How to Become a "401k Millionaire"


Is it possible to save a million dollars for retirement on a relatively modest salary?

Yes -- without a doubt. In fact, it's far easier than you probably think.

A recent study by Fidelity shows becoming a 401k millionaire is within reach of many of us. It merely requires smart planning and the will to follow through.

Fidelity culled data from 1,000 401k millionaires to draw some interesting conclusions. Most had salaries less than $150,000. Their average age was 59. The majority of them worked at the same company for at least three decades.

Don't fit in all (or any) of these categories? It doesn't matter. Age and salary are important, sure. Yet it's what we can learn from the habits of these retirement millionaires that truly illuminates.

The early bird gets the million

Save early, save often.

It's an age-old truism in the retirement business. Yet it can't be stressed enough. The sooner you start saving, the sooner the magic of compounding kicks in.

A retirement account such as a 401k has another huge benefit for early savers -- tax advantages. A standard 401k allows you to make pre-tax contributions. A Roth 401k allows for tax-free earnings and withdrawals in retirement. Either way, it's a huge boon. Spread out over three or four decades, it can make you a millionaire several times over.

Deciding where to set your contribution level is often tricky. Many of us tend to underestimate how much we'll actually need post-retirement.

Simply put, it's wise to save as much as you can without seriously impacting your quality of life. Yet if you're looking for a percentage, we'd advise you never drop below 15-percent. If you can set that number a few points higher, you absolutely should.

Fidelity's 401k millionaires, on average, saved about 14-percent. Their employers kicked in another five-percent annually, allowing them to nearly reach 20-percent every year. One note: the IRS caps 401k contributions at $17,500. If you're older than 50, you may defer up to $23,000.

It's also critical to take the maximum allowable employee contribution. Fail to do so, and you are essentially refusing to take free money. Suffice to say, this is a terrible wealth building strategy. You might as well be lighting money on fire -- yet it's astonishing how many of us do fail to meet our employee match.

According to Fidelity's numbers, 28-percent of each 401k millionaire's account was derived from employer contributions. This worked out to a bit less than $5,000 per year, every year.

That's an eye-opening number. It's also key to take full advantage of any profit sharing options offered. That's another easy way to turbocharge your savings.

A balancing act

Portfolio composition is another important consideration. Bonds are slow yet steady. Yet stocks were the preferred option for 401k millionaires. On average, they invested three-quarters of their savings in stocks or stock mutual funds. Their median return over the last 12 years? A respectable 4.8 percent. That's good for a nearly nine-percent account growth rate.

Those are the sort of numbers that put a smile on face of any long-term saver. Can you can tolerate the turbulence and risk inherent with this approach? Then we'd advise you to do the same. Make sure to continually adjust your portfolio balance to keep up with life circumstances, however.

Finally, today's workers have job mobility that would amaze previous generations. Yet our retirement tactics haven't always kept pace with the new realities of the workplace. Cashing out a retirement account is one example.

Many of us may switch positions or firms half-a-dozen times over the years. Pulling money out of a 401k is generally always a bad idea. This is especially true for larger balances. Yet even a seemingly trivial amount of money represents serious growth potential over a long enough timeline.

Resist the temptation to cash in your chips and play the long game instead. Transfer your balance into a new account or consider a rollover IRA.

The simple path to a million dollars

Earning the "401k millionaire" title doesn't take great fortune or special skills. You merely need to follow a time-tested formula.

A quick example. Let's say you start saving in your mid-20s at a salary of $50,000. You work until your mid-60s and get a modest one or two percent raise each year.

Every year you save 12-percent. Your employer kicks in four-percent. You also avoid 401k loans and withdrawals.

Assuming a conservative five-percent rate of return, you'll be a 401k millionaire by the time you hit retirement.

Sounds easy enough, right? Perhaps in theory. In practice you'll need to delay gratification. You'll need to outwork your competitors and colleagues. You'll need to make your money work for you.

Because it may not be enough to be a 401k millionaire. Depending your age and circumstances, you may need two or even three times that much to live the retirement of your dreams.

Luckily, the 401k millionaire formula never changes. Apply what you've learned, and you'll be in great financial position.

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