Who wants to retire a millionaire? Many of us do, and a 401(k) could be your ticket to achieving that goal — that is, if you manage yours the right way. While setting money aside in any retirement plan is a good way to grow wealth, a 401(k) in particular could lead you to millionaire status by the time your senior years roll around. This especially holds true if you adopt the following strategies.
1. Always contribute enough to get your full employer match
Most employers that sponsor 401(k) plans also match employee contributions to varying degrees, and if yours does the same, capitalizing on that match could be your ticket to becoming a retirement millionaire. Remember, not only does your employer match constitute free money for your savings, but as is the case for your out-of-pocket contributions, you also get the opportunity to invest your matching dollars for added growth.
Let’s say your employer puts $1,800 a year into your 401(k) over 30 years, and that your investments in that plan also generate an average annual 7% return, which is a bit below the stock market’s average. All told, you’ll end up with $170,000 from your employer alone over the course of three decades. Talk about impressive.
Catch-up contributions, as the name implies, allow older workers to make up for lost time by putting more money into their retirement savings. If you’re 50 or older this year, you can contribute an additional $6,500 to your 401(k) for a total annual contribution of $26,000.
Now to be fair, setting aside $26,000 for retirement in any given year is not an easy thing to do. But let’s say you manage to put an extra $6,500 into your 401(k) between the ages of 50 and 65 to reach that $26,000 mark. Let’s also assume you get an average annual 5% return during that time between you’ve shifted to more conservative investments. All told, during those 15 years, you’ll grow your 401(k) balance to $561,131. And to be clear, that’s on top of whatever balance you had before the age of 50.
3. Keep your fees as low as possible
The funds you choose for your 401(k) come with fees, known as expense ratios, that can eat away at your gains. Keeping those fees to a minimum is therefore instrumental in growing wealth in your plan, and to that end, it pays to favor index funds over actively managed mutual funds. Index funds expense ratios can be one-tenth the cost of those charged by actively managed funds, and if you think those active funds always outperform index funds, think again. Often, you’ll do better with index funds at a fraction of the cost.
The better a job you do of managing your 401(k), the more likely you’ll be to retire a millionaire — or perhaps even a multimillionaire, if you play your cards right. Because 401(k)s come with much higher annual contribution limits than IRAs, they’re a solid wealth-building tool, and the right moves on your part could help you make the most of yours.
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