Doing a little research and making a few simple moves can make a world of difference in retirement.
For the record, most people don't have a million-dollar 401(k) account. There's usually just not enough income or enough time to grow a work-sponsored retirement plan into a seven-figure stash. Even for people at or over the age of 65, mutual fund company Vanguard reported that their clients' average 401(k) balance in 2022 stood at just a tad over $230,000.
For a handful of lucky investors though, a 401(k) worth a million bucks (or more) isn't a mere myth. They've done it. Time did most of the heavy lifting, mind you, but it is possible.
Here's a rundown of four smart things these folks might have done that you can easily do for yourself with your workplace-offered retirement savings plan.
1. Qualify for your company's maximum matching contribution
Did you know most employers that offer 401(k) retirement savings accounts will also chip in some of their own money to your account? It likely won't be a life-changing amount. In most cases, a company will match between half and all of your own contribution, up to a maximum of 6% of your wages. Last year's average contribution was on the order of 4.8%, according to mutual fund company and plan manager Fidelity.
Still, it could be worth a few thousand dollars' of free money every year if you're willing to make sizable contributions of your own. That's an easy (and quick) 100% return on your investment. That additional money could be worth six figures in the future, if collected consistently and invested well over time.
2. Choose an S&P 500 index fund
It's no coincidence that retirement plan managers like the aforementioned Fidelity and Vanguard predominantly offer their own mutual funds as investment choices within a 401(k) plan. Like most other funds, however, the bulk of these mutual funds will trail the performance of a benchmark such as the S&P 500.
Standard & Poor's data-digging indicates that over the course of the past five years, nearly 79% of large-cap funds offered to U.S. investors underperformed the S&P 500. For the past 10 years, the figure ratchets up to more than 87%. Over the past 15 years, 88% of U.S. large-cap mutual funds underperformed compared to the .
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The solution? Don't try so hard to beat the market by picking a company's actively managed funds. Improve your odds -- and raise your likely returns -- by owning index funds that are only designed to mirror the performance of benchmarks like the S&P 500 index. A single index fund based on the S&P 500 is arguably adequate in and of itself, in fact. While not always, index funds also usually boast lower expense ratios, which otherwise crimp your overall returns with a particular fund.
3. Don't leave your contributions as cash
Many 401(k) retirement account plan managers will now automatically assign a generalized fund allocation for enrollees who don't make such a choice, but that's not always the case. Make sure you know what's happening with your money.
If you don't pick investments, your money might simply be swept into a money market fund, which offers very little in the way of returns.
4. Consider using a Roth 401(k)
Last but not least, you may want to find out if your workplace's 401(k) plan offers a Roth option.
The chief difference between a Roth 401(k) and a traditional 401(k) account is simple enough. That is, contributions made to traditional 401(k) accounts are tax deductible for the year in which they're made, but withdrawals made from these accounts are taxable. Conversely, contributions made to a Roth 401(k) account don't reduce your taxable income when you're making them, but withdrawals from a Roth 401(k) come out tax-free. Generally speaking, you'll want to incur any tax liability associated with a workplace retirement plan when your tax rates are going to be their lowest.
You won't always know when this will be, of course -- you can only make your best educated guess. If it ends up being the wrong one, that's OK. You're still saving and growing your money, which is more than plenty of other people can say.
James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
FAQs
Recommended 401k Amounts By Age
Middle age savers (35-50) should be able to become 401k millionaires around age 50 if they've been maxing out their 401k and properly investing since the age of 23. I'm expecting to be a 401k millionaire when I turn 50 in 2027 by contributing to a Solo 401k plan.
At what age should you be a 401k millionaire? ›
Recommended 401k Amounts By Age
Middle age savers (35-50) should be able to become 401k millionaires around age 50 if they've been maxing out their 401k and properly investing since the age of 23. I'm expecting to be a 401k millionaire when I turn 50 in 2027 by contributing to a Solo 401k plan.
What is the best 401k mix for a 60 year old? ›
At age 60–69, consider a moderate portfolio (60% stock, 35% bonds, 5% cash/cash investments); 70–79, moderately conservative (40% stock, 50% bonds, 10% cash/cash investments); 80 and above, conservative (20% stock, 50% bonds, 30% cash/cash investments).
Do people get rich off 401k? ›
Look at the behavior of workers who have invested their way to seven-figure retirement accounts. One key characteristic among them is patience. New data from Fidelity Investments shows the number of 401(k)-created millionaires reached an all-time high in the first quarter of 2024.
How much of your income do experts recommend investing in a 401 K account? ›
For that reason, many experts recommend investing 10-15 percent of your annual salary in a retirement savings vehicle like a 401(k).
