Unlock the Secrets to Joining the Growing 401(k) Millionaires Club

More Americans than ever before are seeing their 401(k) balances hit the million-dollar mark, driven by a robust stock market.

As of the third quarter of 2024, the number of people with at least a million dollars in their 401(k) accounts surged to 544,000, a significant rise from 497,000 just three months prior, as reported by Fidelity Investments, a major manager of employer-sponsored retirement plans. This data pertains solely to Fidelity’s clients.

The count of IRA millionaires under Fidelity’s management also reached a new high, totaling 418,111.

Amassing a million dollars in a 401(k) or an Individual Retirement Account (IRA) is an achievement few Americans reach. The 544,000 millionaires represent just over 2% of all Fidelity’s 401(k) participants.

Moreover, a million-dollar nest egg isn’t necessarily the dream retirement fund many Americans hope for. In fact, the majority of retirees live on much less.

“There’s a fascination with the million-dollar mark in this country,” observed Monica Dwyer, a certified financial planner based in West Chester, Ohio. “It appears so vast and elusive.”

The Allure of Becoming a 401(k) Millionaire

Fidelity doesn’t claim everyone should aim to become a 401(k) millionaire, but it regularly features these high achievers in its quarterly retirement updates.

“If we omit it from the press release, we’re bound to be questioned about it,” mentioned Mike Shamrell, vice president of thought leadership at Fidelity Investments.

Shamrell explained that there’s merit in examining the behaviors of those who have amassed significant retirement savings, especially for those aspiring to similar financial success.

Most 401(k) millionaires belong to the Gen X or Boomer generations. They typically have a history of saving for around 26 years and contribute upwards of 17% of their pre-tax earnings to their retirement plans.

“They exemplify the benefit of staying committed to saving,” Shamrell added.

For those inspired to pursue this financial milestone, here are several strategies to help you grow your retirement savings into seven figures.

Start Your 401(k) Early

Despite the potential benefits, only half of American households participate in retirement plans, according to federal statistics.

Beginning your 401(k) contributions early enhances your chances of achieving millionaire status by retirement, according to financial advisors.

“The golden rule for retirement planning is to start as soon as possible,” suggested Peter Lazaroff, a certified financial planner from St. Louis.

Strive to Earn Your Full Employer Match

Many 401(k) plans include an employer match, which essentially provides additional contributions matching those of the employee up to a certain percentage of their salary. Commonly, employers match 50 cents on each dollar contributed by the employee, up to 6% of the employee’s salary.

Not taking full advantage of this match is akin to leaving free money on the table, Lazaroff pointed out.

Target Saving 15% of Your Income

A general guideline is to save at least 10% of your pre-tax income in a 401(k). With an employer match, you can boost this figure to 15% relatively easily.

Increasing savings over time to about 15% is ideal, according to Colin Day, a certified financial planner also based in St. Louis. “If we manage that for 30 years, we’re well on our way to a seven-figure retirement fund,” he said.

If saving 15% seems daunting now, consider setting up your 401(k) contributions to increase by one percentage point each year, a feature available in many plans.

Maximize Your Contributions When Possible

If your budget allows, financial planners recommend maximizing your contributions to the legal limits.

For IRAs, the maximum annual contribution for 2024 is $7,000, or $8,000 for those aged 50 or older. For 401(k)s, the limit is $23,000, increasing to $30,500 for those 50 and up.

“Ultimately, every saver should aim to max out their contributions to their 401(k),” advised Lazaroff.

Keep Your 401(k) Intact When Changing Jobs

It’s common for workers to cash out smaller 401(k) accounts when switching employers, but this can significantly reduce the potential long-term growth due to compound interest.

Experts recommend rolling over your 401(k) into either an IRA or your new employer’s 401(k) plan.

In 2022, several retirement plan providers announced a joint effort to improve the transferability of small retirement accounts.

Stay Invested During Market Downturns

During market downturns, the instinct might be to sell off investments to avoid further losses. However, advisors suggest staying invested to benefit from future gains.

Remember, a market drop doesn’t reduce the number of shares you own—think of them like chickens that might slim down but aren’t going anywhere. Eventually, they’ll plump back up.

Avoid Early Withdrawals from Your 401(k)

The 401(k) is structured to encourage saving for retirement and discourage early withdrawals by imposing penalties.

Withdrawing funds before age 59 ½ usually incurs a 10% penalty tax on top of the regular income tax, potentially taking a significant chunk out of your withdrawn amount.

Exceptions exist for specific situations like buying a first home or facing a severe financial hardship, but ideally, funds should remain in the 401(k) until retirement.

Consistently Save Over Time

The average 401(k) millionaire at Fidelity has been saving diligently for about 26 years.

Don’t let that time frame intimidate you. Starting in your early 20s and continuing into your early 60s gives you roughly the same amount of time to build your retirement savings.

If you start saving 10% of a $50,000 salary at age 25, with a standard employer match, and assume a 7% annual return plus a 2% annual salary increase, you could reach the million-dollar mark by age 55, according to calculations from Bankrate.

“The key is to keep investing consistently over time, not trying to time the market,” Shamrell concluded.