The Million Dollar 401(k) Plan

Fidelity Investments recently completed a review of their 401(k) and IRA account holders and found that the number of accounts crossing above the $1 million value mark compared to 2020 rose by 74%…over 750,000 account holders.  Can you use your 401(k) plan to become a millionaire?  The answer is Yes, and to help you get there, review these six strategies:

1. Start early. If your goal is to create a million-dollar retirement plan, there is simply no substitute for starting early.  In most cases, the biggest factor in wealth accumulation is money compounding over time.  A $1,000 invested today at 10% will be $2,000 in seven years; $4,000 in fourteen years; $8,000 in twenty-one years; $16,000 in twenty-eight years and so forth.  This is the magic of compounding. Your goal should be to invest a minimum of 10% of pay (before the matching contribution).
2. Max the match. Think about how you would answer this question, “How much would you invest if I guaranteed that you would double your money in the first year?” That’s exactly what many employers do by providing a matching contribution for employees who contribute to their company 401(k) plan. Many plans will match 25%, 50%, or even 100% of the first 3%-6% of your compensation.  You must be willing to ‘invest’ your money for the long term, and don’t lose sight of the power of a matching employer contribution. No other investment strategy will offer as much potential.
3. Focus on stocks. In the short term, stock values can and often do fluctuate significantly.  However, stocks offer the best opportunity for long-term retirement planning.  Long-term historical returns for stocks are about 9%, while bonds historically are less than half that amount. So if you are ten years or more away from retirement, consider an 80% or higher allocation to stocks.
4. Increase your contributions. Does it make sense to invest in your 401(k) plan above the matching limits?  While you don’t get the benefits of additional matching contributions, you continue to earn tax-deferred growth and avoid taxes on the contributions.  Increasing your contributions is easier than you think.  Think about this – If you are in a 28% marginal tax bracket, a $1,000 contribution only costs you $720.  The government pays the rest for you!  One painless way to increase your contribution is to commit one-half of all pay raises to your 401(k) plan.  You’ll be surprised how fast this will add up.
5. Avoid loans. Many retirement plans allow you to borrow from your account.  Some people like the thought of borrowing from their 401(k) plan based on the idea that they are borrowing from themselves.  In reality, you are “stealing” growth opportunities from yourself because you are robbing yourself of tax-deferred growth.
6. Stick with it. One study suggested that over 40% of people who changed jobs cashed in their 401(k) plan, which in turn created income tax liability and often federal penalties as well.  Make sure that you and your family understand the importance of your retirement plan.  It is a gift to yourself of financial abundance during your elder years.

Here’s an example of committing to a lifelong contribution plan and the power of compounding:

A 22-year-old with beginning earnings of $40,000 with a salary rising at 5% per year; investing 10% in her 401(k) where 6% of pay is matched at 50%; investing in all stocks earning an average of 9%…would have a $1,000,000 401k at age 50!