If you get started early, it’s a fairly straightforward process to become a 401(k) millionaire. That said, it’s extremely important to avoid making avoidable mistakes. Look at the fact that fewer people are able to retire at 65 today than at any time in history. 30.8% of workers over age 65 are still working just to make ends meet. You can avoid working into your senior years with a 401(k) and some diligence.
Become a 401(k) millionaire by following these simple rules:
1. Get the full company match
All companies have different matching plans; some match a certain percentage of funds while others match dollar for dollar until a cap. Whatever the matching scheme your company uses, be sure that your contribution amount qualifies for all of the available company match. It’s free money after all.
2. Keep your job
While some employees are fully vested on day one, for most it takes a few years to become fully vested. In that case, the money that your company contributed to your 401(k) won’t be yours if you leave for another company during that time. On the other hand, if a new job provides a much greater income or a more generous 401(k) program of their own, it may be worth considering letting go of the unvested amount.
3. Time is your best friend
Every budget has a limit to how much you can invest in a 401(k) plan at the end of each month. And unless you have a very high income, it’s unlikely you’ll reach contribution limits. This means that getting started early is paramount. Becoming a 401(k) millionaire is simple piece of cake if you start at age 25. It’s far more challenging, if not impossible, when you start at age 45.
● Compare: Two employees work for the same company at the same salary. Let’s assume that both make $50,000 per year and receive a 2% raise each year. The employer matches 50% up to 6% of their salary. The annualized return is 8%. Both contribute 10% of their gross pay and retire at age 65. One employee starts at 25 years old, the other at 45.
● The 25-year old employee will retire with $2,204,825. The employee contributed a total of $308,050 and the employer contributed $92,415.
● The 45-year old employee will retire with $358,688. The employee contributed $123,917. The employer contributed $37,175.
● Time will make all the difference in the world!
4. Leave your 401(k) alone
Avoid taking any money out of your 401(k) unless there is no other option. A large nest egg can look very tempting when you need cash to purchase a new home or pay for a blow-out family vacation. It’s possible to borrow money from your 401(k), but will you pay it back in time to keep compounding? Let your money grow.
5. Contribute the maximum that you can
The more money you squirrel away now, the more you will have at retirement. At first it can be challenging to save, however, get in the habit before it’s too late; even if it’s just a few percent of your income. When you get a raise, apply most of it to your 401(k) instead of increasing our lifestyle. You’ve been living without that raise, so continue to do so.
The biggest mistake you can make is waiting to get started. When you’re starting out, your income might not seem sufficient to save a significant amount, but it’s important to begin as soon as possible. Time coupled with steady contributions is all it takes to become a 401(k) millionaire.