How to become a 401K Millionaire
Can anyone become a 401K millionaire? If you live in the United States, with the robustness of the market, and the structured economic system, Yes you can do it.
In case you don’t know it. In the USA, the 401K plan is an employer-sponsored retirement plan that eligible employees may make tax-deferred contributions from their salary to on a pre-tax basis. That means you aren’t going to pay any tax until the money is withdrawn from your account. Most of the time, employers often make matching contributions on behalf of the employees to help fund their retirement.
For example, some employer may match dollar for dollar up to a certain percentage of the employee’s annual salary. Some employers contribute $50 for every $100 that an employee contributes, also up to a certain percentage of the employee’s income. That’s free money for the employees that if properly invested in suitable investments, will go tax-deferred, and the employee can start withdrawing during retirement.
401K offers you tax incentives — For example, let’s say your annual salary is $50k; ideally, you are supposed to pay some taxes on that income. If you contribute, $5K to 401K, you are effectively lowering your tax bracket since your contribution to the 401K is tax-deferred.
The 401(k) plan became law in 1978 and s named after the subsection of the Internal Revenue Code that established it. As of Sept. 30, 2017, 401(k) plans accounted for roughly $5.3 trillion of the $27.2 trillion in total retirement-plan assets in the United States, The IRS imposes contribution limits per year, although limits for 401(k) plans are more generous than those for other plans: $19,000 in 2019, up from $18,500 in 2018. This increases to $25,000 if you’re age 50 or older.
So how would a 3% match work? If you put in 3% of your $50,000 salary, or $1,500, your company puts another $1,500 in the pot. You can add more than that $1,500 yourself, but the company won’t match beyond 3%.
Not every employer offers the 401K plan; some companies have other options such as 401a, 403b. If your employer is not offering any match, you can set up “Individual Retirement Arrangements (IRAs). Small business can use the Simple IRA (The Saving Incentive Match for Employees. Check out the IRS (Internal Revenue Service) website to find out more information about your retirement option.
Achieving this status depends on four main factors:
1. Age you are starting.
2. The amount you contribute
3. The frequency of contribution
4. The returns you get on your investment.
Here are some statistics about 401K contributions in the USA.
– The average 401K balance among participant is $104K
– 71% of the portfolio has exposure to equities.
– The total amount held in all 401K account is $5.3 trillion
– The average savings rate is 8.6%
– According to fidelity, there are over 157,000 401K millionaires in America. There are other 148,000 people who have saved $1 million or more in an IRA.
Here are some tips on how to become a 401K millionaire:
1. Start early: If you are listening to me today, and you are just getting out of college. You are in a better position to retire with over a million dollar in your portfolio. If you start investing at age 25, and you are contributing $300 every month, if you get 9% returns, by age 65, you will have $1.1 M in your retirement account. If on the other hand, you wait till you are 35 years, contributing the same amount every year, you will have less than $450K by the time you turned 65 years. To get to $1M, at age 35 years, you will need to increase your savings to about $600 per month.
2. Max out your 401K contribution each year: When and if possible at all, ensure that you are maxing out your 401K contribution. That means, contribute the maximum allowable by law to take advantage of the tax incentives that come from investing in the 401K plan. For example, in the current year 2019, the maximum allowable contribution is $19K if you are under the age of 50. Why is it good to max out your 401K contribution, again take two people, for example, if one person is able to contribute $10K per year, in 20 years if the money grows at the rate of 8% per year, he will have just about $500K. Another person that contributes $19K for 20 years at the same rate will have over $900K.
If for some reason, you are not able to start early, contributing the maximum allowable by law is your next best option in order to catch up and reach the million-dollar mark.
3. Pick good investments. — Avoid single stock. At the end of the day, it’s all about the returns that you are getting on your investment. If two people are participating in the 401K retirement contribution. One person can average a return of 10% per annum on the investment, while the other person is only making mediocre returns of less than 3%. Typically, you can get returns of 10% in your 401K account, and that will be considered a great return, on average, people get about 8%. If you are getting below 5%, that is considered below average. You are taking on a considerable risk if you invest in single stocks because of uncertainties around us. Many companies are being disrupted today, imagine someone that bet their retirement on Blockbuster, Radioshack, or Toy R Us? These companies have gone bankrupt, and investors lost billions of dollars in the process. So, don’t invest too heavily on single stocks.
4. Be consistent & persistent: Attaining a 401K millionaire status is a slow process. Don’t expect this to happen overnight. To see results, you must do it consistently during your career life. When you change jobs, make sure you quickly enroll in your new employer’s retirement plan, and if possible at all, try and raise your contribution by 1% every year until you are contributing 15% of your income into your retirement account. Part of being persistent and consistent means that you should not take a break from investing and don’t withdraw money from your retirement account.
5. Give it time: Patience is your best friend when it comes to saving for retirement. This is not about any get quick rich scheme. It’s something you must be ready to do over your entire career, and you need to stay invested for a long time before you can see results. Most 401(k) millionaires have been contributing to their plan for about 30 years before they can get to the million-dollar mark. Be patient, understand that it will take time to build lasting wealth. Automate the process, be a learner, and you will be able to position yourself to become a 401K millionaire.
If you live in the United States if you work and earn money, you may even be a low-income earner today, but if you continue to improve your skills, if you don’t settle for less, you can increase your earning power, and you can become a 401k millionaire if you follow the recommendations that I will be sharing today. With some proper planning and discipline, you can do it.
If you are behind right now, you should play catch up and find ways of saving more money.
Finally, earning money is the most critical part of the equation. You must find a way of earning some income either as an entrepreneur, or an employee for you to be able to make money and invest.
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