Do you dream of becoming a millionaire? Are you like most Americans and are only saving in a company-sponsored 401(k) plan? With the advent of the 401(k) in 1981 so employees could supplement pensions it has become more important for people to save for these tax-advantaged plans now more than ever. As 401(k) plans have become more popular, we have seen the decline of pensions in a traditional sense. But the chances of reaching a million in your 401(k) is slim as only about 1% of the 52 million accounts has reached that level. But if you want to beat the odds then the key is to start early and save as much as you can. Here are five helpful tips that could get you past the million mark.
In one survey of 401(k) millionaires, they saved an above average 14% of their pay over their entire career from beginning to end. Now most people are saving the maximum that their company will match and not much more than that if they are contributing that much. Most of the millionaire 401(k) participants had also been saving that above-average amount for a long period as most are over 50 with the average age of 60. The key to their success here is not a well-kept secret at all, but one of the best known least used ways to becoming wealthy is the compounding of your money over a very long period. Think of it in reverse by looking at your credit card statements if you are not one of the ones who pays off their bill every month in full. If you pay the minimum and do not charge any further purchases, you see that it takes forever to pay down the bill. That is because the credit card companies charge high-interest rates, and they compound them every month. If you use compounding of interest in your favor, you can see your balances grow beyond what they would otherwise.
In 2015 a 401(k) participant can contribute up to $18,000, and someone over the age of 50 can contribute up to $24,000. Now most people do not start out contributing that much to their accounts but it is a level that many people do reach over time. If someone is 30 years old and makes $50,000 a year saving 14% of their salary with a 2% annual raise they can amass about $550,000 by age 55 and that can double to $1.1 million by age 65 with the power of compounding and steady contributions. One of the best ways to max out your contributions if to save through your work’s plan and generate additional income that will help supplement your living expenses. As your income from work and your other income rises, it allows you to set aside more of your paycheck to reach eventually the maximum that you are allowed to contribute. And always get the maximum that your employer will match no matter what. In most millionaire, 401(k) accounts up to a third of the value has been from matching. So always take full advantage of the matching if your company offers one.
Another way to help you reach your goal of a million in your 401(k) account is to act like a lifer with your employment. Most 401(k) millionaires have been at the same job an average of 34 years. That is a rarity these days with Millennials averaging five years with a single job. Not the best way to maximize your earning potential when you consider things such as vesting and wait periods before you can begin contributing. These are all key items to consider when you go to get a new job or switch careers. These can kill any momentum that you have created with your savings so always keep these in mind when you look for a new job or are thinking of a career change. If you are prone to switching jobs, try to hang in there at least until you are vested. And if you change to a job that has a wait prior to being able to contribute to the company’s plan still save in a brokerage account until you can switch to the company’s 401(k).
Another way to reach the status of millionaire is to invest early and heavy in equities. When we are younger, we can take the additional risks that are associated with equities. Now I do not think that in today’s world of retirement that anyone should ever get 100% out of equities due to the fact we are living longer in our retirement years and therefore will need equities to help maintain some level of growth in our portfolios. As Warren Buffett says, “be greedy when others are fearful and be fearful when others are greedy.” Not bad words to live by when it comes to buying and selling equities in general. But the best way to actually achieve financial health is to buy at opportune times and hold the equities until something changes to make the investment unattractive for a long term hold. Trading in your 401(k) account is a surefire way to miss out on some excellent opportunities so avoid it at all costs. When you are indeed close to retirement it is wise to dial back the equities in favor of bonds but never forget you will still need some capital appreciation in your retirement years so do not over do this when the time comes.
If you are one of the many that change jobs then you have to make a decision as to take your 401(k) with you to your new job or roll it over into an IRA. These are questions that only you can answer, but it is wise to seek the guidance of a professional when or if you need to seek their advice. A fee-only planner is ideal for these instances and can help you in many ways. Remember, it is not always the best thing to take your 401(k) with you as many plans are considered excellent when compared to others. Do your homework prior to making any major changes to your plan.
Taxes are another area that can eat your profits and your money directly from your 401(k). Now I could write an entire post on the tax consequences on your 401(k) but know that it is best to consult a CPA or financial planner when deciding any tax issues. And no there is not a one size fits all answer to tax or if you should take an account with you as everyone’s situation is different and can only be addressed by a thorough evaluation.
If you need additional help with your 401(k) or have other questions that have not been addressed feel free to contact me for further information.
