Question: Who wants to be a 401(k) millionaire? This is an easy one, so there’s no need to take a lifeline and phone a friend. The answer: Everybody.
The catch? It’s not so easy to accumulate a seven-figure nest egg. Life happens. There are bills to pay. Groceries to buy. Kids to put through college, aging parents to care for, and home improvements to be made. In fact, due to life events (and a lack of adequate savings), 61% of Americans say they will have to delay retirement, according to the recently-released Retirement Survey & Insights Report 2024 from Goldman Sachs Asset Management.
Becoming a 401(k) Millionaire
Happily, 401(k) millionaires do exist. There were 497,000 “401(k)-created millionaires” at the end of June, according to Fidelity Investment’s Q2 2024 Retirement Analysis report. That tells you that with a little planning, a lot of savings, and a few bull markets along the way, joining the millionaire’s club is doable.
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Many workers think it’s virtually impossible to get to the magic $1 million mark. Are they right?
“Impossible? No. Difficult? Yes, very much so,” said Daniel Noonan, senior investment writer at Morningstar Wealth. “Like many things in life, the true answer would be it depends.”
So, what does it take to turn all those payroll deductions and 401(k) contributions into a $1 million account balance decades down the road?
The biggest factors, Noonan says, are disciplined and consistent savings. It might sound sexy, but it helps move the savings balance needle every paycheck, every month, every year, and every decade.
But it’s also about mastering the key building blocks of wealth. Just like a house needs a sturdy foundation, so does a 401(k) saver’s investment plan. Here are key must-do savings and investment tips to boost your odds of reaching the $1 million mark.
1. Invest early
The longer your money can work for you while you’re sleeping, the greater your chances of growing your wealth in a meaningful way. If there’s one thing working in your favor, it is compounding, or earning gains on both your contributions and prior gains. So, the earlier you start saving, the better. A late start to savings, or a delay of at least 10 years, was the top factor that contributed to a reduced retirement account balance, according to the report from Goldman Sachs Asset Management.
For example, a 25-year-old looking to retire at age 65 starting with a zero balance would only need to sock away $416 a month, or $5,000 a year, and earn an annual return of 7.5% to accumulate a 401(k) nest egg of $1,265,772, according to a retirement savings calculator.
In contrast, a 35-year-old starting with zero savings would need to save $833 per month, or $10,000 per year, at 7.5% to reach a balance of $1,129,437 at age 65. A saver who waits to 45 to start contributing to a 401(k) would need to max out his or her 401(k), and save $1,958 a month or $23,500 a year in 2025 (up from $23,000 in 2024), to accumulate $1,090,981 by age 65.
And a 401(k) plan participant who starts saving at age 55, or just 10 years before retirement, would need to take advantage of catch-up contributions and save $2,583 per month, or $31,000 a year, just to save $455,126. If you are 50 or older and you are short of your savings goal, taking advantage of catch-up contributions is key. In fact, if you are between the ages of 60-63 by the end of 2025, your catch-up contribution will be $11,250.
While it’s never too late to start saving and reach the $1 million milestone, it gets tougher if you delay your savings.
“At age 35, you still have time,” said Noonan. “At age 45, you still have time, but it’s getting much harder. And at age 55, candidly, the math gets very difficult.”
2. Invest as much as you can
There’s only so much asset appreciation and compounding can do when it comes to building wealth. Saving is the key to turning a puny nest egg into a sizable one. Your goal should be to save 15% of your pay, says Lindsay Theodore, a certified financial planner and thought leadership senior manager at T. Rowe Price. “Saving aggressively is a big part” of reaching your goal, said Theodore.
A key to saving more is spending less. More importantly, it means not creating so many monthly bills that it crimps your savings or results in debt. “A key part is really managing your budget and being really selective about the types of things you add to your fixed expenses,” said Theodore. In fact, T. Rowe Price research shows that trimming your expenses to free up $550 per month and investing the money at 7% annually can grow your savings by roughly $445,000 over 25 years.
Saving multiples of your salary.
It’s essential to keep tabs on your savings to see if you’re socking away enough and earning a large enough return to make it to the $1 million endzone years down the road. T. Rowe Price offers savings benchmarks related to your salary that can put you on the right track.
