-dollar deposit up to the first 6% of your salary. If at all possible, saving enough to get the full amount your employer is willing to match is the best way to capture all the free money you can get.

401(k) plans typically offer menus of investment options, including a range of aggressive and conservative choices. As long as you're further than 10 years away from retiring, choosing higher-return options like stock mutual funds or ETFs is worth the risk. You'll never reach $1 million by sticking with ultra-safe low-return investments, and when time's on your side, you can deal with the volatility of aggressive investment options in order to capture the growth they offer. 

401(k)s that offer both traditional and Roth options give you the flexibility to consider your tax situation. Early in your career when you're in a low tax bracket, a Roth 401(k) is often the better choice, as the tax-free withdrawals a Roth offers in retirement are worth more than immediate tax savings. Later on as your earnings rise and you climb into higher tax brackets, traditional 401(k) contributions can save you more in taxes upfront. In the end, a mix of Roth and traditional retirement accounts is an ideal way to build a nest egg.

To get to $1 million, the best thing to do is to gradually increase your contributions to your 401(k) over time. One painless way to do so is to boost your contribution percentage whenever you get a raise. By doing so, you'll be able to set more money aside while still seeing your paycheck grow. For many, that's a key psychological lift that will keep you focused on your long-term goals without feeling like you're making too big a sacrifice now.

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The worst thing you can do with your 401(k) is to use it for purposes other than retirement. When you switch jobs, never withdraw a 401(k) balance outright, and instead, roll it over into your new employer's 401(k) or an IRA to keep it intact. 401(k) loans aren't quite as bad, but the consequences when things go wrong can be just as bad for your retirement aspirations. By avoiding loans and early withdrawals, you'll give yourself the best chance to reach the $1 million mark.

Contribution limits on 401(k)s are extremely high, at $18,500 for 2018. But when you turn 50, you get an opportunity to make an additional catch-up contribution of up to $6,000 more into your 401(k). By that time in your career, the chance to boost your total retirement savings can be timely and valuable in helping you reach your end goals.

You shouldn't micromanage your 401(k) investments, treating them as long-term choices that will pan out over time. Yet that doesn't mean you should ignore your retirement savings entirely. Sometimes, your 401(k) might have an investment that doesn't perform the way it should, and in that case, making a switch will help you stay on track toward getting the growth you need to build up your nest egg.

Even once you reach the $1 million mark in your 401(k), your job isn't done. With traditional 401(k)s, withdrawals will be subject to income tax, meaning that taking the entire amount out in one lump sum will push you into the highest possible tax bracket. Instead, be prudent about taking distributions over time in order to keep your taxes low. That way, you'll get your full money's worth from your million-dollar retirement savings.

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It might seem crazy to think that anyone could retire with $1 million in savings in a 401(k). But by starting early and following these 12 steps, you'll put yourself in the best possible position to get the financially secure retirement you've always wanted.

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