3 Secrets of 401(k) Millionaires

The roadmap to success is simple to follow.

For many, an employer retirement plan like a 401(k) is a powerful wealth-building tool that can turn retirement dreams into reality. Obtaining 401(k) millionaire status requires steady action over the years, but it’s more doable than you might think.

At the end of 2023, over 400,000 accounts had at least $1 million at Fidelity Investments alone. Do you want to join them? Here are three secrets to getting the most out of your 401(k) plan and retiring a millionaire.

1. Do more than the minimum

401(k) plans make it simple to participate. You can elect to contribute a percentage of each paycheck to your plan. The problem for many people is that they elect to contribute the bare minimum or less than they can truly afford. Remember that your savings rate, the percentage of your income you invest, will significantly affect how much wealth you accumulate in your 401(k) over time. The more you put in (and the earlier you do it), the better off you’ll be.

Familiarize yourself with the 401(k) contribution limits and plan accordingly. For 2024, you can elect to contribute as much as $30,500 and $76,500 in total each year, depending on your age. The typical employee may not approach these limits, but you can increase your contributions over time. Did you get a raise this year? Consider using a portion of it to increase your contributions.

Compounding does its best work the longer you give it. In other words, pushing those contributions higher while you’re young could add thousands to your long-term 401(k) returns and shave years off the time it takes to reach your financial goals.

2. Grab that free money

You don’t need to make the road to millionaire status harder than it needs to be. Many employers offer an employer match on their 401(k) plans. This is a monetary incentive from the employer to encourage employees to participate in their plans.

It’s easy. The match is up to a certain percentage of your salary. Most employer matches are either dollar-for-dollar or two-for-one. For example, suppose your employer matched dollar-for-dollar up to 5% of your total salary — and imagine you make $100,000 before taxes.

To get the match, you would elect to contribute $5,000 annually (5% of your salary). The match would be another $5,000, giving you a total contribution of $10,000. That’s right, it’s essentially free money because all you need to do to earn the match is participate in your plan. A two-for-one match in this example would come out to your receiving $2,500 from your employer for your $5,000 elected contribution, a $7,500 total.

The bottom line? Everyone with access to an employer match should contribute at least enough to earn the full match if they can.

3. Stay out of the way

Investing is a long-term game, and that’s especially true of retirement planning. The whole point of a retirement account like a 401(k) is that you leave it alone and let your funds grow over time. Unfortunately, that doesn’t prevent people from sticking their hands in the cookie jar early.

According to Vanguard Group, approximately 3.6% of their 5 million retirement plans and administrators saw investors withdraw funds early. That’s expensive for two reasons. First, withdrawing from a retirement plan, like your 401(k), early comes with penalties. Not only will you have to pay the taxes due on your withdrawal, but you’ll pay a 10% penalty on the funds. Second, you’re taking that money out of the market, meaning it’s no longer working on your behalf.

A 401(k) is a powerful wealth-building tool. But like any tool, it can be misused. Life can be challenging, and we get the occasional curveballs thrown our way. Still, think long and hard before you tap into that 401(k) early. The long-term cost is likely far more significant than you realize.

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