Five proven habits that build a million-dollar 401(k)
Fritz Gilbert spent 28 years turning steady 401(k) contributions into a seven-figure balance. Here are the five habits that helped him — and other savers — reach 401(k) millionaire status.
In 2013, Fritz Gilbert reached a goal he had worked toward for 28 years: His 401(k) hit the million-dollar mark.
With that tick to seven digits, Gilbert, who is 55, newly retired and founder of The Retirement Manifesto blog, joined an exclusive club.
He became one of the people who hit millionaire status with their 401(k)s.
At Fidelity Investments, which holds over 16.2 million 401(k) accounts, only 187,000 had balances of $1 million or more. That was the total at the end of September 2018.
So how did Gilbert and the other savers do it? Slowly. Here are five keys to 401(k) millionaire success.
1 Start Early
There’s a barrier to building a seven-figure 401(k) balance that affects everyone. Annual contribution limits put a cap on how much can be added to the account each year.
The 401(k) contribution limit for 2018 — $18,500, or $24,500 for those 50 or older — isn’t exactly stifling for most people. But it does mean the path to $1 million requires an early start.
Like Gilbert, the average 401(k) millionaire at Fidelity has been contributing for nearly 28 years. Starting early also gives your money more time to grow. That means you capitalize on compound interest.
Each year, investment returns are added to your balance, and the next year’s return is based on that bigger balance. Your returns begin earning a return, in other words.
2 Regularly Increase Your Contributions
It’s unlikely you’ll be able to max out your 401(k) at your first job. It’s also unlikely you’ll do it every single year. That’s fine.
Gilbert says he started by contributing 6% of his salary. Then, he increased his contribution each year by directing the majority of each salary increase into his 401(k) instead of his take-home pay.
“It was forced scarcity — forcing ourselves to live below our means by taking increases in pay and putting them in savings,” Gilbert says.
Start by contributing enough to earn employer matching dollars provided by your plan. Then try to increase by 1% or 2% each year.
3 Be Patient
That compound interest referenced earlier? It starts out as a slow burn.
“In 2000, my balance was at about $250,000. That’s 15 years in. And yet, in not even the same amount of time — 13 years later — I was at $1 million,” Gilbert says.
That’s because the bigger your balance, the bigger the effect of compound interest. Let’s say Gilbert contributed $10,000 to his 401(k) in year one. If he earned a 6% return, he would start the next year with $10,600. By year 15, a 6% return on $250,000 amounts to $15,000.
Once compound interest starts to pick up speed, you’ll see your money quickly multiply.
“Saving for retirement is something you do over your entire career,” says Meghan Murphy, vice president at Fidelity Investments. “It absolutely does not happen overnight.” “If you’re 45 and you haven’t saved $1 million yet, that’s OK.”
4 Take Appropriate Risk
Compound interest relies on investment returns. If you have a long time horizon, you’ll likely have a portfolio that is heavily tilted toward stocks. Most retirement savers do.
Stock mutual funds should also make up a meaningful part of that mix. Historically, those investments have posted higher returns than other options available through 401(k)s.
At Fidelity, 401(k) millionaires hold on average 77% of their assets in equities, also known as stocks. Over the past year, 86% of the growth in those accounts came from market returns; only 14% was contributions.
“Being invested appropriately for your age is something we’re constantly stressing,” Murphy says. “It’s important throughout your entire career to make sure you’re not investing too conservatively.”
Your 401(k) will allow you to invest in stocks through mutual funds, which pool investor money to purchase a selection of investments.
If you’re not comfortable choosing funds, you can invest your entire 401(k) in a target date mutual fund, which invests in stocks and bonds. The fund’s allocation between the two is targeted to a retirement year, and adjusts as that time approaches.
5 Keep a Lid on Your Account
Taking loans or early distributions from your 401(k) stunts its growth. That should be obvious. What often isn’t obvious? The impact of fees.
Fees, especially expense ratios charged by mutual funds, can easily erode your return. A recent NerdWallet analysis found that 401(k) fees can add up to a lifetime cost of over $200,000, not including lost investment returns.
Keep fees down by choosing low-cost investments, with expense ratios under 0.5%, if possible. If your plan offers only expensive funds, contribute enough to earn your employer match first. Then review how to open an IRA in 4 steps.
Arielle O’Shea is a writer at NerdWallet. Email: aoshea@nerdwallet.com. Twitter: @arioshea.
The article 5 Key Steps to Join the 401(k) Millionaires Club originally appeared on NerdWallet.
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Frequently Asked Questions
How long does it typically take to build a $1 million 401(k)?
