How to Become a 401(k) Millionaire
More Americans are entering the 401(k) millionaire club. In fact, 422,000 retirement savers are now labeled 401(k) millionaires¹.
It’s not a surprise we are seeing a rise in questions about how to become a 401(k) millionaire.
If you’ve been wondering how to make it happen, you’ve come to the right place.
Becoming a 401(k) millionaire involves several key strategies. Keep reading to find out what they are.
#1 Make Consistent Contributions over Time
One of the fastest ways to boost your 401(k) account balance – and become a 401(k) millionaire – is to contribute more.
In addition to contributing regularly, look for opportunities to maximize your regular contributions to take advantage of tax-deferred growth.
For example, if you’re 50 or older, utilize catch-up contributions to increase your savings rate.
Contribute more whenever you can.
If you receive unexpected funds, such as a tax refund, consider investing a portion into your 401(k) to boost your retirement savings.
This can be an effective way to increase your retirement account balance without impacting your regular budget.
When you are tempted to stop contributing or to contribute less, don’t give in.
Stay the course.
When you are tempted to withdraw from your 401(k), see if you can hold out a little longer.
Keep in mind that the SECURE Act has raised the age for Required Minimum Distributions (RMDs), allowing more time for your investments to grow.
RMDs will now start at age 73. And starting in 2033, the RMDs move up to age 75.
One of the reasons Fidelity saw a jump in 401(k) millionaires is because more retirees are continuing to allow their 401(k) money to grow instead of withdrawing it.
According to Fidelity, “Most pre-retirees and retirees under the age of 70 maintained a savings mindset and did not withdraw from their 401(k) plans.”²
[Related Read: Retirement Plan Contribution Limits for 2024]
#2 Capitalize on Employer Matches
Another strategy to become a 401(k) millionaire also involves contributing – but the key here is to contribute enough to receive the employer match.
A typical 401(k) match may be around 3% – 6% of the employee’s salary.
This means that, if you contribute enough to receive your company’s match, your employer will contribute the same amount back to your retirement plan.
For example, an employer may match 100% up to 6% of your pay.
If you make $40,000 a year, you could put in $2,400 (or 6%) for the year, and your employer would match this 100%.
This means you would get $2,400 of free money toward becoming a 401(k) millionaire.
Matching employer contributions is a straightforward way to expedite wealth accumulation.
[Related Read: The #1 401(k) Mistake Married Couples Make Is Failing to Take Advantage of Employer Matches]
#3 Don’t Just Contribute and Forget It
Savings alone will only take you so far – 401(k) millionaires are engaged with their 401(k)s.
They don’t just contribute and leave it alone.
They monitor their account by reading their 401(k) statements and adjusting accordingly.
If you want to join the 401(k) millionaire club, make sure you actively manage your 401(k) by regularly reviewing and potentially rebalancing your investment choices to align with your risk tolerance and investment goals.
This means rebalancing your investments regularly.
Don’t know how to read your 401(k) statements? Find out how today!
Unsure how much you are paying in fees? Review your plan or speak to your plan administrator.
Want to see a change in your 401(k) account balance? Rebalance to take advantage of growth opportunities.
Avoid the “set it and forget it” mentality. Stay engaged.
[Related Read: How Rebalancing May Boost 401(k) Returns]
#4 Avoid Target Date Funds
If you were auto-enrolled in a 401(k) plan when you started your job, there is a chance you were enrolled in a target date fund.
401(k) millionaires avoid target date funds for a few reasons.
First, target date funds tend to have higher fees (which these millionaires know about because they are engaged and read their 401(k) statements).
Next, they understand that target date funds are not always personalized to their individual goals or risk tolerance.
Target date funds are designed as a one-size-fits-all, simple option for everyone.
A target fund is a fund offered by an investment company that’s structured to meet capital needed at some date in the future, such as retirement. The asset allocation of a target date fund is based on a predetermined retirement date.
Target date funds are structured to reallocate automatically as you move through different life stages.
As you age toward your target retirement date, the funds shift toward more conservative investments to protect your money.
Because target date funds are based on the date of retirement, they fail to take into consideration that not all investors are created equal.
In addition, target date funds may often underperform in good markets and may do a poor job of managing downside risk during tough markets.
401(k) millionaires understand they need to do some work.
They know they can’t simply enroll in a target date fund and hope for the best.
They understand they must actively make decisions to get them closer to their goal.
To put it bluntly, those who engage with their 401(k)s and choose investments in the plan menu are much more likely to become 401(k) millionaires than those who don’t.
[Related Read: Are Target Date Funds the Best for Your Retirement Goals?]
#5 Get Help When You Need It
If managing your 401(k) feels overwhelming, or if you’re not confident in your investment choices, consider seeking the help of a professional.
They can provide personalized advice tailored to your financial situation, helping to optimize your 401(k) performance and potentially avoid costly mistakes.
Professional 401(k) management help has been shown to increase 401(k) investors’ returns.
In a 2019 study titled Advisor’s Alpha, The Vanguard Fund Group, Inc., reported a 3% average increase in the value of portfolios of clients who have their accounts professionally managed.³
Aon Hewitt and Financial Engines conducted a study from 2006 to 2012 comparing the returns of investors who sought help through online sources or managed accounts to those who managed their 401(k)s themselves.
The study examined the 401(k) investing behavior of 723,000 workers at 14 large U.S. employers. It showed that investors who received professionally managed help earned higher median annual returns than those who invested alone.
In fact, participants who had their assets managed by professionals saw an average of 3.32% (net of fees) more in returns annually than those who managed their own accounts.⁴
The study revealed, “If two participants—one using Help and one not using Help—both invest $10,000 at age 45, assuming both participants receive the median returns identified in the report, the Help participant could have 79 percent more wealth at age 65 ($58,700) than the Non-Help participant ($32,800).”⁵
The difference between being a 401(k) millionaire or not may simply come down to asking for help when you need it.
Have questions or concerns about your 401(k) performance? Book a complimentary 15-minute 401(k) strategy session with one of our advisors.
Sources
- https://newsroom.fidelity.com/pressreleases/fidelity–2023-retirement-analysis–despite-uncertain-market-conditions–retirement-savers-have-high/s/b1b9fef9-4da9-4725-9080-bd614678181b
- https://www.fidelity.com/about-fidelity/Q4-2023-retirement-analysis
- https://www.investopedia.com/articles/personal-finance/102616/how-much-can-advisor-help-your-returns-how-about-3-worth.asp
- https://corp.financialengines.com/employers/FinancialEngines-2014-Help-Report.pdf
- https://corp.financialengines.com/employers/FinancialEngines-2014-Help-Report.pdf
