Why the Number of 401(k) Millionaires Is Going Up and What You Can Do To Join Them
The number of 401(k) millionaires is going up. According to new fourth-quarter data from Fidelity Investments, one of the largest providers of retirement plans that cover 23 million 401(k) participants, the number of 401(k) millionaires increased by a whopping 20% compared to the third quarter of 2023.
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What’s fueling this surge? Fidelity believes that this positive savings behavior is likely due to the strong performances in stocks and bonds coupled with steady savings rates. Its analysis revealed that 27% of plan participants proactively increased their contribution rates throughout 2023. And 78% of 401(k) savers were contributing at a rate high enough to secure the full matching contribution offered by their employer.
Believe it or not, achieving that 401(k) millionaire milestone is more doable than you think. As long as you follow a sound strategy and stay committed to saving money, you could join the club, too.
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How You Can Too Achieve the 401(K) Millionaire Status
A 401(k) plan is a retirement savings account offered by many employers. Here’s how you could take advantage of this savings vehicle to become a millionaire and enjoy a comfortable retirement lifestyle.
1. Start Early
Depending on the assets you hold in your 401(k) account, your interest earnings could compound monthly, quarterly or annually. Compound interest is when you earn interest on both the money you’ve saved and the interest you earn on those savings, and it needs time to work. So, the sooner you start saving, the better since you give the markets more time to do some of the heavy lifting for you.
“It can be tempting to plan to contribute more in the future when your income is higher, but it’s nearly impossible to catch up, even by making higher contributions in later years,” said Chris Rivers, CFP, CRPC, and principal at Armstrong, Fleming & Moore.
If you haven’t been contributing to your 401(k) consistently, this is your sign to start.
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2. Take Advantage of Employer Match
“Taking advantage of 401(k) employer match is about as close as it gets to finding free money, as you’re getting compensated simply for saving for your own retirement,” Rivers said.
An employer match means when you put money into your 401(k), your employer will put some in, too. The match amount varies. Some employers offer a partial match of 50% of your contributions, which means they’ll contribute $50 if you contribute $100 to your 401(k). Other employers may offer a dollar-for-dollar match up to a certain percentage of your salary, typically 3%.
Not only does an employer match immediately grow your account balance, but it also helps to accelerate the benefits of compounding over time. So, there’s no reason not to take advantage of it.
“Make sure you understand the matching formula, and then do what you can to maximize the amount you receive in matching contributions,” Rivers advised.
3. Match Your Investment Risk to Your Time Horizon
If you start putting money into your 401(k) in your mid-20s to 30s, you should expect to have it invested for 30 to 40 years before you touch it. Given this long time horizon, Rivers suggested weighing your 401(k) plan’s investments toward growth early in your career since you could withstand more risk as a young adult.
“While growth-oriented investments can be volatile, any downturns will work in your favor if you can stay the course, as you’ll be investing at lower prices,” Rivers said.
Of course, he believes that diversification is still important, but earlier in your career, when you can’t touch the money, he believes it makes more financial sense to tilt toward a more aggressive investing strategy.
“As you get closer to retirement, you can then recalibrate your assets to a more balanced allocation,” he said.
4. Level Up Your Contributions
Perhaps the quickest and most straightforward way to increase your 401(k) balance is by contributing more to it. Though you may not have enough disposable income early in your career to level up your contributions, it’s something you should consider doing as you move up the career ladder and make more money.
“If you get a $5,000 raise, increase your 401(k) contribution by $50 per paycheck. You’ll send an extra $1,200 to the 401(k) plan and still have $3,800 in additional income from your new raise,” Rivers said.
And if you make the change at the time you get the raise or bonus, it won’t feel like you’ve lost any of your net income. Plus, you’ll avoid falling victim to lifestyle inflation, which is when your spending goes up every time your income increases.
5. Don’t Make Early Withdrawals Unless Absolutely Necessary
“At some point, you will most likely have an emergency or change jobs. Resist the urge to liquidate your 401(k) for emergencies or because it doesn’t have a lot of money in it,” warned Matt Hylland, financial planner at Arnold and Mote Wealth Management. “If you withdraw early, you will be subject to a penalty of 10% and extra federal and state income taxes. This hurts your chances of becoming a millionaire.”
Plus, tapping your 401(k) early eliminates its future compound growth. It’s like planting a seed and then digging it up before it has a chance to grow into a tree. So, before taking money out of your retirement account, consider alternatives such as using your emergency fund, applying for a home equity line of credit (HELOC) or starting a side hustle to supplement your income.
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