For several months now, and every month, 401(k) retirement account providers, such as ADP, Fidelity, Charles Schwab and ShareBuilder 401k, among others, have been reporting how the number of people who have more than a million dollars in their 401(k) accounts is growing and growing to reach all-time highs.
For example, Fidelity reported that, as of the first quarter of 2024, 485,000 accounts managed by this company have a million dollars or more. It sounds like an impossible dream to achieve, but in reality it is not.
With three simple strategies you can reach those 401(k) millionaires who have reached the long-awaited seven figures of retirement savings. Let’s review what are those magic tricks that only 3.3% of retirement savers know how to implement.
Take Advantage of the Matching Contributions of your Job
Not all employers or companies offer a retirement plan, such as a 401(k) or other tax-advantaged group retirement savings program. Many people have to save for retirement on their own, using an individual retirement account (IRA) or a taxable brokerage account.
Try to get the full contribution from the company, because if you don’t contribute enough to get it, you’re practically leaving money lying around that could go into your retirement fund.
Each 401(k) plan has a different matching policy, with particular numbers and percentages of scopes. But in most cases, if you contribute up to a certain percentage of your salary, your company will also contribute an amount up to 100% of your contribution in some cases.
Some plans offer very good company contributions, such as $0.50 per dollar up to 6% of your salary or a dollar-for-dollar match on the first 3% and $0.50 per dollar on the next 2%.
By 2024, the 401(k) deductible contribution limit is $23,000 for workers under age 50, or $30,500 for workers age 50 and older. So you don’t need to be a billionaire or a superhero saver to get ready to hit a million dollars in your 401(k).
You Should Never Interrupt Your 401(k) Contributions: Never, Ever!
Interrupting your contributions to the 401(k) plan can be tempting when you are facing financial difficulties or to put your money elsewhere and cover other needs. However, interrupting contributions can cost you a lot of money, and this is where the power of compound interest comes in.
This is one of the biggest advantages of long-term saving, because when you keep your contributions constant you are not only adding money to your retirement account, but you are also allowing this already saved money to earn interest on interest. This multiplier effect can give you tens of thousands of dollars in the long term and get you a much looser retirement.
The Tax Advantages of Saving in Your 401(k) That Get You Closer to $1M
It’s always worth remembering that 401(k) contributions are usually tax-deductible, reducing your annual taxable income. In addition, the interest and earnings on your 401(k) investments grow tax-free over time until the day you reach your minimum retirement age and can start enjoying your money.
Beyond the tax advantages, which are short-term or long-term, financial discipline is one of the arts that you must master so that the doors will soon open for you in that 401(k) millionaires club. Every dollar you stop contributing is a dollar that loses the opportunity to grow in the market with compound interest.
Retirement may seem like a distant milestone, but the sooner you start saving and the longer you keep your money untouched, the juicier your monthly payments will be when you stop working to start cultivating your garden or stroll around the world on one of those luxurious all-inclusive cruises.