20 Steps to a Million-Dollar 401(k)

How much money do you need for retirement? Most of us would like to have a million dollars in our retirement accounts, but that can seem like a pipe dream. It's actually more achievable than you might think, as long as retirement isn't just around the corner. A 401(k) account can be a big help getting you to that million dollars.

Here's a look at 20 steps to take or consider in order to build your retirement nest egg more briskly.

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Before plowing a lot of money into your 401(k) account, it's smart to check out how good a plan it is. Most will serve you well, but if yours is a clunker, with high fees, poor investment options, and so on, you might only use it a little, while socking a lot of money in other retirement accounts, such as IRAs or regular, taxable brokerage accounts.

One good resource for evaluating your 401(k) plan is BrightScope.com, which offers information on lots of companies' plans and rates them according to factors such as fees and company generosity.

ALSO READ: Why Now's a Good Time to Start Hoarding Cash

The standard 401(k) plan that most of us are familiar with is probably not your only option. These days, more and more employers are offering both traditional and Roth 401(k) accounts, which work much like traditional and Roth IRAs.

With the traditional accounts, you get an upfront tax break from your contributions, and are taxed on withdrawals. With the Roth accounts, you contribute post-tax money and get no upfront tax break, but if you follow the rules, your withdrawals in retirement can be tax-free. That should have particular appeal to younger workers who have many years of investment growth ahead of them. If they manage to amass hundreds of thousands of dollars in their accounts, being able to tap that money in the future without taxes will be very valuable.

Don't just save and invest hoping for the best -- have a retirement plan, and know how much you're aiming to amass and how you will do so.

Check out this table that shows how much your savings and investments might amount to over time. Clearly, it's very possible to amass a million dollars in a 401(k) account -- you just have to contribute meaningful sums over a lot of years.

Let's not get ahead of ourselves, though. Before you can start amassing vast sums, you should already have an emergency fund with at least three to six months' worth of living expenses in it, and you should be free of any high-interest-rate debt, such as that from credit cards. Don't let yourself think it's too hard to get out of debt. It may not be fun, but gobs of people have paid off huge debts, and you probably can too.

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A 401(k) account has several advantages over an IRA, and one of them is that 401(k) plans typically feature matching contributions from employers. A common match has employers chipping in 50% of what you contribute, up to 6% of your salary. So if you earn, say, $100,000, and you contribute $6,000 to your 401(k), your employer will add an extra $3,000. This is free money and you should aim to grab as much of it as you can.

ALSO READ: What to Do if Your 401(k) Match Is Taken Away

It's also important to be aware of any vesting restrictions in your company's 401(k) plan. The dollars you contribute to your account are always yours, but the dollars chipped in by your employer may be subject to a vesting schedule, meaning that they become yours only after some period(s) of time. For example, a four-year vesting schedule might give you ownership of 25% of a matching contribution immediately, another 25% next year, 25% the year after that, and the final 25% in the fourth year. Vesting schedules are used in order to motivate workers to stick around.

If you're aiming to amass a million dollars or more in your account, it's not likely to happen if you're just socking away a small percentage of your earnings each year. In many cases, even contributing 10% of your earnings won't be enough. Run the numbers to see how much you can and should contribute, and aim to increase that amount each year, if possible.

Don't ignore taxes in your financial planning. Know the tax treatment and rules for your 401(k) account: If it's a traditional account, your reported income will drop by the amount of your contribution, so if you earn $65,000 and contribute $5,000, your income will drop to $60,000, shrinking your tax bill. When you withdraw funds from the account in retirement, they'll be taxed at your ordinary income rate.

For Roth 401(k)s, a $5,000 contribution won't change your $65,000 earnings, nor will it shrink your tax bill in the year of your contribution. But if you play by the rules, you'll get to ultimately withdraw that money tax-free in the future. Dividends received in a Roth IRA get to bypass taxation, while those received in a traditional account get taxed at your ordinary income tax rate.

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Many people like to load up their 401(k) accounts with the stock of their employer. There's good logic in that -- after all, you probably know the company you work for much better than you know most other companies. You may even get to buy shares at a discount! But tread carefully, because it can be risky to have significant company stock in your account. Why? Well, think about it: You already rely on your employer for the money you live on. If your 401(k) is full of company shares, that means you're putting your financial future -- your retirement -- in your company's hands, too. And bad things do sometimes happen to good companies. Lots of big names have gone through bankruptcy.

ALSO READ: 401(k)s and Employer Stock: Great Opportunity or Big Mistake?

Next, be aware of your plans default investments, and consider making some changes. A 401(k) plan will typically park your dollars in fairly safe investments automatically, instead of having you take on risks you haven't chosen yourself. But fairly safe investments, such as CDs or government bonds, tend to not grow quickly. Lots of plans these days will put your money in a "target-date" fund designed to distribute your money across stocks and bonds according to your age and likely retirement date. That might be fine, but for many people, it will still be too conservative a mix. Look into what other options you have and consider them. If you want to take on a little more risk in exchange for the hope of greater rewards, you might simply employ a target-date fund that assumes you're retiring five or 10 years later, so that it holds more stock.

