When most people daydream about becoming a millionaire — you know you do it, don’t even try to deny it — and reality comes back with a cruel smack across the face, folks tend to get a bad case of the blues, believing that there’s never, ever going to be a way to actually achieve such a lofty goal. Au contraire. You actually can become a millionaire, but it will take some work, some thought, and the application of solid strategies. It isn’t easy, but it’s definitely not impossible.
If an average worker wants to build a decent retirement nest egg that would allow you to gracefully finish out your days on earth with ease, according to the Motley Fool, you’re going to need to save something like $1.8 million. That’s what a 2023 survey produced by Charles Schwab revealed, which is why you should probably get started on maximizing your savings as soon as possible.
There are three secrets you need to know if you want to be a 401 (k) millionaire.
The first one, Motley Fool author Katie Brockman said, is that time is your friend. Not just any friend, mind you, but your best friend. As Mick Jagger once said, “time is on your side.”
Time is your most valuable resource when saving for retirement. Thanks to compound earnings, your money will grow exponentially faster the longer it has to build. The more time you have to save, the less you’ll need to contribute each month to reach your $1 million goal.
For example, say you’re earning a modest 8% average annual return on your investments, and you have a target of $1 million by retirement age. Here’s approximately how much you’d need to contribute each month depending on how many years you have to save:
I know what you’re probably thinking. With the price of gas, groceries, and prescription drugs what they are right now, you’d have to sell your left kidney in order to get a few extra hundred dollars a month to put back in your retirement fund. Just do what you can. It’s better than not putting back anything at all. The longer you wait to get started, the less likely you are to follow through.
Brockman revealed the second secret is to avoid digging into your savings if you can.
A lot of folks end up pulling a loan from their 401(k) when the crap hits the fan and they are in a desperate financial situation. However, taking money out of the account is far more damaging than you realize as it will incur taxes and penalties if you happen to be younger than 59 and a half. And, of course, borrowing money from the 401(k) could make it more difficult to reach you’re goal of $1 million.
For instance, say you currently have a balance of $100,000 in your 401(k), and you’re contributing $300 per month. In one scenario, say you take a loan of $5,000, while still contributing $300 monthly. In another scenario, say you avoid the loan entirely and continue saving at your normal rate.
Assuming you’re earning an 8% average annual return on your investments, here’s approximately how your savings would add up over time in both scenarios:
In other words, that single $5,000 loan — even if you paid it back quickly — could ultimately cost you roughly $34,000 in missed potential earnings over 25 years. If you end up making repeated withdrawals, it could cost you even more.
The third secret to becoming a 401(k) millionaire is to ensure that you take full advantage of the employer match benefit that most companies who offer workers an account offer. This means that whatever amount you are putting into your retirement account, the company will match it up to a specific limit. You need to make sure you are taking your employer up on the perk. It’s free money. Who in their right mind doesn’t like free money?
An idiot. That’s who.
And you aren’t an idiot. You can’t be. You’re reading this article.
The average match is 3.5% of a worker’s wages, according to data from the U.S. Bureau of Labor Statistics. If you’re earning, say, $60,000 per year, that amounts $2,100 per year in matching contributions. That may not sound like much, but at an 8% average annual return, $2,100 per year would add up to around $238,000 over 30 years — and that’s not even including your own contributions.
Also, most workers tend to see their wages increase over time. Because many 401(k) plans offer the employer match as a percentage of a worker’s salary, the more you earn, the more you can receive from your employer.
Again, putting these three secrets into practice, consistently, and not indulging the temptation to draw out money when you hit a rough patch, is not going to be easy, but the sacrifices you make today, will lead to your success later.