The Secret to becoming a 401(k) Millionaire

We recently came across an article from Fidelity Investments where they had analyzed the savings habits of approximately 1100 investors with 401(k)s. All of them were people who earned less than $150,000 a year but still had managed to accumulate more than $1 million in their 401(k) savings plan.

Fidelity found that the average person that they looked at, who was 59 at the time of their survey, had a number of things in common. Most of them started quite young, took advantage of any company matching program that their employer had and saved approximately 14% of their income each year (not counting the match that their employer made).

Roughly speaking the average worker had put aside just over $13,000 of their own pay every year and, with the employer contribution of approximately $4500, and up with a total of nearly $18,000 in their retirement 401(k) every year. As a result of this they were able to grow their account balance from $426,000 in June 2000 to just over $1.2 million in the same month of 2012.

If those numbers sound good to you (and they should) then the tips below should sound good as well.

Tip 1: Start putting money into your 401(k) as early as possible. The fact is that compound interest is your best friend and any money that you are able to put in your 401(k) during your 20s and 30s will pay off greatly once you hit your 50s, 60s and 70s.

Tip 2: Put as much into savings as possible during your working lifetime. 15% is a good number to start with if you want to retire by the age of 65 but if you want to retire much earlier than that you’ll need to go up to 20, 30 or even 40% of your salary. (If that sounds impossible you might want to refer to our other recent blog about how to make that happen.)

Tip 3: Don’t be too conservative. One of the best ways to stall your savings is to put all of your money into “safe” investments. The fact is that bonds or savings accounts can’t hope to match the high returns that you’ll get from stocks and definitely won’t go nearly as far in building up your retirement nest egg.

Tip 4: Subtract your age from 120. This is a common rule of thumb that can help you figure out what percentage of your investments should be allocated to stocks. For example, if you are 45 years old the percentage of your portfolio that should be in stocks should be 75%.

Tip 5: Don’t follow your emotions. Many people make the mistake of letting the highs and lows of the markets scare them into making bad decisions. Your best bet is to find an asset allocation that make sense for you based on your age and your risk tolerance and stick to that, going back to it occasionally to change it as your financial situation changes.

Tip 6: Keep an eye on fees. On average, what you pay in fees on your investment choices can mean a difference in your savings account of $100,000 or more. The lowest fees are usually found with index funds while the highest are found with actively managed funds. 401(k) plans tend to have fees that are quite high but you can still find plants that have cheaper options.

Tip 7: Keep working for as many years as you can. Simply put, the longer that you work the longer that your 401(k) and other retirement plans can increase as well as the fact that you will have money coming in to pay for expenses and won’t need to use what you’ve put away.

Hopefully these 7 Tips have opened your eyes to some of the things that you need to do in order to max out your 401(k) benefits and retire with a lot more money. If you have any questions about planning for retirement or personal finance questions in general, please let us know and we’ll get back to you with answers and advice ASAP.

8 thoughts on “The Secret to becoming a 401(k) Millionaire

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  7. Essential points here. Also, make sure you contribute the maximum amount needed to get a full employer match. This is just found money and it will grow tax free for a long time. Also, use the 120 rule because it encourages younger investors to be more in the market where over time investment returns are higher and risk is minimized over long periods.

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