There are many roads to wealth, but the 401(k) might be the road most traveled for everyday people. According to estimates by Fidelity Investments, approximately 485,000 of its over 23 million total 401(k) participants had a balance of at least $1 million at the end of March 2024. While a million bucks isn't what it was a decade or two ago, it's still a great financial goal for retirees, especially since the median U.S. family has just $87,000 saved.
So, how do you get the most out of your 401(k) plan ? Investors can learn from the triumphs of others; here are four secrets to becoming a 401(k) millionaire yourself.
1. You get in the game
Vanguard reported last year that 83% of workers eligible to participate in the company's 401(k) plans did so. That's a solid number, but it also means that nearly two in 10 people who could be using a 401(k) are skipping out. It's a painful statistic because not investing means you entirely miss out on the long-term benefits of compounding.
An investment plan that returns an average of 8% annually will double in value every nine years. A worker contributing five percent of a $50,000 annual salary from age 25 to 65 with 2% annual raises will amass a $1.4 million nest egg. That same person would retire with just under $300,000 if they waited until age 40 to start saving. That's over a million dollars lost .
The lesson here? Get started, even if it doesn't feel like you're contributing enough to make a difference. Trust me, it is.
2. Earn the free money if you can
Many employers offer a company match to incentivize you to participate in your plan. Your employer will generally match your contributions, either dollar-for-dollar or with a stated ratio, up to a certain percentage of your salary. So, if your employer matches dollar-for-dollar up to 5%, a worker making $100,000 and contributing 5% would receive $10,000 total. That's $5,000 from their salary and $5,000 from the match.
This is virtually free money. It's there for the taking, and it's usually only lost if you leave your job before your 401(k) is vested or by not contributing to your plan in the first place. It doesn't take a calculator to determine that free additional money added to your 401(k) can be a game-changer for your retirement savings. Strive to contribute enough to earn the maximum match your employer offers.
3. Leave it alone
It's called a retirement plan because you're not supposed to touch it before retiring. But life happens. Unfortunately, financial hardships can put people in difficult situations. There is nothing wrong with tapping into your 401(k) when it's the difference between putting food on the table or not. Roughly 9% of workers borrowed from their 401(k) last year for hardship reasons or otherwise.
But if you can help it, don't touch that money. Early 401(k) withdrawals generally trigger penalties and taxes. Even a 401(k) loan you eventually repay still removes those funds and stops the compounding process. Emergencies happen, but otherwise, leaving your money untouched will help you maximize your long-term wealth.
4. Take a little bit of risk
Workers have plenty of investment options in their 401(k) plan. The specifics will vary, but most plans offer an assortment of mutual funds that cater to whatever investment style suits you. Mutual funds give investors a choice between small and large companies, U.S. or international stocks, and actively managed or passive funds. Some funds invest in bonds, which offer safer returns but have less upside potential.
Ultimately, you should invest your 401(k) contributions in a manner that is comfortable for you.
Having said that, I've seen many people overly shy away from more stocks out of fear of volatility. Someone who is 25 and has decades ahead to endure the stock market's ups and downs shouldn't put most of their money into bonds that return 2% to 4% annually. Instead, consider aiming for maximum long-term growth, even if the ride is bumpy sometimes.
Stocks are generally riskier than bonds, but U.S. large caps have historically proven safe. The S&P 500 , an index of 500 of America's most prominent companies, has periodically fallen 20% or more. However, it has always come back to make new highs and averages nearly 10% annualized returns over time. If you're not retiring within the next five years, consider targeting funds that track the S&P 500.
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