What is the most reliable way to become a millionaire? I can tell you now – Maximize your 401k donations every year. It will take a while, but I promise you will get there. This is the easiest way to build wealth. The problem is you have to start investing in young people, most of us don’t know when we are 22 years old. We all spent too much money and invested enough in our 20s. Even when I started working in 1996 I didn’t want to contribute to my 401k. For that young man, he has been retired for more than 40 years. Why do I put so much money aside? I want to go out and have fun, change my old trash car and buy beautiful clothes. Fortunately, my dad convinced me to invest in 401k and got me out of the huge mistakes. The compounding effect of early investment is surprising. Too bad, so many young people don’t understand the concept and instead delay investment until later.
*Update 2025* – I usually update this post every January. If you’ve seen this before, scroll down to the chart to see how rich you will be when you maximize 401k every year. (I updated this post in the second half of this year because I didn’t contribute to my 401k last year. What happened?!
Inadequate retirement savings
Delaying retirement savings is a big mistake. If you don’t start saving right away, it can be difficult. Can you believe 45% of all households in the United States have no retirement savings at all? Yes. Even families preserved for retirement are not adequately preserved. According to the latest (2022) survey on consumer financing, the median value of retirement-age household retirement accounts is $185,000. That’s just a person and Retirement account. People without a retirement account have much less savings.
In any case, even $185,000 is not enough to support a frugal retirement. If you track annual fees, you will know. For us, $185,000 will cover about 3 years of moderate living. That’s not long enough. Many people work in retirement for more than 30 years. What will they do when the savings disappear? They will have to rely on other sources of income, such as Social Security benefits and part-time jobs. Unfortunately, this can lead to a significant downgrade in lifestyle.
Fortunately, I’m not average, and neither are you. If you are reading this, you are ahead of the average family.
I’ve been maximizing my 401k for years and my retirement savings are in good shape. Let me tell you how rich you would be Since you started working, you have made a contribution of 401k every year. Hold tightly, as you will be amazed at the power of compound*.
*Compound is just another word for complex interests.
Maximum 401k per year
The following figure shows how much your 401K is worth if you propose the biggest contribution each year.
notes: In our case, my workers divide the maximum contribution by 12 per month. For simplicity, we will invest in VFINX, the Vanguard S&P 500 Index Fund. (This does not include any employer contributions. If your employer helps, you should be ahead of this chart.)
This is how to read this figure.
- The horizontal axis is something you have worked for many years.
- The green line is how much your 401k will be worth if you maximize it every year.
- The blue line is how much you contribute.
For example, If you started working since January 2015, you may have invested in a tax account for 10 years. If you contribute the most every year, then you You should have about $377,783 in your 401k account Until now. 2023 and 2024 are wonderful years for the stock market. Every investor should do a good job. This is the reason for continuing to invest. Compound interest is huge.
My 401k
I started working in mid-1996, so let’s get off until 28 years. If I maximize and invest in VFINX every year, then I should have about…$1,598,000 in the 401k at the end of 2024. Unfortunately, I don’t have that many IRAs. Like most people, I made some mistakes as a kid. When I first started working, I didn’t maximize my 401k contribution. It took me several years to increase my contribution to the maximum allowed. Also, I chased the show in my 20s. This means my investments are underperforming in a crucial early years.
*In 2024, I stopped soloing for my 401K and rolled everything to the IRA. I didn’t make much money last year. Unless I can increase my income somehow, I’ve contributed to the 401k. You can read more here – Should I stop contributing to my 401k?
2024 has been another wonderful year for me. My IRA grew by 19%! By the end of 2024, my IRA is worth about $1.2 million. Yes! I’m a 40,000 millionaire. However, I still performed poorly. If I made the biggest contribution from the start and invested in VFINX, it would take 21 instead of 28 years.
My dad told me to invest in 401k, but he didn’t know about index funds. I had to learn from my mistakes. I still thank him for convincing me to invest early.
How does your 401K perform?
The complete table is below. Very easy to use. You look at the first column and find the number of years you have worked so far. The accumulated value column shows how much your 401k will be worth if you maximize your contribution from the start. 4Th The column shows the maximum contribution of the corresponding year.
You can see the magic of compounding on this table. If you donated $7,313 in 1988, today it will turn out to $151,589! That’s incredible Gain is 2,073% It will continue to increase every year. When it comes to investment, time is your best ally.
Maximizing 401k will allow you to have money when you retire. If you do this and start working before 2006, you will be a millionaire now. I love my 401k. Unfortunately, most workers don’t contribute enough. That’s why the median value of a retirement account is so low.
take away
- Reduce your contributions as soon as possible. It took me several years to come up with a 401k contribution. These early stages are crucial and you need to maximize them as quickly as possible. The longer you wait, the more you lose from complexity.
- Don’t chase performance. When I was young, I didn’t know how to invest. I just chose the best performance of the previous year. This is called chase performance. The strategy is terrible and will perform poorly in the long run. Funds that performed very well the previous year usually have poor performance next. Best investment Low-income index funds Like VFINX, there are more to increase every month.
- Don’t suspend investment. I stopped for a while after the Dot Com Bubble broke. Due to the decline in the market, the results are pretty good in the short term. But, in the long run, this is the wrong move. If I continue to invest, my pension fund will be more valuable today. Even during a downturn, you need to continue to contribute. I learned this lesson and continued to invest during the Great Recession. It paid off.
- Don’t borrow money from 401k. I didn’t do it because I never did it. This is the wrong move because your retirement fund will be exhausted and you will miss compound interest. Your retirement account should be designated for retirement.
These are the main courses I learned from 28 years of investing in a retirement account. I hope these lessons will stop some young investors from making similar mistakes.
Maximize your 401k
Of course, each 401K plan is different. Your retirement plan may not have any good investments, otherwise the expenses may make a huge gain from your total returns. Here is an easy way to see what you want to pay – Sign up Authorization And use its 401K fee analyzer tool. This free tool will help you figure out your payment amount. I checked my 401k and by the time I was 55 I would pay nearly $5,000. It sounds a lot, but it’s actually very low. All my investments are low-cost index funds. In any case, if you are paying too much, you should probably transfer your investment to a lower-cost fund.
For most people, maximizing their 401k donations each year is the easiest way to become a millionaire. You will pay less taxes and you won’t match any employer on the table. As a reward, contributions are automatically deducted so you won’t even miss the money. Start investing when you are young, the magic of compound interests will make your 401K enhance your 401K and ensure retirement comfort. Don’t wait until you are 55 to start investing, because it’s almost impossible to catch up.
How about your 401k account compared to my desk? Are you ahead or behind?
If you need help tracking your financial situation, please sign up Authorization Manage your portfolio. They provide investors with many great tools, including a 401K fee analyzer and the best retirement calculator on the internet. I log in almost every day to check my account.
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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 United States, so check it out!
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