I Want to Be a 401(k) Millionaire by Retirement. Here's How I'm Planning to Get There. | The Motley Fool (2024)

Million-dollar 401(k) accounts are pretty rare, for the record. There's usually just not enough time -- nor income -- to reach that mark.

It's not entirely unheard of, however, for a 401(k) account's value to reach seven figures. That's why I'm going to try everything I possibly can to make it happen. Even if I fall short of the target, I'm still confident I'll be pretty happy with the outcome of my efforts.

Feel free to borrow as many of my plan's specifics as you want.

What's a 401(k) anyway?

For anyone who doesn't know all the ins and outs of 401(k) plans, here's the deal.

Simply put, 401(k) plans are retirement saving programs offered by an employer to its employees. Most major companies provide their workers with this option, but they're not unheard of for small businesses, either (although more often than not a small business will offer less-complicated alternatives like a SEP IRA or SIMPLE IRA.) Even self-employed individuals like myself can establish what are called solo 401(k) plans, which work the exact same way as those offered to large companies' workers. That is, employees deposit a portion of their paychecks into these accounts, and in many cases an employer will contribute additional money on behalf of the workers. All of it is ultimately invested for the benefit of the employee, which grows without being taxed as long as it remains in the account.

The only tax-based matter to consider? Whether you prefer to pay taxes now or later. Contributions to traditional 401(k) accounts are tax-deductible now, but withdrawals from these accounts are taxed as income later. Conversely, increasingly popular Roth 401(k) plans don't reduce your taxable income now, but withdrawals from them aren't taxed in the future.

So how do you become a 401(k) millionaire? Here are my four top self-imposed rules you might want to follow.

1. Max out your allowed contribution

It's kind of obvious that if you want to get the very most out of a 401(k) plan, however, you must put the most in.

With that as the backdrop, this year's maximum allowable contribution to a 401(k) account is $23,000, up from 2023's cap of $22,500. For most individuals, these contributions should be tax deductible, although there are some exceptions to this tax break.

Coming up with this kind of money is easier said than done. It's worth the scrimping, saving, and budgeting, though.

2. Make sure you're signed up for your matching program

If you are already enrolled in your company's 401(k) plan, then you're most likely also enrolled in your employer's matching program. But it never hurts to make sure.

Now, employers that offer to match your contributions into a 401(k) only do so up to a point. In many cases, the most they'll match is 6% of your salary; mutual fund company Fidelity reports that last year's average employer contribution on behalf of workers was 4.5%. At the other end of the employer-contribution spectrum, a small handful of high-earners working for very generous employers will see as much as $69,000 deposited into their 401(k) accounts in 2024 (provided the worker actually earned that much). That's the absolute limit when adding a company's contribution to the tally. And to be clear, even if you don't deposit your maximum salary deferral amount of $23,000, your employer can still make up for that shortfall with its own money so long as no more than $69,000 makes it into your account this year. Such plans, however, aren't terribly common.

Whatever the amount given, it's free money! For most people, that's at least a few hundred bucks -- if not a few thousand -- every year they work.

3. Invest for the maximum (and the most likely) growth

Your investment options within a 401(k) plan are usually limited to the mutual funds of a single investment company's funds. And even then, you might not have access to all of that organization's choices. Given that most mutual funds already consistently underperform their benchmarks anyway, this can seemingly work against your hopes for maximizing your investments' growth.

But more choices don't necessarily mean better returns. Your best bet is actually buying and then adding to the simplest of investment choices, in fact. That's an index fund built to mirror the S&P 500 (or something close to it) that isn't trying to beat the market by regularly swapping out stocks.

Most fund managers don't outperform the overall market specifically because they're trying so hard to do so! If you try to do so with their funds, it can actually crimp your bottom line's growth.

4. Leave it alone

Lastly, no matter how much or how little I put into my 401(k) in any given year, once it's in there, it's in there to stay until I retire.

There's an obvious reason for this stubbornness. Any withdrawals I make before I turn 59 and a half are not only taxed as income, but also incur an additional penalty of 10% of the amount in question. I'd rather find any other way to come up with any cash I might need in the meantime than be forced to fork over a wad of it to the IRS just for accessing money that's mine anyway.

The bigger reason I'm not interested in taking money out of my retirement savings until it's time, however, is that I know all too well the long-term cost of doing so. Assuming I only achieve just average returns between now and 15 years from now (when I intend to retire), every dollar I don't leave invested now will be more than $4 I don't have then. That's a huge opportunity cost.

Just do what you can when you can as often as you can

But you probably already know you can't fully adhere to all four rules in every single year from here until retirement. Don't sweat it. I can't, either, and they're my rules! The key to success is following them as closely as you can as often as you can, rather than becoming so discouraged that you don't even bother trying.

It's all too easy to do nothing when it feels like you're doing too little to matter. The nickels and dimes add up, however, and there are going to be times when you can make bigger contributions, just as there are times when the market's going to roar. You want to be as ready as possible for those times.

This might help: The 2% of 401(k) accounts that Fidelity says are worth $1 million or more? Most of them (if not all of them) didn't get that big because their owners were thinking about reaching that milestone when they first started out. They simply continued to sock money away even when it was tough to do so.

Plenty of them might have been surprised when it actually happened. If you have faith in the process and the stock market's potential, you could end up being pleasantly surprised, too.