What is the surest way to become a millionaire? I can tell you now – Your maximum contribution is 401k each year. It will take some time, but I guarantee you will get there. This is the easiest way to build wealth. The problem is that you have to start investing at a young age, and most of us didn’t know that when we were 22. We all spent too much money and didn’t invest enough in our 20s. I didn’t even want to contribute to my 401k when I started working in 1996. For this young man, retirement was more than 40 years away. Why should I put so much money aside? I wanted to go out and have fun, trade in my old car, and buy nice clothes. Fortunately, my dad convinced me to start saving in my 401k and saved me from a huge mistake. The multiplier effect of early investing is amazing. Unfortunately, many young people do not understand this concept and postpone investing until later.
*Updated 2024* -I usually update this post every January. If you’ve seen this before, scroll down to the charts to see how rich you will be when you max out your 401k per year. (I updated this post late this year because I didn’t max out my 401k last year. What happened?! Find out below.)
Retirement savings are woefully inadequate
Postponing retirement savings is a big mistake. It can be difficult if you don’t start saving right away. You can believe it 45% of American households have no retirement savings at all? it’s the truth. Even families that saved for retirement did not save enough. According to the latest (2022) Consumer Finance Survey, the median value of retirement accounts for families near retirement age is $185,000. This is just the people with Retirement accounts. People without retirement accounts have much less savings.
However, even $185,000 will not be enough to support a frugal retirement. If you track your annual expenses, you will know. For us, $185,000 would cover about 3 years of modest living. That’s not long enough. Many people spend more than 30 years in retirement. What will they do once the savings are gone? They will have to rely on other sources of income such as Social Security benefits and part-time work. Unfortunately, this can be a drastic reduction in their lifestyle.
Fortunately, I’m not average and neither are you. If you’re reading this, you’re way ahead of the average family.
I have maxed out my 401k for many years and my retirement savings are in good shape. Let me show you how rich you would be if you did You’ve maxed out your 401k contribution every year since you started working. Hold on tight because you’ll be amazed at the strength of the formula*.
*Compound is just another word for compound interest.
Maxed out 401k each year
The chart below shows how much your 401k would be worth if you maxed out your contribution annually.
NB: In our scenario, I ask the worker to make the maximum contribution divided by 12 each month. To keep it simple, we’ll invest in VFINX, a Vanguard S&P 500 index fund. (This does not include any contributions from your employer. You must be ahead of this scheme if your employer helps you.)
Here’s how to read this chart.
- The horizontal axis is the number of years you have worked.
- The green line is what your 401k would be worth if you maxed it out each year.
- The blue line is your contribution amount.
For example: If you started in January 2014, that means you could have invested 10 years in your tax-advantaged account. If you’ve contributed the maximum each year, then you’re in You should have about $353,000 in your 401k account now. 2023 has been a great year for the stock market. Every investor should have done a very good job. This is why you should stay invested. Compound interest is huge.
My 401k
I’ve been working since mid-1996, so let’s round up to 26 years. If you max out every year and invest in VFINX, then… I should have about…$1,633,000 in my 401k account at the end of 2023. Unfortunately, my account doesn’t have much. I made some mistakes when I was young, like most people. I wasn’t able to max out my 401k contributions when I first started working. It took me a few years to be able to increase my contribution to the maximum allowed. I also chased performance in my early 20s. This meant that my investments underperformed in those crucial early years.
*In 2023, I only contributed $10,000 to my 401k. I didn’t make enough income to contribute the maximum. You can read more here – Should I stop contributing to my 401k?
2023 has been a great year for me. My 401k increased by 23%. At the end of 2023, my 401k was worth just over $1 million. Yes! I’m a 401k millionaire. However, I am still weak from the chart. It would take 19 years instead of 27 years if I reached my contribution limit and invested in VFINX.
My dad asked me to invest in my 401k, but he didn’t know anything about index funds. I had to learn from my mistakes. I’m still grateful he convinced me to invest in my 401k.
How’s your 401k doing?
Full schedule below. It’s easy to use. You need to look at the first column and find how many years you have worked. The Accumulated Value column shows how much your 401k would be worth if you reached your contribution maximum from the beginning. 4y The column shows the maximum contributions for the corresponding years.
You can see the magic of composition on this table. If you contributed $7,313 in 1988, it would turn into $219,244 today! This is unbelievable Profit 2,998% It will continue to increase every year. Time is your best ally when it comes to investing.
Maxing out your 401k will make you rich by the time you retire. If I had done that and started working before 2005, I would be a millionaire by now. I love my 401k. Unfortunately, most workers do not contribute enough. That’s why the average value of retirement accounts is so low.
Lessons learned
- Maximize your contributions as quickly as possible. It took a few years before I was able to max out my 401k contributions. Those early years are crucial and you need to make the most of them as soon as possible. The longer you wait, the more you lose with doubling down.
- Don’t chase performance. I didn’t know how to invest when I was young. You’ve just selected the best-performing funds from the previous year. This is called Chasing performance. This strategy is terrible and will underperform in the long run. Funds that performed well the previous year usually underperform the following year. It’s better to invest in a low-fee index fund like VFINX and keep adding more each month.
- Don’t stop investing. I stopped investing for a while after the dot-com bubble burst. This worked well in the short term because the market went down. However, this was a wrong move in the long run. If I kept investing, my retirement fund would be worth much more today. You need to continue contributing even during a recession. I learned this lesson and continued investing during the Great Recession. It has paid off well.
- Don’t borrow from your 401k. I didn’t do this because I never had to. It is a wrong move because your retirement fund will be depleted and you will miss out on the opportunity to double. Your retirement accounts should be designated for retirement.
These are the key lessons I’ve learned from 27 years of investing in my retirement account. I hope these lessons will prevent some young investors from making similar mistakes.
Maximize your 401k
Of course, every 401k plan is different. Your retirement plan may not have any good investments or fees may take up a large portion of your total return. Here’s an easy way to find out how much you’re paying – sign up with it Enable And use their 401k fee analysis tool. This free tool will help you figure out how much you’re paying. I just checked my 401k and will pay almost $5000 in fees when I turn 55. This sounds like a lot, but it’s actually quite low. All of my investments are in low-cost index funds. However, if you are paying too much in fees, you may have to move your investment to funds with lower fees.
For most people, maxing out your 401k contribution each year is the easiest way to become a millionaire. You’ll pay less in taxes and won’t leave any employer matching at the table. As a bonus, the contribution is automatically deducted so you don’t miss out on money. Start investing when you’re young and the magic of compound interest will grow your 401k and ensure a comfortable retirement. Don’t wait until you’re 55 to start investing because it will be nearly impossible to catch up.
How do your 401k accounts compare to my schedule? Are you ahead or behind?
If you need help tracking your money, sign up with Personal capital To manage your portfolio. They have many great tools for investors including a 401k fee analyzer and the best online retirement calculators. I log in almost every day to check my accounts.
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Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects all over the USA so check them out!
Joe also highly recommends Personal Capital to DIY investors. They have many useful tools that will help you reach financial independence.
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