Given enough time, anyone can become a 401(k) millionaire. Fidelity reported a 25% increase in the number of 401(k) millionaires on its platform this year alone. It is important to note that this analysis does not include individuals with total retirement savings over $1 million. Read on to learn easy steps to start your journey to becoming a 401(k) millionaire.
1. Initiate Your 401(k) Account
Sometimes a frightening reaction is just the first step. To begin your journey to owning a 401(k) account, the first step is to create your 401(k) account. Don’t be afraid; simple procedures.
But this assumes your business has a 401(k) plan. You can enjoy the benefits of this event only after opening an account. If your employer offers a 401(k) match, it would be unreasonable not to create an account and take advantage of the free money your company offers.
For those who are self-employed, it is important to take the time to set up a 401(k) account for your business. If you earn more than $500,000 a year, you may want to consider using a cash balance retirement plan in addition to a 401(k) income plan.
2. Contribute Enough Money To Your 401(k) Account
The second step on the path to becoming a wealthy 401(k) involves determining the appropriate contribution. Below we’ll dive into the financial side of creating a million-dollar retirement plan. As a general rule, it is recommended that you set aside at least 10% of your income. If you’re a late starter or eager to build 401(k) wealth, you’ll need to make a larger contribution.
The tax benefits associated with 401(k) contributions make these distributions easier to manage. Your 401(k) contributions are tax-free each year. In 2023, the maximum 401(k) contribution is $22,500. Individuals age 50 and over have the opportunity to contribute an additional $7,500 per year in contributions. Self-employed or business owners, especially those age 50 and over, can save up to $66,000 per year, including contributions.
3. Grow Your 401(k) Contributions Through Investment
A successful 401(k) fundraiser should invest well with your contributions, without putting the first $1 million into your retirement account. If you take the longer, harder path of saving $22,500 per year without increased investment, it will take you about 45 years to reach this milestone. Conversely, if your investment returns 10% annually, you can reach the same goal in just 18 years while maintaining an annual income of $22,500.
4. Dedicate the Time to Achieve 401(k) Millionaire Status
Becoming a 401(k) millionaire is a journey that evolves over time. Because 401(k) plans have limited annual contributions, this milestone often takes years of hard work. Here are some calculations that explain your path to 401(k) wealth based on your available time; for example, an 8% return on your retirement savings.
- To achieve this goal in 48 years, you need to invest approximately $170 per month.
- Achieving this goal in 30 years requires a monthly investment of approximately $735.
- A 20-year period requires a monthly contribution of approximately $1,821. Monthly investment for 10 years is approximately $1,821. Contributions should be approximately $5,755 (note: this exceeds the 401(k) limit unless you are self-employed and over 50).
- Trying to reach this milestone in 5 years would only require a ridiculous monthly payment of around $14,205 (again, beyond the donation limit).
In fact, these calculations emphasize the importance of starting retirement investment as early as possible. The sooner you start saving for retirement, the easier your path to 401(k) millionaire status will be.
5. Avoid the Error of Tapping into Your 401(k) Prematurely
By diligently following the previous four steps, you will be on your way to becoming a 401(k) millionaire. But making the mistake of withdrawing 401(k) funds too early before retirement can hurt your chances of achieving financial independence.
In addition to hindering your financial growth, these withdrawals are often subject to taxes and penalties. During tough times, resisting the urge to tap into your 401(k) is critical to building enough resources to maintain the lifestyle you want in retirement.
Be on your way to true 401(k) millionaire status by following these simple tips. While reaching a million dollars in a 401(k) is a significant accomplishment, many readers of this article may feel that accumulating additional retirement savings is necessary to reach retirement goals. Work with a trusted financial advisor to identify your specific financial freedom goals.