Retiring a millionaire is a common goal for investors, but it takes a solid plan to reach that level of wealth.
Luckily, the plan doesn’t need to be complicated. In fact, the simpler the better, as it’ll be easier to stick to.
If you want to retire a millionaire, all you have to do is get your full company match on your 401(k) and invest it.
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The company match is all it takes
The 401(k) is an employer-sponsored retirement plan that includes a provision that allows your employer to contribute toward your retirement savings as well.
Most employers that offer these plans will match a portion of your contributions to encourage you to use them. One of the most common 401(k) matches is $0.50 on the dollar for up to 6% of your salary. That means that if you contributed just enough to get the full match, you’ll effectively be saving and investing 9% of your salary every year.
If you start your career earning $50,000 a year and never get a raise beyond what would keep up with inflation, you could still become a millionaire (in today’s dollars) just by contributing enough to get your full company match. That said, it would take about 45 years. Here’s what that 401(k) would look like if its investments achieved a total inflation-adjusted return of 6% on a combined contribution of $4,500 per year.
| Year | Balance |
|---|---|
| 1 | $4,628.50 |
| 10 | $61,007.29 |
| 20 | $170,262.06 |
| 30 | $365,920.71 |
| 40 | $716,315.55 |
| 46 | $1,048,392.55 |
Table source: Author. Calculations by author.
If you start with a higher salary or get raises that outpace inflation, following this simple strategy will put you on track to reach millionaire status even sooner.
What to do once you’ve made your contributions
It’s likely that your 401(k) will only offer a limited number of mutual funds and exchange-traded funds for you to invest in (though many do make their company match in company stock). Ideally, among those options will be an S&P 500 index fund, a total market index fund, or both.
Index funds are great choices for retail investors because they generally have very low fees. While you’ll still have to pay the administrative and other fees charged by your 401(k) plan manager, keeping the expenses low on your investment choices is generally a smart move. The average annual fees on a 401(k) account amount to about 0.87% of the assets in it.
The S&P 500 has produced real total returns of about 6.5% per year since 1928. So, if you can keep your fees relatively low, and have access to a low-cost index fund, you can expect to average about real annualized returns of 6% in your account over the long term.
A few things to help you get to and keep $1 million
There are a few things that can help you on your path toward $1 million.
If you switch jobs in your career, you’ll have an opportunity to roll over your 401(k) into your new employer’s 401(k) or into an Individual Retirement Account (IRA). While there are some situations in which an IRA rollover gives up some valuable options, it’s often the best course of action. An IRA offers a way to reduce the fees you’re paying on your investments, and it opens up more investment choices to you, which should help you build up your portfolio’s value faster.
More importantly, no index fund produces 6.5% returns year in and year out. In fact, a few great years in a row could accelerate your path to millionaire status.
But even if the market and your investments have a few bad years in a row, don’t get discouraged, especially early in your career. Actually, the best time to hit an extended rough patch for your portfolio is at the start of your investing career.
Regardless, you’ll have to occasionally reassess your portfolio’s performance along the way. If you’re ahead of schedule, you might want to consider shifting to a modestly more conservative asset allocation that includes options such as a bond index fund, which may produce lower returns than a stock index fund, but which comes with the benefit of less variance.
If you start early, sticking to the basic blueprint of taking full advantage of your employer match should be enough to get you to $1 million by the time you retire. It just takes time and patience.