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Want to Be a 401(k) Millionaire? 7 Tips You Should Know

Motley Fool - Sat Mar 16, 3:51AM CDT

More Americans had balances of $1 million or more in their 401(k) plans than ever before in 2023, according to Fidelity Investments. The company, one of the biggest providers of employer retirement plans, recently released data that revealed the number of its 401(k) accounts with at least $1 million totaled close to 422,000 at the end of last year.

Whether your retirement plan is with Fidelity or another company, joining the ranks of wealthy individuals could be a real possibility. Want to be a 401(k) millionaire? Here are seven tips you should know.

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Image source: Getty Images.

1. Start investing early

Arguably the best investing advice you'll ever get is to start socking money away as early as possible. Time is your greatest ally in building a sizable nest egg.

If you started investing $2,100 per year in a 401(k) plan at age 25 and kept it up, you'd have over $1 million at age 65 assuming a return of 10% (roughly the average long-term return of the S&P 500). If you waited until age 45 to begin investing, you'd have to save a whopping $16,000 per year to grow your account balance to $1 million.

2. Invest regularly

Time in the market beats trying to time the market -- hands down. Investing regularly is the best way to build up your 401(k) account. Set up an automatic deduction from your paycheck that flows directly into your 401(k). It's easy and ensures you're consistently investing.

3. Maximize your employer match

How would you like a 100% return on your investment? You can get it with a 401(k) employer match. Many employers offer them. You should at least contribute the amount needed to maximize your employer match. Don't turn down free money.

4. Minimize fees

While employer matches provide a major tailwind for your 401(k), fees can be a significant drag. Check out the annual expenses of all the investment alternatives your 401(k) plan offers. If the fees for one option appear much higher than others, research it to see if the returns it has provided over the long term are worth the added cost.

5. Don't invest too conservatively

It could be tempting to invest too conservatively, especially if you begin during a period when the stock market is highly volatile. Over the long run, however, stocks offer the highest returns of any investment alternative. Investing in index funds that own stocks can be a good way to avoid being overly conservative.

6. Take advantage of catch-up contributions

The current standard maximum annual individual contribution to 401(k) plans is $23,000. This maximum amount typically increases each year. However, if you're 50 or older, you can invest even more money via catch-up contributions. For 2024, the catch-up contribution limit is $7,500. Taking advantage of this opportunity to save more for retirement is especially wise if you didn't begin investing early in your career.

7. Rebalance your portfolio over time

Imagine a scenario where your 401(k) account tops $1 million only a year or two away from retirement. Then the stock market crashes, wiping out half of your savings. Unfortunately, there's a real possibility that this could happen.

While you shouldn't invest too conservatively throughout most of your career, investing too aggressively during the years leading up to your retirement can also be problematic. Rebalancing your portfolio over time (i.e., shifting money from more aggressive investments such as stocks to more conservative investments like bonds) can be a good way to reduce your risk.

Investing your 401(k) account in a target date fund automates this process. The closer you get to the target date (your retirement year), the greater the allocation will be toward less aggressive investments.

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