Fidelity found that 422,000 401(k)s and 392,000 IRAs have million-dollar balances among its 45 million retirement investors. Under 2% of the total.
No method exists for building a million-dollar 401(k), and everyone's route to retirement savings success is different. However, 401(k) millionaires share several habits. Here are three ways to reach a seven-figure account balance.
1. 401(k) millionaires invest more than most. 401(k) millionaires typically contribute a lot to their funds. The average 401(k) millionaire contributes 17.5% of their earnings, not considering employer matching, according to Fidelity. The average seven-figure Fidelity 401(k) account holder puts almost 26% of their salary into it, including matching payments.
Two key things affect your 401(k) balance: time and contribution rate. Now is the best moment to start aggressive retirement savings. The x-factor you control is your savings rate, which most 401(k) millionaires exploit to their advantage.
2. No stock market fear for 401(k) millionaires Conservatism with 401(k) investments is a common mistake. Many plans provide "safe" retirement investments like money market or bond funds. If you have a decade or more to retire, the stock market is the greatest place for most of your savings.
The typical 401(k) millionaire invests three-fourths in equities and stock-based mutual funds. Stocks fluctuate, but they usually perform well over time. Since 1965, the S&P 500 has averaged over 10% yearly returns.
3. Few 401(k) millionaires borrow from their savings. Most 401(k) plans enable active participants to borrow up to $50,000. 401(k) loans have low interest rates and you pay yourself back, so it seems like a decent way to borrow money.
This logic has one major flaw. Over lengthy periods, the stock market has delivered 10% or greater annual returns, and the S&P 500 often rises 20% or more. Taking money out of your retirement account and paying yourself back lowers your return on investment than leaving it in.
Fidelity reports 17.6% of 401(k) members have outstanding loans. While a 401(k) loan is a good safety net in a financial emergency, it should be a last resort, not a first.
An incomplete list These are some of the greatest ways to build a million-dollar 401(k). Starting early, investing in IRAs and brokerage accounts, and avoiding early withdrawals can also help. No special formula or tremendous luck involved. Starting saving early, investing a double-digit percentage of your earnings, and not withdrawing money before retirement are the greatest ways to establish a million-dollar 401(k).
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