While becoming a millionaire may seem impossible, the good news is anyone can become a 401(k) millionaire if given enough time. According to Fidelity, almost 500,000 401(k) millionaires are on its platform alone. That figure doesn’t include all 401(k) millionaires (those combining assets in retirement accounts). Keep reading as we share the reasonably easy steps to put yourself on the path to becoming a 401(k) millionaire.
1) Set Up Your 401(k) Account
It is often said that the most challenging part of anything is getting started. The first step to becoming a 401(k) millionaire is opening your 401(k) account. Don’t be scared; it is straightforward. To be blunt, if you never contribute to your 401(k), you will never achieve 401(k) millionaire status.
Of course, I assume you have a job offering a 401(k) plan. This employee benefit will only help if you open the account. If your organization provides a 401(k) match, you would be crazy not to set up an account and get what is essentially free money from your employer.
If you are self-employed, take the time to set up a 401(k) for your business. If you earn more than $500,000 per year, consider setting up a cash balance pension plan in addition to your 401(k) profit-sharing plan. Higher contribution limits for business owners make becoming a 401(k) multi-millionaire even easier.
2) Save Enough Money Into Your 401(k) Account
The second step to becoming a 401(k) millionaire is determining how much money to contribute each year. Below, we will share some of the math behind building a millionaire retirement portfolio. At a minimum, most people should strive to save 10% of their salary. If you are starting late or want to become a 401(k) millionaire more quickly, you will want to save even more.
Before you freak out, the tax benefits of contributing to a 401(k) can help make these contributions more budget-friendly. Your contributions to a 401(k) will be pre-tax, meaning you won’t owe taxes on those contributions this year. The maximum 401(k) contribution in 2024 is $23,000. Those 50 or older can make a $7,500 catch-up contribution each year. Self-employed individuals or business owners could potentially save $69,000 per year, plus the catch-up contribution if they are 50 or older.
3) Be Sure To Invest Your 401(k) Contributions
Becoming a 401(k) millionaire without contributing $1 million into your retirement account will require the help of compound interest. If you want to do it the hard way by contributing $23,000 per year and just having it sit there, it will take around 40 years. Assuming a 10% return on your investments, it would take 18 years with the same $23,000 contribution. Cutting the time in half to become a millionaire sounds amazing to me.
4) Give Yourself Time To Become A 401(k) Millionaire
I know we all love instant gratification, but becoming a 401(k) millionaire will take time. There are annual contribution limits to your 401(k) plan, so at the very least, we are talking about several years for anyone to become a 401(k) millionaire. Here are some rough calculations to become a 401(k) millionaire, depending on how long you have to reach this big milestone. We are assuming an eight-percent return on your retirement account investment.
Forty-eight years requires about $170 per month.
Thirty years requires about $735 per month.
Twenty years requires about $1,821 per month.
Ten years would require about $5,755 per month. (This is above the maximum 401(k) contribution limits unless you are self-employed and 50 or older.)
Five years requires about $14,205 per month (also above the contribution limits).
As you can see here, the earlier you start investing for retirement, the easier it will be to become a 401(k) millionaire.
5) Raiding Your 401(k) Is A Big Mistake
If you follow these four steps, you should be well on your way to the big achievement of becoming a 401(k) millionaire. However, if you make the mistake of raiding your 401(k) before retirement, you will significantly reduce your chance of ever achieving financial freedom. You will also get hit with taxes and penalties on your withdrawals. Not raiding your 401(k) when times get tough is essential to accumulating enough assets to maintain your standard of living in retirement.
Follow these five simple steps, and you should be on your way to becoming a real-life 401(k) millionaire. While a million-dollar balance in your 401(k) is a huge accomplishment, most people reading this post will likely need to accumulate even more retirement assets to have the retirement they dream of. Work with your fiduciary financial planner to determine your financial freedom number.
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