Unlock the Secrets to Becoming a 401(k) Millionaire: 4 Essential Tips for Retirees

Becoming a 401(k) millionaire might sound like a fantasy for many. Often, it seems like the average salary simply isn’t enough to build a seven-figure nest egg in an employer-sponsored retirement plan.

However, achieving this financial milestone is more feasible than it appears. According to mutual fund giant Fidelity, as of the third quarter of 2024, there are over 540,000 participants in their managed workplace retirement plans who have accumulated more than a million dollars. So, it is possible.

What’s their secret? These individuals consistently follow four crucial steps, which you can adopt too.

1. Commit to Contributing, Even When It’s Tough

Many people, especially those early in their careers or earning lower wages, hesitate to save for retirement because they fear they might need immediate access to their earnings.

Unfortunately, this short-term mindset can extend for years and significantly impact one’s financial future. Skipping just one or two years of retirement savings can easily become five or more years, which could drastically alter the outcome.

To illustrate, investing just $3,000 annually in an S&P 500 index fund for 30 years might result in about $570,000. Extend that to 35 years, and the total nears $957,000 (assuming an average annual return of 10%). That additional five years could start you off with about $20,000 more after the first five years, proving how crucial time is in compounding your investments.

Even if it strains your budget at the outset, finding a way to begin contributing—and sticking with it—is crucial, even if it feels painful.

2. At Least Match Your Employer’s Contribution

The exact amount you can afford to set aside might vary, but at the very least, you should contribute enough to your 401(k) to maximize your employer’s match.

The match percentage varies by company and can change annually. Fidelity notes that in the third quarter of the previous year, the average U.S. employer contribution was $1,240, while employees deferred $2,350 of their salaries into their 401(k)s. This indicates that roughly one-third of the contributions are typically from employer matches, which usually range from 4% to 5% of an employee’s earnings.

You’ll need to know your employer’s current match rate and contribute enough to maximize this benefit. Remember, this is essentially free money that can significantly increase your retirement savings.

3. Don’t Attempt to Outperform the Market

Most retirement plans are managed by mutual fund companies like Fidelity or Vanguard and offer a limited selection of investment options.

Instead of trying to pick funds that claim to beat the market, opt for a straightforward index fund. Data from Standard & Poor’s shows that over the past five years, 77% of large-cap funds have underperformed the S&P 500, and over ten years, about 85% have done the same. Only about 2% of large-cap funds consistently perform in the top half over any five-year period.

Chances are, then, that the safest and most effective strategy is to match the market’s performance rather than trying to exceed it.

4. Allow Ample Time

Becoming a 401(k) millionaire usually takes a long time, often requiring 30 to 40 years of consistent contributions.

Those who have accumulated substantial retirement funds have experienced significant market fluctuations but have recognized that the eventual gains outweigh the temporary losses. They continued to invest even during market downturns, benefiting from buying at lower prices.

It’s worth noting that it generally takes about 20 years for your investment returns to surpass the amount of your annual contributions. After this point, earnings on your investments begin to significantly compound. That’s why it’s critical to keep contributing regularly, no matter how small the amount may seem initially—the most substantial growth often occurs in the final third of the investment timeframe.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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