Another great kind of investment for long-term dollars in your 401(k) account is one or more low-fee index funds, such as ones that track the S&P 500 and the universe of bonds. An index fund is considered "passive," because its managers don't have to actively study the world of possible investments, deciding what to buy and when to sell. Instead, each index fund simply tracks a particular index, and holds pretty much the same securities as the index. Thus, the best index funds tend to sport extremely low fees, which helps preserve your gains.

You need to be aware of the fees your 401(k) plan is charging you. You might find them in regular or small print on your statements, or you might need to ask your plan administrator about them. A little digging, perhaps at BrightScope.com, can help you see how your plans' fees stack up relative to others. If they seem too high, let your company know. Steep fees will eat into your returns, so you might want to only contribute enough to your plan to max out on matching funds, and after that direct retirement savings to IRAs and/or regular, taxable brokerage accounts.

One handy trick to help you increase how much you're socking away in your 401(k) is to save and invest as much as possible of any raises and tax refunds you receive. If you receive a 4% raise at work, for example, consider hiking the percent of your income that you contribute to your 401(k) by a similar amount. If you get a $3,000 tax refund, aim to increase your 401(k) contributions by about $3,000 or as close to it as you can. You probably can't bank every raise and refund, but doing so with most is a fairly painless way to boost your savings.

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Here's a big rule to follow if you're hoping to amass a million dollars in your 401(k): Don't borrow from it. Yes, you're allowed to do so, but any dollars you remove from the account can't be growing for you. If you were to take out $10,000, for example, for four years, and that sum would have grown by 8% annually, it would have grown to $13,605. So you would have forfeited that $3,605 of growth. Also, though money is typically borrowed from 401(k)s with the intention of repaying it, that doesn't always work out. If you can't repay the money, you can face a 10% early withdrawal penalty, plus taxes on the amount borrowed.

ALSO READ: 4 Mistakes to Avoid When Borrowing From Your 401(k)

Another common blunder is cashing out your 401(k) account when you change jobs. Doing so will hurt your chances of becoming a 401(k) millionaire, even if you start up a new 401(k) account with your new employer. You might think that what you're cashing out is an amount too small to matter, but consider this: Even a $10,000 cash-out could have grown to $46,600 at 8% over 20 years. It's generally best to roll over your 401(k) account into your new employer's plan, or to roll it over into an IRA, so that money can keep growing for you.

You'll likely need to be socking away significant sums each year in your 401(k) if you want to amass a million dollars, which isn't easy for many of us. One effective strategy to address that is to boost your income via a side job. It doesn't have to be a kind of work that you hate. Some creative thinking and online digging can help you identify some appealing ways to make money on the side. You might, for example, tutor kids online, make and sell furniture, drive for a ride-sharing company, or do freelance web design, among many other options.

Another way to generate more funds for saving and investing is to ensure that you live below your means. That means only spending money that you have and avoiding taking on debt. Ideally, it means only spending money that you have while also saving for your future. Some ways to save money include taking advantage of coupons and discounts while shopping, cooking more meals instead of dining out, and shopping around for lower-priced insurance policies.

The more you know about Social Security, the better retirement-related planning and decision-making you'll likely do. For starters, learn how much income you might receive from the program. Setting up a my Social Security account at the Social Security Administration (SSA) website will let you see the SSA's records of your earnings and estimates of future benefits. (If you spot any errors in its records, be sure to have them corrected.) For some context, know that the average monthly retirement benefit check was recently $1,513, or about $18,000 annually. If you expect to receive about $25,000 annually and you're looking for about $60,000 in retirement income, then you'll need your 401(k) and other retirement savings to make up the difference.

ALSO READ: Here's the Timeline for Social Security Benefit Cuts

All retirement planning should be done while keeping inflation in mind, because failing to do so can leave you with an insufficient income in the future. For example, you might sense today that a $60,000 income will serve you well in retirement, but if retirement is 25 years away, $60,000 won't cover nearly as many expenses then as it will now. Inflation has averaged about 3% annually for many years now, though it can be much higher or lower in some years.

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Finally, for best results in all of your financial life, keep reading and learning. Doing so can save you a lot in your personal financial management, and it can make you a better investor over time, too. Lots of articles at Fool.com will be helpful, and you can also gain a lot from books such as John Bogle's The Little Book of Common Sense Investing, The Little Book of Value Investing by Christopher H. Browne, Common Stocks and Uncommon Profits by Philip A. Fisher, and The Little Book That Still Beats the Market by Joel Greenblatt.

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