How to Become a 401(k) Millionaire

It's not as daunting as it seems

Mid-way through 2022, portfolio data from Fidelity showed that roughly 294,000 individuals were 401(k) millionaires. Joining the ranks of the 401(k) millionaires may sound intimidating, but with consistency, patience, and an appropriate approach to investing, this lofty goal is achievable. Here is guidance on reaching a seven-figure 401(k) balance.

Key Takeaways

  • Begin contributing to a 401(k) plan as early as you can.
  • Contribute regularly by setting up automatic payroll deductions that invest in your pre-selected investments.
  • Be mindful of annual contribution limits. In 2022, you're allowed to contribute $20,500, and in 2023, you're allowed to contribute $22,500. You can also make catch-up contributions.
  • Prioritize getting your employer's full match offering.
  • Be hands-on in terms of your investments within your 401(k), and don't be afraid to take risks, especially when you are young.
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How to Become a 401(k) Millionaire

Contribute Consistently and Enough

Becoming a 401(k) millionaire is slow going. Let's start with the first hurdle: you're only allowed to contribute a certain amount to your 401(k) each year. In 2022, this limit was $20,500. In 2023, this limit is $22,500. You can also make catch-up payments of $6,500 in 2022 or $7,500 in 2023 if you're 50 years or older.

With these limits in mind, it is important to contribute as much as you can when you become eligible to save in a 401(k) plan. If your employer offers a match, contribute enough to earn the full match. Not doing so is leaving free money on the table. 

The key is to start early, even if you are not able to maximize your full contribution potential amount. Consider that once a year has passed, that 401(k) contribution limit has passed. You can't make up for lost time, and 401(k) millionaires will have often made an early start on saving for their retirement.

Invest Appropriately

Select your 401(k) account investments based on your financial objectives, age, and risk tolerance. The general rule is that the longer you have until retirement, the more risk you can take. If you don't take an appropriate amount of risk, your account won’t grow as fast as it could. 

There are countless stories of plan participants in their 20s with all or a large percentage of their account in their plan's money market or stable value option. Although these options are low risk, they historically don't perform as well as equities over the long term.

Investment risk and investment return often have a positive relationship. If the risk of a portfolio is high, chances are better that investors will be rewarded with potentially higher returns. If risk is low, investors will not be rewarded and returns will usually be lower. Gauge your own risk preference, but understand that being risk adverse may limit your 401(k) potential.

When you change jobs, don't ignore your old 401(k). You can roll it over to an IRA, or you can roll it into a new plan.

Don't Neglect Old 401(k) Accounts

If you've changed jobs, you'll need to decide what to do about 401(k) accounts with old employers. You've got several options: rolling the account over to an individual retirement account (IRA), leaving it in the old plan, or rolling it to a new employer's plan.

How you transfer money from existing accounts to a new account has tax implications. Because the money contributed into a 401(k) is tax-deferred, withdrawing the money and not depositing it into a new tax-deferred retirement savings account within 60 days could trigger taxes due, plus a 10% early-withdrawal penalty if you are younger than 59½. Instead, use a direct rollover to avoid paying taxes or penalties on the withdrawal. 

The most important thing is to keep tracking this money. As you move on in your career and have more employers, it can be difficult to remember where all your assets are. Whichever choice you make now, you may want to consolidate them with other retirement accounts, later on, to make your funds easier to manage.

Target-Date Funds Are Not a Magic Bullet 

Target-date funds are typically mutual funds with a mixture of stocks, bonds, and other investments. They can be a turnkey option for retirement savers, as they base their aggressiveness on the target retirement date. Target-date funds are often offered as a default option by plan sponsors when employees don't make an investment choice on their own.

Because target-date funds provide you with a diversified portfolio, they can be a good option for younger investors, who may not have other investments outside of their 401(k) plan. However, as you accumulate diversified investments outside of your 401(k), you may want to consider tailoring your 401(k) investments to fit into your overall investment situation.

One of the big selling points touted by target-date fund issuers is the glide path. If you are decades from retirement, the fund will contain more growth-oriented investments. As you get closer to retirement, the fund will glide to a more conservative mix of investments. Be sure to understand the glide path for any target-date fund you are considering before deciding if it is right for your retirement situation. And also, watch the fees: Some target-date funds cost more than other good retirement options, such as index funds and ETFs.

Avoid 401(k) Loans

There may be conditions where a 401(k) loan makes sense. A 401(k) loan allows you to take money from your 401(k) loan but repay the funds over a series of up to five years. You do get charged interest which you pay into your 401(k), and you may have to repay the full balance of your loan if you leave your current employer (or face taxes and penalties on defaulted loans).

If your ultimate goal is to become a 401(k) millionaire, 401(k) loans will prohibit progress to that goal. Not only are you not allowed to make contributions to your 401(k) as you have your loan, your portfolio is missing the opportunity to appreciate due to funds having been withdrawn.

The Value of Financial Advice

As you get older, the assets you manage are likely to become more complicated and may include your IRAs, annuities, a spouse's retirement plan, a pension, taxable investments, and other assets. Hiring a financial advisor to help you look at your current 401(k) plan in the context of these other investments can help you get the most out of your 401(k).

Many plans offer participants access to investment advice, sometimes for a fee, via their plan provider or online services. The quality of this advice varies, so do your homework ahead of time. Ask if the advice takes into account any outside investments and your overall situation.

How Long Will Becoming a 401(k) Millionaire Take?

If you invested $22,500 into your 401(k) each year and earned a consistent 8% return each year, you'd achieve a plan balance of $1 million in roughly 20 years. Note that this does not factor in a potential employer match.

What Is the Downside to Being a 401(k) Millionaire?

401(k)s subject to required minimum distributions may be troublesome for certain individuals. This means that some people must withdraw a certain amount of money from their retirement accounts when they achieve a certain age (70.5 or 72, based on when you were born). If these contributions were made into a traditional 401(k) as opposed to a Roth 401(k), the distributions will be taxable.

Is Being a 401(k) Millionaire Better Than a IRA Millionaire?

A 401(k) has the benefit of having a potential employer match. An IRA has the advantage of being self-controlled, so you can pick from a much wider range of investment options. One retirement vehicle isn't necessarily better than the other, and it'd be wise for some investors to consider having both types of accounts.

The Bottom Line

Taking action early and continuously during your working life is key to maximizing the value of your 401(k) account and becoming a 401(k) millionaire. Contribute consistently, invest according to your situation, don't ignore your old 401(k) accounts, and seek advice if needed.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. 401k Specialist. "Fidelity Q2 Analysis Shows Just How Hard Stock Losses Hit 401ks."

  2. Internal Revenue Service. "401(k) Limit Increases to $22,500 for 2023, IRA Limit Rises to $6,500."

  3. Internal Revenue Service. "Topic No. 413 Rollovers from Retirement Plans."

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