Is your 401K growing slower than a tranquilized elderly snale stuck in molasses? Let me show you how to become a 401K Millionaire in about two decades. Turn your retirement account into several million dollars, as fast as possible, by follow these simple tips.
The following is a letter to my children on how to maximize your 401K benefits.
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401k Millionaire Math Class
Dear 401k Investor,
When I first got into the workforce, the benefits package included a 401K. I knew it was a retirement account of some sort and arbitrarily chose to contribute 5%. After all, I have 40 years to go and I need a new truck, starter home, fancy work suits, the latest gadget, computer upgrade, etc… In retrospect, that was a huge mistake that cost me years of additional servitude to Corporate America.
Depending on which organization you work for, the 401K retirement plan could go by other names – 403b or Thrift Saving Plan (TSP) to name a couple. They are all great for tax efficient investing and operate very similarly. Contributions reduce your annual income tax requirements and the taxes of buying and selling investments within the account. I’m about to show you some exciting math, but make sure you understand how to optimize investment and the right way to pay off debt before jumping entirely on-board.
If I had contributed the max allowable by law to my 401K from the start, I would be in a much better position. Let’s take a look at how these types of retirement accounts can grow.
Year 1 – $21,916
Year 2 – $45,817
Year 3 – $71,883
Year 4 – $100,309
Year 5 – $131,310
Year 6 – $165,118
Year 7 – $201,988
Year 8 – $242,197
Year 9 – $286,047
Year 10 – $333,869
Year 11 – $386,021
Year 12 – $442,897
Year 13 – $504,924
Year 14 – $572,568
Year 15 – $646,338
Year 16 – $726,788
Year 17 – $814,525
Year 18 – $910,208
Year 19 – $1,014,556
Year 20 – $1,128,354
In Year 20, you only contributed $27,000 based on projected future max 401k contribution limits. However, your investments themselves earned $86,798. See how it took until year 13 to break a half million and only 7 years to make the next $500K…almost half the time. This is the magic of regular maximum allowable periodic investments with compounding interest that has your money earning money completely tax free.
If you enjoy your job, work a traditional 40 year career , and invest the most allowable by law, you’ll pass…
$2 Million at Year 26
$3 Million at Year 30
$4 Million at Year 34
$5 Million at Year 36
$6 Million at Year 38
With an astonishing $7,517,830 after 40 Years
A 401K Millionaire 7 times over!
If you have access to any of these types of retirement vehicles, I urge you not to make my mistake. The 401K is basically the best mechanism to achieve financial independence.
401K Growth Assumptions
I know your asking, “Ok Dad…that sounds great and all, but where are you getting your math?” Spreadsheets and financial formulas kido, learn to love them. I took the Existing Balance + Yearly Contributions + Employer Match + Average Return of the S&P 500 Index – Expense Ratio of the fund. I’ll go into more detail later, but in an nutshell.
Existing Balance – How much money you have in the retirement account that carries over from year to year.
Yearly Contributions – The maximum allowable by law of annual contributions. This projection includes an average increase of $425 per year based on historical data.
Employer Match – The average employer match across the U.S. is roughly 6%, which I’ve reflected as $3,000 per year. It is likely the $3K is a modest assumption as it’s sure to increase through inflation over the years.
Average Return of S&P 500 – 401K’s typically automatically reinvest dividends and capital gains. The average rate of return of the S&P 500 index is 9.1% using data from 1928 through the present.
Expense Ratio – Most 401K’s offer an institutional total market or S&P 500 index fund with very low expenses. This is reflected in the calculation as 0.04%.
Becoming a 401K Millionaire Requires These 8 Steps
- Choose an employer with a decent match near 6% or more.
- Check the IRS website and determine the max contribution limit for the year.
- Take that number and divide it by your gross annual salary and round up to the nearest percentage.
- Login to your 401K provider and make your contribution amount that percentage.
- Ensure you meet the random employer matching fine print. I recommend not front loading your 401K contributions early in the year, but rather equally each pay period.
- Choose a low cost total market or S&P 500 index fund with an expense ratio of 0.0X%
- Do not withdraw or take a loan from your retirement accounts.
- Check the IRS website each year and adjust your contribution percentage to match (see step 3 & 4)
401K Do’s and Don’ts
Don’t worry about the age restrictions as there’s many ways to withdraw early without penalty. I’ll discuss 401K portfolio allocations into foreign equities, emerging markets, bonds, and the like in a future letter.If you take no other advice, max your 401K! You'll be better off than 90% of everyone else struggling to build a retirement fund.Click To Tweet
The best tool to track your progress toward becoming a 401K Millionaire is Personal Capital. I’m affiliated with them and have been using the free service for quite some time. It has seriously opened my eyes. Aside from a customize tailored Retirement Spreadsheet, PC is the next best thing. Please share our 401K dos and don’ts with your next generation and let us know in the comments below your thoughts.
Kylven Ross is the owner and primary contributor of theFIway.com. He has been married for 17 years and is father to a son and daughter living in New England. Professional accomplishments include a bachelor’s degree and industry certifications in the cyber sector. He has spent the last 18 years working in the U.S. Defense Industry and as a Military Police Officer.
He discovered the concept of Financial Independence (FI) during a rather stressful year in the compliance space. After fully absorbing the benefits of FI, he has since committed to turning his household’s finances in the right direction. His experiences are documented as a series of letters that are used to educate his children and others about money. He does not want the next generation to make the same mistakes, but rather achieve financial freedom and find happiness.