In America, the 401(k) has become the number-one way we save for retirement. More than pensions, savings accounts, IRAs, regular investment accounts – the average person’s balance in their 401(k) is at an all-time high.
What do you need to do to get your 401(k) to $1 million by the time you retire? Here are six strategies you can use to make you a millionaire investor.
1. Never cash it out
If you leave your job and take a cash distribution of your 401(k) you have to pay all the interest that’s due and a 10% penalty.
Let’s say you have $50,000 in your 401(k) and you leave your job. You want to use the money to buy a new car and take a vacation. If you’re in the 20% tax bracket, and you pay a 10% penalty, you’re only going to come away with $35,000.
But the worst part is that’s money that will never grow into your retirement.
2. Do not borrow against it
1 in 5 Americans borrow against their 401(k). But what’s the real cost of that 401(k) loan?
When we decide to borrow money against our 401(k), it’s probably not going to be for a reason that is going to benefit our retirement. It’s a sign we’re living beyond our means, and we’re not paying ourselves first.
When you borrow against your 401(k), you’re not saving and time is working against you. Your money is not compounding.
If you’re unable to repay the loan, the amount you have taken out gets treated as a withdrawal. You have to pay the interest on it plus a 10% penalty.
Also, most 401(k) plans require that if you leave your employer the loan must be repaid immediately. So you’re trapped in your job.
Avoid the temptation of treating your 401(k) like a piggy bank.
3. Roll it over
The costs of owning a mutual fund is called the expense ratio. The funds in your 401(k) are going to have some of the highest expense ratios – or fees – you’ll find.
The average mutual fund expense ratio – and this number varies depending on where you search for information – is about 1.5%.
Expense ratios range from as low as 0.2% (low-cost index funds) to as high as 2%+. These fees will eat up tens to hundreds of thousands of dollars in your 401(k) over your lifetime.
When you leave a job, you should consider rolling your 401(k) over to an IRA where you can invest in low-cost index funds.
4. Increase your contribution percent
Bump up your retirement contributions with every raise. A raise is found money.
If you have a written spending plan and are out of debt, you’ll never see the money if you automatically invest your pay raise.
You won’t miss it.
If you get a 2% raise, increase your 401(k) contribution percent by 1–2%.
5. Invest heavily in stocks
If you’re young, select funds in your 401(k) that are 100% in mutual funds or low-cost index funds if they are available.
The stock market has a proven history of generating wealth for investors who are in it for the long haul. Young people don’t need to be invested in a bunch of bond funds, money market funds, commodities, or CDs.
Smart investors know the benefit of being in the stock market and not being afraid of it. When you are decades away from retirement, you can ride out any market swings.
6. Be consistent
The stock market is going to have it’s wild rides. In 2008–2009, the market lost 50% of its value. If we sold all of our holdings at the bottom, we’re probably still trying to recover.
But if we stuck with it and kept investing even as the market continued to go down, we’re sitting pretty today. We made up all of the losses and reaped the rewards of the big gains over the past few years due to the power of dollar cost averaging.
If you follow those steps, invest early and invest often, you’re almost guaranteed to retire with at least $1 million.