The Secrets To Building A $1 Million 401(k)
Oh, the power of 401(k)s. What began as an obscure IRS regulation to allow taxpayers a break on taxes and supplement their pensions has now become America's number-one way to save for retirement. According to a 2013 Gallup survey, 65 percent of those earning $75,000 or more expect their 401(k)s, IRAs, and other savings to be a major source of income in retirement. It now far surpasses pensions, at 34 percent.
Over 30 years after the 401(k) began, we're now seeing the first generation of workers who have had access to a 401(k) for their entire careers retire. Many are doing quite well, some even retiring as 401(k) millionaires.
Yes, having a seven-figure 401(k) is still largely in the realm of the wealthy one percent, but Time reports that number is growing fast. Two of the largest 401(k) plan providers, Fidelity Investments and Schwab, reported that the number of million-dollar-plus 401(k)s has more than doubled since 2012.
So what's the secret? Starting with an already high salary doesn't hurt, of course. However, even if you're not making millions, here are some tips to help you a build a cushy 401(k) nest egg.Think Long Term
Compounding, earning money on your reinvested earnings as well as on your original savings, is the way to turn a little bit of money into a lot of money and the secret to successful 401(k)s. So start saving at the highest possible percentage as early as you can. With every raise in salary you get, increase your contribution rate. Pick up freelance or part-time work and consider putting that money aside for retirement as well.
If it's an option at your company, get your employer to match your contributions. Many workers aren't thinking long-term and don't contribute enough to the company 401(k) plans to get the full match. They're essentially missing out on free money.
Waiting to invest until age 45 rather than 25 can cost you thousands of dollars in savings, but if you are a little older, you will need to look beyond the 401(k) and consider other options like a brokerage account. 401(k)s have annual limits (for 2015, the limit is $18,000, or $24,000 if you are 50 and older).
Be A Company Lifer (Or At Least Act Like One)
Many of the 401(k) millionaires retiring spent over 30 years at the same company. In 2015, for many young employees, that's just not realistic. After all, job switching is often the best way to get a salary increase. However, even if you plan to change companies every few years, build up your retirement plan as if you were a company lifer.
First, treat your 401(k) as untouchable. If you're buying a house, or looking into another big expense, don't tap your 401(k). If you leave your job, don't take your 401(k) in cash either. Statistics show that slows or even stops your savings growth.
Instead, roll your old plan into your new 401(k) or an IRA when you switch jobs. Or, if 401(k) is worth $5,000 or more, you can leave it behind at your old plan.
When you start a new job, you may have a waiting period before you can enroll in a company's 401(k) plan. When you face a gap, keep saving, either in a taxable account or in a traditional or Roth IRA (if you qualify).
Also, even if you dislike your job, if you're close to vesting, consider sticking around for a little while longer. Once you're fully vested, you can take the entire company match with you when you part ways with your job, but to do that you may need to be with the company for 3 to 5 years.
All in all, if you're lucky enough to be negotiating for a new position, or considering a new job, it's important to take into account not just the salary, but the retirement plan as well. If it's not a generous retirement plan, hopefully you can negotiate a higher salary to make up the difference.