Is the S&P 500 Index fund a good investment? ›
Investing in an S&P 500 fund can instantly diversify your portfolio and is generally considered less risky. S&P 500 index funds or ETFs will track the performance of the S&P 500, which means when the S&P 500 does well, your investment will, too. (The opposite is also true, of course.)
How many Americans have $1,000,000 in their 401k? ›
The amount of retirement millionaires continues to grow, too: As of March 2024, the number of 401(k) accounts with balances of at least $1 million rose to 885,138, up nearly 12%, from year-end 2023, and nearly 30% year over year. The average account balance for this group was $1,137,409 as of March 2024.
Can I retire at 62 with $400,000 in 401k? ›
If you have $400,000 in the bank you can retire early at age 62, but it will be tight. The good news is that if you can keep working for just five more years, you are on track for a potentially quite comfortable retirement by full retirement age.
What is a good 401k balance at age 65? ›
Fidelity goes on to explain that someone who plans to delay their retirement until age 70 may need to save eight times their income to maintain the same lifestyle in retirement, while someone who wants to retire closer to age 65 may need to save as much as 12 times their income.
How much money do you need to retire with $100,000 a year income? ›
So, if you're aiming for $100,000 a year in retirement and also receiving Social Security checks, you'd need to have this amount in your portfolio: age 62: $2.1 million. age 67: $1.9 million. age 70: $1.8 million.
According to The Federal Reserve, the median retirement account savings for households between ages 55 and 64 is roughly $185,000. While this is a considerable amount of money, it's probably not enough to secure a comfortable retirement for most people.
How many people have 500k in 401k? ›
How much do people save for retirement? In 2022, about 46% of households reported any savings in retirement accounts. Twenty-six percent had saved more than $100,000, and 9% had more than $500,000. These percentages were only somewhat higher for older people.
How much to put in a 401k to retire a millionaire? ›
How Long Will Becoming a 401(k) Millionaire Take? If you invested $23,000 into your 401(k) each year and earned a consistent 8% return each year, you'd achieve a plan balance of $1 million in slightly under 20 years. Note that this does not factor in a potential employer match.
What's better than a 401k? ›
IRAs offer a better investment selection.
You'll have the full suite of assets on offer at the institution: stocks, bonds, CDs, mutual funds, ETFs and more. With a 401(k) plan, you'll have only the choices available in that specific plan, often no more than a couple dozen mutual funds.
Is $1000 a month in 401k good? ›
If you start by contributing $1,000 a month to a retirement account at age 30 or younger, your savings could be worth more than $1 million by the time you retire. Here's how much you should expect to have in your account by the time you retire at 67: If you start at 20 years old you should have $2,024,222 saved.
At what age should I stop contributing to my 401K? ›
The tax-free growth and those extra employer contributions will stall when and if you stop contributing more money to your 401(k). Most experts recommend contributing to your 401(k) for at least as long as you're working.
What is considered high income for 401K? ›
Highly compensated employees (HCEs) are employees who are earning more than $155,000 in 2024, or who own more than 5% of a business. Employers can also name the top 20% of earners in the firm as HCEs, as long as they're making over $155,000 per year for 2024. 5 (For 2023, HCEs must earn at least $150,000 per year.)
What is the 50 30 20 rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.
What if I invested $1,000 in the S&P 500 10 years ago? ›
Over the past decade, you would have done even better, as the S&P 500 posted an average annual return of a whopping 12.68%. Here's how much your account balance would be now if you were invested over the past 10 years: $1,000 would grow to $3,300. $5,000 would grow to $16,498.
How much does it cost to buy S&P 500? ›
For an S&P 500 index fund, many come with no minimum investment. For an S&P 500 ETF, you might need to pay the full price of a single share, which is generally upwards of $100—but some robo-advisors like Stash offer fractional shares for as little as $5.
How Long Will Becoming a 401(k) Millionaire Take? If you invested $23,000 into your 401(k) each year and earned a consistent 8% return each year, you'd achieve a plan balance of $1 million in slightly under 20 years. Note that this does not factor in a potential employer match.
Can I retire at 55 with $1 million in 401k? ›
It's definitely possible, but there are several factors to consider—including cost of living, the taxes you'll owe on your withdrawals, and how you want to live in retirement—when thinking about how much money you'll need to retire in the future.
At what age should you have $1 million in retirement? ›
Based on this, if you retire at age 65 and live until you turn 84, $1 million will probably be enough retirement savings for you. However, it's important to remember there is no one-size-fits-all amount.
How much should a 35 year old have in a 401k? ›
By age 35, aim to save one to one-and-a-half times your current salary for retirement. By age 50, that goal is three-and-a-half to six times your salary.
