Is your goal to retire a millionaire? If this is indeed the case, as it is with so many of us, here are some tips and tricks to help get you into the group who call themselves millionaires. One of the best and easiest ways to retire a millionaire is to invest in your work’s 401(k) plan. Not only do these funds grow tax-deferred, or in some instances tax-free, but there can also be a company match that provides you an additional source of free income to help get you to a million dollars.
The first and maybe the most obvious way to achieve this goal is to save early and as often as you can. When you are younger, you have the power of compounding of interest on your side. In many of my blogs, I have shown the value of an additional five, ten, or fifteen years of consistent savings. If you have doubts go into Excel and use the Future Value function and plug in your numbers and see what the spreadsheet tells you. I think you, like most of us, will be amazed at what an extra ten years of compounding will do to your portfolio’s value.
The number of 401(k) millionaires has doubled since 2012 mainly due to the fact these people stayed invested during the recession of 2008 and 2009. And during that time they also continued to invest in their 401(k) accounts on a very consistent basis. I would never suggest someone try to time the markets as few had any success with that during the recession, and even fewer are having success in today’s markets that are experiencing all-time highs. And the power of dollar cost also averaging has been used by these consistent investors as well. During the recession, they were buying at extremely low prices and then proceeded to purchase as the markets rose. This allowed them to buy more in 2008 and 2009 and the following years right up to the present where due to the high nature of the markets their investments are buying fewer shares. Over time, this is the preferred method rather than trying to time the markets.
Look at it this way as well. Since the bottom in the spring of 2009 stocks have more than doubled in value. From 2009 to the end of 2014 alone the S&P 500 was up over 160% when dividends were reinvested. When you annualize the return, it works out to about 18% annually. And if you were invested in an indexed S&P 500 Exchange Traded Fund your costs could have been as low as .05% for some of the low-cost funds such as offered by Vanguard. Not a bad return when everything is considered.
So how does one actually become a 401(k) millionaire? First it is important to save as much as you can for as long as you can. Ideally aim for saving between 10% and 15% of your salary prior to considering any matching funds. Depending on how the 401(k) is set up you may be reducing your taxes now and letting the money grow tax-deferred. If you opt for a ROTH account, your taxes will be paid now, and any future withdrawals will be tax-free.
Invest in equities rather than bonds or leaving money in cash accounts. And make sure you diversify as much as possible as well. And that means go international if that is an option in your 401(k) plan. Equities not only have earnings but pay dividends, something bonds do not do. But here the key is to diversify with quality equities from all over the world and not limit yourself to domestic equities.
If you do not take advantage of your 401(k)’s company match, you are leaving free money on the table. And that is something you never want to do under any circumstance. No matter if you are hitting the 10% to 15% range of your salary always contribute up to the maximum that your employer will match. According to some estimates, as much as almost 30% of 401(k) millionaire’s accounts are made up of the matching funds from employers. Do not overlook this vital aspect of any 401k) plan.
And finally under no circumstance should you withdrawal money prior to retirement. Not only will the IRS hit you with taxes but if you are under the age of 59 ½ they will also hit you with a 10% early withdrawal penalty.
Even with some 401(k) plan only offering higher fee investment options with a company match it still makes sense to invest. But do be aware of management fees of the plan as well as the investment funds contained within the plan. In cases where the fees are substantial still invest up to the match then switch to an IRA until that is fully funded then switch back to the 401(k) plan with a higher percentage of your salary.
If you have any questions or concerns, please feel free to contact me.