It takes time and consistency. Fritz Gilbert reached the million-dollar mark after contributing for 28 years, and the average 401(k) millionaire at Fidelity has been contributing for nearly 28 years. Annual contribution limits cap how much you can add each year, so the path to $1 million requires an early start and a long, steady runway for compound interest to work in your favor.
What was the 401(k) contribution limit in 2018?
The 401(k) contribution limit for 2018 was $18,500, or $24,500 for those 50 or older. While that ceiling isn’t stifling for most people, it does mean the path to $1 million takes an early start so your money has more years to grow through compound interest.
How should I increase my 401(k) contributions over time?
Start by contributing enough to earn the employer matching dollars provided by your plan, then try to increase your contribution by 1% or 2% each year. Gilbert began at 6% of his salary and grew it by directing most of each raise into his 401(k) instead of his take-home pay — what he calls forced scarcity.
How much of a 401(k) millionaire's balance comes from investments?
At Fidelity, 401(k) millionaires hold on average 77% of their assets in equities, also known as stocks. Over the past year, 86% of the growth in those accounts came from market returns, and only 14% came from contributions — showing how much appropriate risk and compound growth drive a seven-figure balance.
How much can 401(k) fees cost over a lifetime?
A recent NerdWallet analysis found that 401(k) fees can add up to a lifetime cost of over $200,000, not including lost investment returns. To keep fees down, choose low-cost investments with expense ratios under 0.5% when possible. If your plan only offers expensive funds, contribute enough to earn your employer match first.
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Fritz Gilbert spent 28 years turning steady 401(k) contributions into a seven-figure balance.
In 2013, Fritz Gilbert reached a goal he had worked toward for 28 years: His 401(k) hit the million-dollar mark.
With that tick to seven digits, Gilbert, who is 55, newly retired and founder of The Retirement Manifesto blog, joined an exclusive club.
He became one of the people who hit millionaire status with their 401(k)s.
At Fidelity Investments, which holds over 16.2 million 401(k) accounts, only 187,000 had balances of $1 million or more.
So how did Gilbert and the other savers do it?.
There’s a barrier to building a seven-figure 401(k) balance that affects everyone.
The 401(k) contribution limit for 2018 — $18,500, or $24,500 for those 50 or older — isn’t exactly stifling for most people.
Like Gilbert, the average 401(k) millionaire at Fidelity has been contributing for nearly 28 years.
Each year, investment returns are added to your balance, and the next year’s return is based on that bigger balance.
It’s unlikely you’ll be able to max out your 401(k) at your first job.
Gilbert says he started by contributing 6% of his salary.
Start by contributing enough to earn employer matching dollars provided by your plan.
That compound interest referenced earlier?.
“In 2000, my balance was at about $250,000.
That’s because the bigger your balance, the bigger the effect of compound interest.
Once compound interest starts to pick up speed, you’ll see your money quickly multiply.
“Saving for retirement is something you do over your entire career,” says Meghan Murphy, vice president at Fidelity Investments.
Compound interest relies on investment returns.
Stock mutual funds should also make up a meaningful part of that mix.
At Fidelity, 401(k) millionaires hold on average 77% of their assets in equities, also known as stocks.
“Being invested appropriately for your age is something we’re constantly stressing,” Murphy says.
Your 401(k) will allow you to invest in stocks through mutual funds, which pool investor money to purchase a selection of investments.
If you’re not comfortable choosing funds, you can invest your entire 401(k) in a target date mutual fund, which invests in stocks and bonds.
Taking loans or early distributions from your 401(k) stunts its growth.
Fees, especially expense ratios charged by mutual funds, can easily erode your return.
Keep fees down by choosing low-cost investments, with expense ratios under 0.5%, if possible.
More From NerdWallet.
Arielle O’Shea is a writer at NerdWallet.
The article 5 Key Steps to Join the 401(k) Millionaires Club originally appeared on NerdWallet.
It takes time and consistency.
The 401(k) contribution limit for 2018 was $18,500, or $24,500 for those 50 or older.
Start by contributing enough to earn the employer matching dollars provided by your plan, then try to increase your contribution by 1% or 2% each year.
A recent NerdWallet analysis found that 401(k) fees can add up to a lifetime cost of over $200,000, not including lost investment returns.
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2 Regularly Increase Your Contributions.
4 Take Appropriate Risk.
5 Keep a Lid on Your Account.
Frequently Asked Questions.
How long does it typically take to build a $1 million 401(k)?.
What was the 401(k) contribution limit in 2018?.
How should I increase my 401(k) contributions over time?.
How much of a 401(k) millionaire's balance comes from investments?.
How much can 401(k) fees cost over a lifetime?.
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aoshea@nerdwallet.com.
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