Five Habits of 401(k) Millionaires

Question:  What are the best ways to accumulate $1 million for retirement?

Answer: Having a goal of saving $1 million prior to retirement is not uncommon and admirable. The good news is that you don’t need to make $1 million to save $1 million. According to a recent study by Fidelity Investments, the number of 401(k) plans with a balance of over $1 million increased by 35% since 2018. The amount you’ll need depends on several factors, including lifestyle, financial obligations, wants, needs and health considerations. Retirement savings aren’t a one-size-fits-all proposition. Here are five basic principles to apply to your financial plant that may help you reach your goals. 

1. Start Early

As Benjamin Franklin said, “money makes money. And the money that money makes, makes money.” The statement that “compound interest is the 8th wonder of the world” is attributed to Albert Einstein. The observations of these two gentlemen make it clear that compound interest is a powerful tool. It’s suggested that when preparing for retirement, saving early and often is a preferred approach. Besides marrying Pete, funding my 401(k) each year has been one of the best decisions I’ve made. There’s a certain contentment in building a foundation for the future. 

2. Maximize your contributions

In 2022, employees may contribute up to $20,500 to 401(k) accounts, not including any potential employer match. Depending on your income, this may be a challenge to accomplish earlier in your career. Studies do show that the average 401(k) millionaire did contribute a minimum of 10%-15% of their income to the plan each year supporting the “pay yourself first” recommendation of managing cash flow. 

3. Make the most of your employer’s match

Not contributing at least the amount that an employer will match to your 401(k) is like leaving “free money” on the table. If you can’t max out your 401(k) contribution, consider contributing the minimum amount necessary to receive your employer’s match. 

4. Choose the right asset allocation

A 2000 study by economists Roger Ibbotson and Paul Kaplan found that asset allocation accounted for more than 90% of the variation in a portfolio’s return over time. If you’re a long-term investor, you know that asset allocation has been one of the most important determinants of investment earnings over time. 

Investing in growth-oriented investments can help significantly boost your retirement savings through the years. While this strategy may not be appropriate for everyone, research has shown that the average 401(k) millionaire invested roughly 75% of their portfolio in growth-oriented investments. 

5. Avoid cashing out early

As most 401(k) millionaires know, staying the course and maximizing earnings are crucial in helping meet long-term retirement goals. Resist the urge to cash out early even if you change jobs. Instead, consider rolling your current 401(k) balance into your new employer’s 401(k) plan or another option. Early withdrawals come with tax consequences and other penalties. It’s also best to avoid abandoning your investment strategy in turbulent market conditions. Many investors who cashed out in a market downturn missed part or all the subsequent recovery.

Next Steps:

Monitor your progress. Now is a good time to check your 401(k) balance to find out where you are and determine a sound strategy to attempt to reach $1 million by retirement. 

Revisit your investment strategy. Is your asset allocation consistent with your retirement savings goals? Your investment mix should reflect your growth expectations and risk tolerance appetite, as well as your time horizon until retirement. 

Make necessary adjustments. Depending on how far away you are from retirement, you may need to increase your monthly contribution rate or adjust your investment mix. Working together, you and your CERTIFIED FINANCIAL PLANNER™ Professional can navigate these decisions and help you work toward the retirement you envision. Stay focused and plan accordingly. 

The opinions expressed are those of the writer as of February 13, 2022, but not necessarily those of Raymond James and Associates, and subject to change at any time. All investments are subject to risk, including loss. Diversification does not ensure a profit or protect against a loss in a declining market. This material is provided for educational purposes only. Past performance is no guarantee of future results. There is no assurance the trends mentioned will continue or that forecasts discussed will be realized. Economic and market conditions are subject to change. Material is provided for informational purposes. Consult your tax professional and financial advisor before making any investment decisions. Withdrawals from tax-deferred accounts may be subject to income taxes, and prior to age 59 ½ a 10% federal penalty tax may apply. Holding investments for the long term does not ensure a profitable outcome. The foregoing is not a recommendation to buy or sell any individual security or any combination of securities.

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.” This article was provided by Darcie Guerin, CFP®, First Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at (239)389-1041, email darcie.guerin@raymondjames.com Website: www.raymondjames.com/Darcie.