How to become a 401(k) millionaire in your Corporate Career
Fidelity Investment in the last quarter of 2019 showed that the number of 401(k) millionaires continued to grow, reaching record levels.1 The number of people with $1 million or more in their 401(k) increased to a record of 233,000 in Q4, up from 200,000 in Q3. The COVID-19 Pandemic would certainly have an impact on 401(k) savings, but the overall trend has increased over time.
There are many stories of corporate career holders that are 401(k) millionaires. But what are the top eight traits of these 401(k) millionaires that one can replicate?2
1. Contribute consistently
Perhaps the most important is to contribute consistently. If there is an option to add money to your 401(k) many employees will just do it periodically. Better to autosave so you can consistently do it automatically each month. You will be rewarded in the long run with autosaving!
In fact, a growing number of employers are automatically increasing employees’ contribution rates each year. According to Fidelity Investments, the company which is the country’s largest administrator of 401(k) plans reported the percentage of 401(k) plans automatically increasing the contribution rate for employees has more than doubled over the last 10 years, from 9% to 19% in 2019. Fidelity's analysis shows that consistency in savings pays off in the long term. Longtime 401(k) savers who have been saving in their 401(k) plans for 10 years straight had an average balance of $306,500.
2. Start saving early
It is critically important to start saving early on for retirement. It may seem like a long way off for someone in their late 20s or early 30s to think about retirement but consistent monthly savings over time will enable you to perhaps retire earlier.
The average millionaire has been contributing to his or her plan for close to three decades, according to Fidelity. And since many of these millionaires tend to contribute the maximum amount allowed this will represent substantial savings over time. Long run-saving is especially beneficial in a tax-advantaged workplace 401(k) retirement savings plans. This is because your money has an opportunity to grow more through favorable tax treatment.
3. Take full advantage of the company match
If your company offers a 401(k) plan, they may also offer a 401(k) match, which is essentially free money, but it’s up to you to take advantage of it.
The Internal Revenue Service in 2020 set the maximum contribution limit for employees who participate in 401(k) to $19,500. If you’re 50 or older, there’s a retirement catch-up provision, allowing you to save even more at $6,500 in 2020.
4. Contribute a minimum of 10% to 15%
As a guide try to contribute between 10% and 15% of your salary. That amount is meant to include contributions from your employer. For 401(k) millionaires, the average company contribution was about 5%. On top of that, during the 12-year period Fidelity studied them, the millionaire group also deferred about 14% of their pay, on average, or about $13,300 annually. As a result, their total annual savings rate was 19%!
However, according to Vanguard, just 4% of savers in their defined-contribution plan who earn $50,000 a year max out their 401(k) plan. For those making between $50,000 and $100,000, that number jumps to 11% of participants. And 32% of people making $100,000 or more max out their tax-deferred savings. The research shows that most corporate employees don't max out their 401(k) contributions which represents money left on the table.
5. Invest for the long term
Always select your 401(k) account investments based on your financial objectives, age, and risk tolerance. The general rule is that the longer you have until retirement, the more risk you can take. If you don’t take on an appropriate level of risk, your account won’t grow as fast as it could. There is a tradeoff between risk and reward. As you take on more risk through stocks the potential for long-term return is greater.
The most popular investment for corporate 401(k) plans are the target-date funds. Because target-date funds provide you with a diversified portfolio based on your age and target retirement date, they can be a good option for younger investors, who may not have other investments outside of their 401(k) plan. However, as you accumulate diversified investments outside of your 401(k), you may want to consider tailoring your 401(k) investments to fit into your overall investment situation.
6. Don’t cash out when changing jobs
Taking a distribution from your 401(k) account when you change jobs is hardly ever a good idea. It could trigger significant tax liability and early withdrawal penalties. When you take money out of your 401(k), you lose the opportunity for it to grow tax-deferred. Even if you’re early in your career and your balance is relatively small, it’s usually a better idea to keep your 401(k) savings with your old employer or better yet transfer your 401(k) to your new employer’s plan or into a rollover IRA.
The average tenure of 401(k) millionaires, according to Fidelity, with their current employer was 34 years. But even if you don’t end up staying that long with the same employer, you can emulate the behavior of our 401(k) millionaires by keeping your retirement savings intact.
7. Rollover old 401k accounts3
It is very important to not neglect old 401(k) accounts. You should rollover old accounts into your new employer's 401(k) if the plan has good low-cost investment options. Keep in mind how you transfer money from existing accounts to a new account could have tax implications. Because the money contributed into a 401(k) is tax-deferred, withdrawing the money and not depositing it into a new tax-deferred retirement savings account within 60 days could trigger taxes due, plus a 10% early-withdrawal penalty if you are younger than 59½ always, and if at all possible, use a direct rollover to avoid paying taxes or penalties on the withdrawal.
8. Get some financial advice
As a general rule, aim to save at least 1 times your salary by age 30, 3 times by 40, 6 times by 50, 8 times by 60, and 10 times by 67.4 Use these as general rules of thumb to keep you on track for retirement.
Factors that will impact your personal savings goal include the age you plan to retire and the lifestyle you hope to achieve in retirement. If you are saving a little later in your corporate career try to catch up. If you're behind, don't worry you can do this. There are ways to catch up. The key is to take action and talk to a financial planner to make sure you are on track to reach your retirement goals.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.