A million-dollar 401 (k) account can provide a tremendous share of financial security in retirement, but according to Fidelity, only 1.6% of accounts actually have a seven-figure balance. If your goal is to join this elite club, then you don’t need to do anything extraordinary. The safest way to get $ 1 million (or more) in your 401 (k) is to follow these three steps.
Start as soon as possible
When it comes to 401 (k) investments, it is important not to underestimate the value of time.
People often think, “I’ll contribute a little bit to my 401 (k) right now; I can make up for it when I grow up,” but that’s exactly the opposite of the way you should think about it.
If your retirement savings account now and when you retire, you get an average return of 7% per year, and you plan to retire at 65, that means when you save at the age of 45 , Then you can expect to rise to $ 45. By the time you retire, every $ 1,000 you save on 35 can increase to about $ 7,600. And when you invest $ 25, your nest egg can cost $ 15,000. In simple words, you get more value from the money that you quickly wipe out.
The sooner you maximize your contributions, the better
Did you know that you can contribute from $ 19,000 to 401 (k) in 2020? If you are at least 50, the limit becomes $ 26,000. The 2020 IRA contribution limit is $ 6,000 ($ 7,000 if you are 50 or older), and you may be able to use both types of accounts.
You do not necessarily need to legally contribute as much as possible to your retirement accounts. For a lot of people, it would not be practical to set it so different. Still, the point is that if you want to retire as a 401 (k) millionaire, you need to be a little aggressive with your savings.
The most common 401 (k) contribution rate is ready to match whichever employer. In other words, if an employer matches employee contributions up to 5% of their salary, employees will contribute in exactly the same way. This is certainly a good thing, but it may not be enough to obtain a million dollar nest egg. Retirement planners (myself included) generally suggest a target retirement savings rate of 10% income – not including contributions from any employer.
You do not need to go there now. A popular strategy is to increase your contribution rate by 1% each year until you reach your desired level. Or, whenever you increase something, increase your contribution slightly. Constant small increases can bring big changes over time.
Set your investment for success
The third important component of becoming a 401 (k) millionaire is a sound investment strategy. You will see that earlier I used the assumption of a 7% average annual return, which is a perfectly reasonable expectation for a properly allocated 401 (k).
So what is a “properly allocated” 401 (k)? The basic idea behind retirement asset allocation is that when you are young, you invest most of your money in stock-based investment funds (equities) that have long-term returns, but are quite volatile in the short-term. it happens. As you age, you gradually convert assets into fixed income (bond) investments. They do not have the same return potential of long-term stocks, but are more predictable.
Asset allocation is a somewhat complex subject, and different 401 (k) plans have different investment options. A basic rule of thumb to know before making your 401 (k) investment selection is: Decrease your age from 110 to determine the percentage of your 401 (k) that should be in stock-based investment options. The rest should be in fixed income investment. For example, if you are 40K like me, it means that you should aim for a 70% stock, 30% bond mix. When you are 50 years old, 60% / 40% allocation is more appropriate.
The bottom line is that the combination of investing early, investing aggressively, and investing wisely is the trifecta of building a million-dollar 401 (k).