You could be a 401(k) millionaire. Here's how

Question: Who wants to become a 401(k) millionaire? This is easy to do, so you don’t have to grab a lifeline and call a friend. The answer: everyone.

The catch? It’s not that easy to accumulate a seven-figure nest egg. Life happens. There are bills to pay. Groceries for shopping. Children who need to graduate, aging parents who need care, and home renovations. According to Goldman Sachs Asset Management’s just-released 2024 Retirement Survey & Insights Report, 61% of Americans say they will have to delay retirement due to life events (and lack of sufficient savings).

Becoming a 401(k) Millionaire

Fortunately, 401(k) millionaires exist. According to Fidelity Investment’s Q2 2024 Retirement Analysis Report, there were 497,000 “401(k) millionaires” at the end of June. This shows you that joining the millionaires club is doable with a little planning, a lot of savings, and a few bull markets.

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Many workers find it virtually impossible to reach the magic $1 million mark. Are you right?

“Impossible? No. Difficult? Yes, very much so,” said Daniel Noonan, senior investment writer at Morningstar. “As with many things in life, the true answer would be it depends on.”

So what does it take to turn all those payroll deductions and 401(k) contributions into a $1 million account balance in decades?

The biggest factors, Noonan says, are disciplined and consistent savings. It may sound sexy, but it helps move the savings needle every paycheck, every month, every year, and every decade.

But it is also about mastering the most important building blocks of prosperity. Just as a house needs a stable foundation, a 401(k) saver’s investment plan also needs a stable foundation. Here are essential savings and investing tips to increase your chances of hitting the $1 million mark.

1. Invest early

The longer your money can work for you while you sleep, the greater your chances of increasing your wealth sensibly. If there’s one thing that works in your favor, it’s compounding, or earning profits from both your contributions and previous profits. So the sooner you start saving, the better. According to the Goldman Sachs Asset Management report, a late start to saving or a delay of at least ten years was the main factor contributing to lower retirement account balances.

For example, a 25-year-old who wants to retire at 65 and doesn’t yet have a balance would only need to save $416 per month or $5,000 per year and earn an annual return of 7.5% in order to to achieve a 401(k). According to a retirement savings calculator, the nest egg is $1,265,772.

In contrast, a 35-year-old starting with zero savings would need to save $833 per month, or $10,000 per year at 7.5%, to have a balance of $1,129,437 by age 65 To reach 401(k) you would have to max out your 401(k) plan and save $1,917 per month or $23,000 per year to accumulate $1,068,136 by age 65. And a 401(k) plan participant who begins saving at age 55, or just 10 years before retirement, would have to take advantage of the catch-up contributions and save $2,542 per month or $30,500 per year , just to save $455,126. If you are 50 or older and are not meeting your savings goal, taking advantage of catch-up contributions is critical.

Although it’s never too late to start saving and reach the $1 million mark, delaying your savings will make things more difficult.

“At 35, you still have time,” Noonan said. “At 45 you still have time, but it becomes much more difficult. And to be honest, the calculation becomes very difficult at 55 years old.”

2. Invest as much as possible

When building wealth, there are limited opportunities to increase the value and compound interest on assets. Saving is the key to turning a meager nest egg into a sizeable one. Your goal should be to save 15% of your salary, says Lindsay Theodore, a certified financial planner and senior executive at T. Rowe Price. “Saving aggressively is a big part” of reaching your goal, Theodore said.

The key to saving more is spending less. More importantly, you won’t run up so many monthly bills that they eat into your savings or incur debt. “An important part is really managing your budget and being really selective about what you add to your fixed costs,” Theodore said. In fact, research from T. Rowe Price shows that if you cut your expenses to free up $550 per month, you can increase your savings by around $445,000 over 25 years, at 7% per month Create year.

It’s important to keep an eye on your savings to see if you’re saving enough and earning a high enough return to reach the $1 million mark in the next few years. T. Rowe Price offers salary-related savings benchmarks that can put you on the right track. For example, they recommend that you save 1 to 1.5 times your salary by age 35. This savings-to-salary ratio increases with age. By age 45 you should have saved 2.5 to 4 times your salary, by age 55 the savings increase to 4.5 to 8 times your salary. And by age 65, the official retirement age, you should have 7.5 to 13.5 times your salary saved in your 401(k), according to T. Rowe Price.

In fact, the amount you save can have a big impact on the final size of your emergency fund. Let’s say you’re 35 and starting to save in your 401(k). Assuming a 7.5% annual return and a $5,000 annual deposit, you’ll have an estimated balance of $564,041 at age 65, which is well under $1 million. However, if you increase your savings to $10,000 per year, your 401(k) balance will increase to $1,129,437 by the time you retire. And if you max out your plan and donate $23,000 per year, your balance increases to $2,599,197.

As you advance in your career and make more money, it’s important to check the numbers to see if you’re within reach of your savings goal. “You’ll want to assess your current savings progress,” Theodore said, adding that you should ask yourself or your financial advisor, “Are my current savings staying on track?” For example, if you want to retire earlier than 65, you need to You may increase your savings, says Theodore.

The good news is that diligent savers who save 15% of their salary are on the right track and have a chance of reaching the $1 million mark, adds Theodore. “If you plan to retire at 65, you should be in good shape,” Theodore said.

3. Choose stocks over bonds

Strive for growth. That’s the advice from Morningstar’s Noonan. Historically, stocks have returned 10% annually, meaning your money will double approximately every seven years. In contrast, US Treasury bonds returned just over 5%.

“All 401(k) successes occur over decades, and stocks are the ultimate compounding machine for that period,” Noonan said.

That doesn’t mean you shouldn’t have exposure to fixed income assets like bonds in your portfolio to provide ballast, stability and income during times of volatile stock markets. Just don’t overdo it. “Don’t rely too heavily on fixed income,” said Mike Dickson, head of research and quantitative strategy at Horizon Investments. “We definitely caution against that because you can leave a lot of money on the table.” You also want your money to outpace inflation so your money has more purchasing power, adds Dickson.

Investing in different types of stocks provides an important level of diversification, he adds. So, invest in mutual funds that own large and small U.S. stocks, international stocks, and emerging market stocks.

“Different asset classes work at different times,” Noonan said. “Diversification keeps you in the game.”

Playing it safe with your 401(k) investments can be just as risky as basing your 401(k) on a single stock, such as your company’s stock.

“If you invest too conservatively, like in cash, you won’t get the return you need,” Theodore said.

4. Let time do the work for you

Investing for the long term, and we mean for the long term – so 20, 30, 40 years of savings – and letting compounding do a lot of the heavy lifting for you is the final piece of the puzzle.

“Compounding will work for you if you stay out of the way,” Noonan said. “Give enough time and you will be amazed by the results.”

One final piece of advice: Try to avoid mistakes that can reduce the growth potential of your 401(k). According to Goldman Sachs Asset Management, the top factors that deplete account balances include cashing out 401(k)s when you change jobs, having too low a return on your investments, and retiring early.

Other mistakes include taking out loans against your 401(k) account, not using your full company match, and not increasing your contribution amount when you get a raise, Noonan says. Trying to time the market or selling out in a panic are other no-nos.

“Saving $1 million in your 401(k) is totally doable,” Theodore said. “But it is important to emphasize that investments are certainly important. Diversity is important. And it’s also really important to be disciplined and not sell just because the market is a little unstable.”

You could be a 401(k) millionaire. Here’s how

Becoming a 401(k) Millionaire

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