It's no secret that a 401(k) plan can make or break your Golden Years, so a path to wealth is exactly what you need if you're going to be a 401(k) millionaire. So, where do you start when wrapping your arms around a seven-figure retirement plan campaign? Let's go with these ten key tips, the building blocks of your newly-rebooted 401(k) "millionaire" plan.
Regardless of your age now, it will only get harder to accumulate a million dollars if you put off saving for another year. "Assuming retirement at age 65 and a 7% return, an investor who starts saving at age 25 has to save about $420 per month to reach that million-dollar milestone, while a person who waits until age 35 to start saving has to save double that, about $885 per month," says Matt Hylland, investment advisor at Hylland Capital Management, in Norfolk, Va.
According to a 2015 study from Financial Engines, one in four workers do not max out their employer match leaving, on average, $1,336 in free money in their employer's coffers instead of their own, Hylland says.
Roll more money into your 401(k) with "found money," says Michelle Clardie, a personal savings blogger with SavingsandSangria.com. "Raises and bonuses are a great way to increase contributions," Clardie notes. "You're already used to living without that extra money, so you won't miss it when you roll it directly to your 401(k). The same goes for amounts you were paying toward debt, like student loans, after you paid off the loan."
As your investments all perform differently, your asset mix will skew toward the highest performing assets, but those might also be the riskiest, Clardie states. "Automatic rebalancing routinely adjusts your investments to make sure they match your desired asset mix," she says.
For 2017, the maximum annual 401(k) contribution limit is $18,000, and every penny counts. "If you put in the maximum 401(k) contribution rate of $18,000 per year, and earn average investment returns of 7% annually, you'd have over $1 million saved in 30 years," notes Lyn Alden, founder of Lyn Alden Investment Strategy.
Avoid fees by going "low." "Mutual fund fees in actively managed funds add up and will literally suck tens of thousands or more of your nest egg over time," says Tom Vilord, president of Wall Street Value in Turnersville, N.J. But passively-managed index funds offer good returns with lower fees.
The 2007-2008 Great Recession hurt many people economically, but for stock investors, it was a "once in a lifetime" opportunity to buy any fund on sale. "We look for sales with everything we purchase but many people don't take that bargain shopper mentality with their investments," Vilord says.
Earning interest on top of interest is the most critical element to investment success in a 401(k), says Vincent Cucuzza, a certified financial planner with Barnum Financial Group, in Elmsford, N.Y. "The way I illustrate this with my clients is by asking them, 'If I gave you a penny, and that penny doubled every day for 30 days, how many pennies will you have at the end of 30 days?'" Cucuzza notes. "The answer is 10.7 million pennies - that's an example of how powerful compound interest can be with a 401(k) plan. 401(k) investors must use the law of compounding interest to their advantage, and to do so means to save as much as they can, as early in their career as possible."
It's important to change your investing strategy at different junctures in your life, notes Robert Baltzell, president of RLB Financial in Los Angeles. "Your risk tolerance changes as you age, and you shouldn't take on as much risk at age 60 as you would at age 30," he says.
That's where asset allocation can help. "Asset location is extremely important," Baltzell says. "Taking on too much risk or not enough really depends on where the investor is at in their timeline of retirement. If a retirement saver is five to seven years away, taking on too much risk could be very dangerous. When you're over 55, your money doesn't have the time to recover. But if the investor is within the 20-year range of retirement, not taking on enough risk would be the worst thing you could do."
Should you find yourself in a hardship situation, look at other options instead of borrowing from your 401(k) plan, advises Mike Zaino, president and CEO of TZG Financial in Charlotte, N.C.
"Even if you can prove your hardship and can avoid the 10% IRS penalty for withdrawing from the account prior to age 59.5, this is your primary source of retirement funding and should never be touched, under most circumstances," Zaino says. "I have seen way too many 30- to 50-year-olds decimate their retirement by making this mistake, only to realize what a poor decision they made when it was too late to rebound from the effects of said decisions."