In 2013, Fritz Gilbert reached a goal he had worked toward for 28 years: His 401(k) hit the million-dollar mark.
With that tick to seven digits, Gilbert, who is 55, newly retired and founder of The Retirement Manifesto blog, joined an exclusive club: People who hit millionaire status with their 401(k)s. At Fidelity Investments, which holds over 16.2 million 401(k) accounts, only 187,000 had balances of $1 million or more at the end of September 2018.
So how did Gilbert and the other savers do it? Slowly. Here are five keys to 401(k) millionaire success.
1. Start early
There’s a barrier to building a seven-figure 401(k) balance that affects everyone: Annual contribution limits put a cap on how much can be added to the account each year.
The 401(k) contribution limit for 2018 — $18,500, or $24,500 for those 50 or older — isn’t exactly stifling for most people. But it does mean the path to $1 million requires an early start: Like Gilbert, the average 401(k) millionaire at Fidelity has been contributing for nearly 28 years.
Starting early also gives your money more time to grow, which means you capitalize on compound interest — each year, investment returns are added to your balance, and the next year’s return is based on that bigger balance. Your returns begin earning a return, in other words.
2. Regularly increase your contributions
It’s unlikely you’ll be able to max out your 401(k) at your first job, or that you’ll consistently max out year after year. That’s fine.
Gilbert says he started by contributing 6% of his salary. Then, he increased his contribution each year by directing the majority of each salary increase into his 401(k) instead of his take-home pay.
“It was forced scarcity — forcing ourselves to live below our means by taking increases in pay and putting them in savings,” Gilbert says.
Start by contributing enough to earn employer matching dollars provided by your plan. Then try to increase by 1% or 2% each year.
3. Be patient
That compound interest referenced earlier? It starts out as a slow burn.
“In 2000, my balance was at about $250,000. That’s 15 years in. And yet, in not even the same amount of time — 13 years later — I was at $1 million,” Gilbert says.
That’s because the bigger your balance, the bigger the effect of compound interest. Let’s say Gilbert contributed $10,000 to his 401(k) in year one, and he earned a 6% return. He would start the next year with $10,600.
At year 15, however, a 6% return on $250,000 amounts to $15,000. Once compound interest starts to pick up speed, you’ll see your money quickly multiply.
“Saving for retirement is something you do over your entire career — it absolutely does not happen overnight,” says Meghan Murphy, vice president at Fidelity Investments. “If you’re 45 and you haven’t saved $1 million yet, that’s OK.”
4. Take appropriate risk
Compound interest relies on investment returns. If you have a long time horizon — as most retirement savers do — you’ll likely have a portfolio that is heavily tilted toward stocks and stock mutual funds, which historically have posted higher returns than other investments available through 401(k)s.
At Fidelity, 401(k) millionaires hold on average 77% of their assets in equities, also known as stocks. Over the past year, 86% of the growth in those accounts came from market returns; only 14% was contributions.
“Being invested appropriately for your age is something we’re constantly stressing,” Murphy says. “It’s important throughout your entire career to make sure you’re not investing too conservatively.”
Your 401(k) will allow you to invest in stocks through mutual funds, which pool investor money to purchase a selection of investments. If you’re not comfortable choosing funds, you can invest your entire 401(k) in a target date mutual fund, which invests in stocks and bonds. The fund’s allocation between the two is targeted to a retirement year, and adjusts as that time approaches.
5. Keep a lid on your account
Taking loans or early distributions from your 401(k) stunts its growth. That should be obvious. What often isn’t? The impact of fees.
Fees — most notably expense ratios, which are annual fees charged by mutual funds — can easily erode your return. A recent NerdWallet analysis found that 401(k) fees can add up to a lifetime cost of over $200,000, not including lost investment returns.
Keep fees down by choosing low-cost investments, with expense ratios under 0.5%, if possible. If your plan offers only expensive funds, contribute enough to earn your employer match, then consider an individual retirement account like an IRA.
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