3 Secrets of 401(k) Millionaires

Retiring with at least $1 million is the goal of many people. Unfortunately, most people don’t achieve this, at least not through their retirement accounts. Only about 3.2% of U.S. households had at least $1 million saved in a retirement account, according to an Employee Benefit Research Institute analysis of Federal Reserve consumer data at the end of 2019.

It’s not inside information or a special savings account that separates someone who has $1 million saved for retirement from the average person trying to make money. There are a few simple secrets that can help the average individual far exceed their retirement account balance. 3 Secrets of 401(k) Millionaires

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1. They are always in line with the whole company.

For most workers, the biggest benefit of a 401(k) is that it can boost your annual retirement savings by up to 100% with a company match. Some companies will match donations dollar for dollar up to a certain percentage of your salary, while others will only match half of your donation, but usually a higher percentage of your salary. Some mix and match.

Read the fine print of your 401(k) plan to make sure you’re contributing enough to get the full match. Anything less than that is leaving money on the table.

It’s worth noting that the amount you need to contribute for a company-wide match is often much less than your 401(k)’s contribution limit. In 2024, you can contribute up to $23,000 (or $30,500 if you’re 50 or older) into the plan. But even with much smaller contributions, you can reach $1 million in retirement.

If your contributions and the company’s match amount amount to about 10% of your salary, you will become a millionaire. Even if you earn an average salary, your savings can build up over 40 years if you combine good investments and income.

2. Pay attention to fees

One of the biggest drawbacks of 401(k) plans is that the fees are very high compared to other retirement savings accounts. Fees vary from company to company, but the average employee at a large company reportedly pays about 0.84% ​​of 401(k) assets in fees. 401(k) average ledger.

Those fees add up quickly. Just as compound interest can work for you when you earn it, it can also work against you when you pay it off. A 0.84% ​​drop in investment returns can cost you tens or even hundreds of thousands of dollars over the course of your career.

There are three types of 401(k) fees: administrative, investment, and service. You can’t do much to control the first, but you can mitigate, or sometimes eliminate, the effects of the others.

Service fees are fees charged for using 401(k) features, such as loan options or participant designated accounts. This is optional, and you won’t pay if you never use it. That said, these features can sometimes be worth paying for.

A larger impact comes from investment fees charged on funds in your 401(k). If you can find a fund with a low expense ratio, you’ll be able to keep your total fees below average. The good news is that funds with low expense ratios often turn out to be broad index funds. These have historically outperformed actively managed funds when fees are taken into account.

It’s best to get rid of the fees as soon as possible. One way to do this is to convert your existing 401(k) to an IRA. Most IRAs don’t charge fees and offer more investment options with lower expense ratios.

3. Does not hinder investment

The biggest secret of 401(k) millionaires is that their investments will serve them well for a very long time.

Saving in a 401(k) is like spinning a flywheel. It’s really hard to turn the wheel at first. You’ve invested a ton of money in your 401(k) and it feels like almost nothing is happening. But the more you keep saving, the easier it becomes to spin the wheel.

After a few years, you will start to feel the impact of investment returns on your account balance. Eventually the wheel can turn on its own. Even if you don’t contribute a penny extra to your 401(k), the amount of investment returns will have a meaningful impact on your account balance each year.

The only problem is that you can’t disrupt the flywheel’s thrust. You cannot withdraw funds from a 401(k).

Unless you have a very good reason to withdraw money from your 401(k), such as a real emergency, it’s never a good idea to withdraw money before retirement. The IRS deters such behavior by imposing penalties. Not only will it hinder your progress towards $1 million by disrupting the flywheel, but doing so will often result in you paying a fine.

Heed these wise words from Charlie Munger: “The first rule of compounding is to not stop unnecessarily.”