For example, they recommend that you have 1x to 1.5x of your salary saved by age 35. That savings-to-salary ratio increases as you age. By 45, you should shoot to have 2.5x to 4x your salary saved, by 55, it jumps to 4.5x to 8x your pay. And by age 65, the official retirement age, you should shoot to have 7.5x to 13.5x your salary saved in your 401(k), according to T. Rowe Price.
Just how much can you save in a 401(k)?
For 2024, the 401(k) contribution limit for qualified savers was $23,000. In 2025, the contribution limit will rise to $23,500. Those age 50 and older may contribute an additional $7,500 in 2024 (this stays the same in 2025) in catch-up contributions. So, the total in 2025 will be $31,000, up from $30,500 in 2024. There are similar rules for holders of 457 plans and 403(b) plans.
Remember, if you are between the ages of 60-63 by the end of 2025, your catch-up contribution will be $11,250, raising the total contribution limit to $34,750. The deadline to contribute is December 31, 2024.
Indeed, the amount you save can have a huge impact on the ultimate size of your nest egg. Let’s say you’re 35 and starting to save in your 401(k). Assuming a 7.5% annual return, contributing $5,000 a year will leave you with an estimated balance of $564,041 at age 65, which is well shy of $1 million. But, if you bump up your savings to $10,000 a year, your 401(k) balance will swell to $1,129,437 by the time you retire. And if you max out your plan and contribute $23,500 a year (starting in 2025), your balance will balloon to $2,654,788.
Keep checking your progress.
As you grow in your career and earn more money, it’s vital to run the numbers to see if you’re within striking distance of your savings goal. “You’re going to want to gauge your current savings progress,” said Theodore, adding that you’ll want to ask yourself or your financial advisor, “Do my current savings have me on track?” If you want to retire earlier than 65, for example, you might have to ramp up your savings, says Theodore.
The good news is diligent savers who save 15% of their salary are on the right track and have a chance at reaching the $1 million mark, adds Theodore. “If you’re planning on retiring at 65, you should be in good shape,” said Theodore.
3. Choose stocks over bonds
Go for growth. That’s the advice from Morningstar’s Noonan. Stocks historically have returned 10% annually, which enables your money to double every seven or so years or so. In contrast, U.S. government bonds are returning a tad over 4.5%.
“All 401(k) success comes over decades, and stocks are the ultimate compounding machine for that time frame,” said Noonan.
Growth, but don't forget diversification.
That doesn’t mean you shouldn’t have exposure to fixed-income assets, such as bonds, in your portfolio to provide ballast, stability, and income during periods of stock market volatility. Just don’t overdo it. “Don’t be so over-reliant on fixed income,” said Mike Dickson, head of research and quantitative strategy at Horizon Investments. “We certainly caution against that as you can leave a lot of money on the table.” You also want your money to be able to outpace inflation, so your money has more buying power, Dickson adds.
Investing in diverse types of stocks provides a critical layer of diversification, he adds. So, invest in mutual funds that own large and small U.S. stocks, international equities, and emerging markets stocks.
“Different asset classes work at different times,” said Noonan. “Diversification keeps you in the game.”
Playing it too safe with your 401(k) investments can just be as risky as letting your 401(k) ride on a single stock, such as your company’s shares.
“Investing too conservatively, like in cash, that’s not going to get you the return you need,” said Theodore.
4. Let time do the work for you
Investing for the long haul — and we mean the long haul, as in 20, 30, 40 years of savings — and letting compounding do a lot of the heavy lifting for you is the final piece of the puzzle.
“Compounding will work for you if you stay out of its way,” said Noonan. “Let enough time pass and you’ll be amazed by the results.”
Avoid these pitfalls.
One last piece of advice: try to avoid mistakes that can reduce the growth potential of your 401(k). Top factors that deplete account balances, according to Goldman Sachs Asset Management, include cashing out 401(k)s when you change jobs, earning too low a return on your investments, and retiring early.
Other mistakes include taking out loans on your 401(k), not taking advantage of your full company match, and not boosting your contribution amount when you get a pay raise, says Noonan. Trying to time the market or selling out in a panic are other no-nos.
The bottom line
“Saving $1 million in your 401(k) is absolutely doable,” said Theodore. “But it’s important to stress that investments do matter. Being diversified matters. And just being disciplined and not selling out just because the market’s a little shaky is really key, too.”
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