If you’ve been putting away money for retirement, you have likely noticed your accounts are near all-time highs.
The average 401(k) balance now stands at $123,900. The number of 401(k) accounts with balances of at least $1 million is 412,000*. How do you become a 401(k) millionaire? If you follow these five tips, you’ll be on the right track.
1. Start Early
Perhaps the most important part of retirement success is starting to save early. Retirement may seem like a long way away for someone in their 20s but consistently saving over time will give you more flexibility later.
According to Fidelity, the average 401(k) millionaire has been contributing to his or her plan for three decades. In the chart below you can see that if you start early you’ll need to save less per year.
2. Contribute Consistently
Becoming a 401(k) millionaire is more of a marathon than a sprint. Contribute consistently during up and down markets.
It’s a good idea to automate your savings so you can consistently invest each month.
3. Contribute 10% to 15%
In a perfect world, every investor would max out their 401(k) contributions. For 2021, the max is $19,500 and $26,000 for those who are 50 and older.
For 401(k) millionaires, the average contribution was 14% of their salary or roughly $13,300 annually. The average company match was 5%. Their all-in annual savings rate was 19%.
It’s important to defer as much as you can. If you can only contribute a few percent this year, that’s a start. Look to continue to build on it and steadily increase your contributions each year. At a minimum, always contribute enough to get your match.
4. Invest Appropriately
I’ve seen a few people in their 20s with a large portion of their 401(k)s invested in bond funds or cash. These options are low risk, but historically they have underperformed equities (stocks) by a wide margin.
The longer you have until retirement, the more risk you can take. Your account can’t grow if you don’t take some risk.
Also, avoid paying excessive fees. Mutual funds and exchange traded funds (ETFs) have annual fees ranging from 0.03%-2%. This is known as the “expense ratio”. These costs will eat away at your returns. Before selecting your funds, review the fees associated with them and their historical performance.
5. Rollover old 401(k) Accounts
Taking distributions from your 401(k) is hardly ever a good idea. You will have to pay income taxes and an early withdrawal penalty.
A plan participant typically has four main options:
- Leave the money in your former employer’s plan
- Roll over the assets to your new employer’s plan
- Roll over to an IRA
- Cash out the account. Pay income taxes and 10% penalty if prior to age 59 1/2
Ideally, you will want to roll over your account into your new plan or an IRA to avoid paying taxes or penalties. As you get older, you will likely have multiple investment accounts and the more you can consolidate the better.
Whether or not you hit the $1 million mark, the goal is to maximize the amount accumulated for your retirement. Using the steps above can help you achieve just that.
Disclaimers and Sources:
*According to Fidelity Investments, the nation’s largest provider of 401(k) savings plan. As of Q1 2021.
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