Maximizing Your 401 (k) Could Make You A Millionaire By 45
Becoming a millionaire might only take 23 years for those who are motivated enough to maximize their 401 (k) s each year. It might not be the quickest or most exciting path to becoming a millionaire, but it’s a much safer bet than trying to get lucky with lottery tickets. Below, I’ll walk you through the math and we’ll see how you might even speed up the process.
How Maximizing Your 401 (k) Can Make You A Millionaire In 23 Years
First question: what does it mean to maximize your 401 (k)? The answer varies from year to year. In 2020 and 2021, you are allowed to contribute up to $ 19,500 to your 401 (k) if you are under 50, or $ 26,000 if you are 50 or over.
For the purposes of this example, I’m assuming you started saving at age 22 and contributed $ 19,500 per year. This comes down to $ 1,625 per month. If you saved that amount every month for 23 years and got an average annual rate of return of 7%, you would have just over $ 1 million by age 45.
Now, this scenario makes a lot of assumptions, and changing any one of them affects how long it would take you to reach millionaire status. First, it assumes that you are consistently saving $ 19,500 per year. If you save less than that in a certain year, it will obviously take you a little longer to reach seven figures. On the flip side, if the government increases the 401 (k) annual contribution limits in the coming years, as it likely will at some point in time, it could save you more in any given year. and become a millionaire faster.
The example above also assumes that you are getting an average annual rate of return of 7% on your investments. Some years you may only earn 5%, and other years you will earn 8%. There is no way to exactly predict how your investments will perform, so you can only ever get a rough estimate of when you will reach your goal. That’s why you need to review your retirement plan and make small adjustments every year to stay on track, whether or not you’re trying to maximize your 401 (k).
Finally, our scenario does not include any corporate matching contribution or 401 (k) after-tax contribution. A corporate match is the money your employer gives to your 401 (k) on your behalf, while after-tax contributions are a special type of contribution that you may be able to make if you want to save even more. for retirement. They don’t give you the same tax breaks as your first $ 19,500 in contributions, but they could still save you some money.
In total, you are allowed to add up to $ 57,000 to your 401 (k) in 2020 or $ 58,000 in 2021. Adults 50 and over can add an additional $ 6,500 to these totals. This includes your first $ 19,500 or $ 26,000, as well as business and after-tax matching contributions.
How to Maximize Your 401 (k)
I imagine the next question a lot of you are asking is how are you supposed to find a spare $ 19,500 every year. It’s just. But the first thing to remember is that you don’t necessarily have to save that much. If you get a match with an employer, you might be able to hit $ 19,500 without saving it all on your own. And there is no rule saying you have to maximize your 401 (k) in order to take out a millionaire. It’s entirely possible to save $ 1 million or more and never maximize your 401 (k). It will just take you a little longer to get there.
But if you’re determined to save $ 19,500 this year or next, the first step is to look at your budget to see where you can make changes to give yourself a little extra cash for retirement. See if you can cut out unnecessary shopping, and look for ways to cut down on your essential spending, like using coupons or credit card rewards to save a few bucks.
You should also be looking for ways to increase your income. Asking for a raise might not be an option in today’s economic climate, but you can always check with other companies in your industry to see if they are hiring and offering a more competitive salary. Or consider starting a side business. If you increase your 401 (k) contributions to reflect what you earn from your side job, that shouldn’t have a huge effect on your tax bill for the year.
If you find that you can’t save as much as you want in any given month, don’t be discouraged. Do your best and adjust as you go. You may be able to contribute more the next month to make up for the month you are missing, or it may take a little longer to reach your goal. But as long as you’re focused and contributing consistently, you can be pretty confident that you’ll get there eventually.