How To Retire a Millionaire With a 401(k) Plan in 22 Years – Clark.com – Clark Howard


Funding your retirement is one of the most important financial goals you’ll ever pursue.

But it can seem daunting, especially if you’re just getting started or if you have a long way to go. How much money will you need? What investments should you make? How much do you need to save every month?

Fortunately, there are some helpful retirement plans that help you save and grow your money tax-deferred.

Perhaps the best type of retirement plan is a workplace 401(k). You can go from $0 to $1 million on an average salary in just 22 years by contributing to a 401(k) plan. Keep reading to find out how.


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How To Become a Millionaire With a 401(k)

The biggest challenge to becoming a millionaire with a 401(k) is making your maximum contribution every year.

If you’re an employee, the IRS will allow you to contribute up to $19,500 in 2021 ($26,000 if you’re 50 or older). That’s quite helpful on paper. With an Individual Retirement Account (IRA), you’re limited to just $6,000 in 2021 ($7,000 if you’re 50 or older).

The other major advantage of a 401(k) over an IRA is a company match. Most companies that offer a 401(k) retirement plan also offer some sort of match. If you’re contributing to your 401(k), your company probably will throw its own dollars into your plan up to a certain amount.

However, the only way to realize the advantage of the 401(k) contribution limits and a 401(k) company match is to contribute significant money each year.


Scenario 1: Average Salary, Average Company Match, Max Contribution

401(k) Factor Amount
Salary $56,310
Annual Employee Contributions $19,500
Company Match Terms 50% of contributions up to 6% of salary
Annual Company Match $1,689.30
Total Annual Contributions $21,189.30
Annual ROI on Investments 7%
Time To $1 Million 21 years, 6 months, 26 days

If you contributed this year’s 401(k) maximum of $19,500 every year, earned a 7% average annual return on investment (ROI) and got the most common 401(k) company match (50% of your contributions up to 6% of your salary) with an average salary, it would take a little more than 21½ years to grow your account to $1 million.

Let’s stop to acknowledge that there are a lot of variables in this equation: your salary, investment ROI and the parameters of your company 401(k) match, just to name a few.

According to the Bureau of Labor Statistics (BLS), the mean salary in the United States in 2020 was $56,310.

Maxing out your 401(k) contributions at that salary would be quite the feat. In this instance, the max contribution represents 34.6% of pre-tax pay. You’d have to live on significantly less than what you’re earning to achieve that.

However, it’s impressive that a person making less than $57,000 can become a millionaire in a little more than two decades just by contributing to a 401(k).

There are some inputs that could make the time frame even smaller. For example, those 50 and older can make an additional $6,500 in catch-up contributions in 2021. That number gradually increases over time. Perhaps a person’s investments will yield an annual ROI that’s better than 7%. Or perhaps they have other retirement funds through an IRA, an inheritance or outside investments. Salary increases would secure more funds from the company match as well.

To be fair, $1 million may not be enough money on which to retire, depending on your lifestyle and how long you live.


Scenario 2: Average Salary, Average Company Match, Contribute to the Match

401(k) Factor Amount
Salary $56,310
Annual Employee Contributions $3,378.60
Company Match Terms 50% of contributions up to 6% of salary
Annual Company Match $1,689.30
Total Annual Contributions $5,067.90
Annual ROI on Investments 7%
Time To $1 Million 39 years, 10 months, 3 days

If you earned a 7% average annual return on investment (ROI) and contributed up to the most common company match (50% of your contributions up to 6% of your salary) with an average salary, it would take a little less than 40 years to grow your account to $1 million.

Although we should all strive to max out our 401(k) contributions each year, money expert Clark Howard tends to be practical and realistic. He knows most people won’t be able to put more than one-third of their salaries toward retirement.

However, Clark is adamant about contributing at least enough to your company 401(k) to get the full company match.

“The beauty of an employer match is that it’s the equivalent of an automatic pay raise,” Clark says. “No need to ask your boss, get a good quarterly review or hope your company has a good year so there’s money for a raise!”

This scenario also highlights the importance of time. To many of us, 40 years seems like an eternity. But to someone in their early to mid-20s, it sounds like a dream. But the reality is that, if you start soon enough, you can put less than $3,500 each year into your workplace 401(k) plan and still be a millionaire by the time you retire.

How Long Will It Take To Reach $1 Million in Your 401(k) by Contributing Up to the Company Match?

Salary Years To Reach $1 Million
$25,000 52 years
$50,000 42 years
$75,000 36 years
$100,000 33 years
$125,000 30 years
$150,000 27 years
$250,000 21 years
$500,000 14 years

Contributing up to the company match is a common way to fund a workplace 401(k) plan. But not everyone makes the same salary.

Let’s assume a company match of 50% up to 6% of one’s salary; that’s the most common 401(k) match. And let’s assume a 7% return on investment. How long will it take you to reach $1 million in your 401(k) account?

Use this chart as a guide to figure it out based on your salary.


Scenario 3: Double the Average Salary, Average Company Match, Max Contribution

401(k) Factor Amount
Salary $56,310
Annual Employee Contributions $26,000
Company Match Terms 50% of contributions up to 6% of salary
Annual Company Match $3,378.60
Total Annual Contributions $29,378.60
Annual ROI on Investments 7%
Time To $1 Million 18 years, 4 days

If you’re 50 or older and contribute this year’s 401(k) maximum (including catch-up contributions) of $26,000, earned a 7% average annual return on investment (ROI) and got the most common company match (50% of your contributions up to 6% of your salary) on twice the average salary, it would take 18 years to grow your account to $1 million.

If you’re 50 years old and making a good salary (twice the U.S. mean salary from 2020, or $112,620 per year) but you haven’t contributed one dollar to your 401(k), there’s still hope. It will take discipline — and perhaps working a few years past the age of 65.

Not everyone does an excellent job of planning for retirement in their 20s and 30s. A 401(k) can help you catch up on your retirement funding fast.


Big-Picture Financial Tips From Clark Howard

Contributing to your workplace 401(k) over a long period of time can be a powerful strategy when it comes to funding your retirement.

But it’s just one aspect of your overall financial picture.

There are a few basic financial principles that Clark suggests for everyone. I discuss them in detail in my article about how to save and invest the Clark Howard way. Here are a few of the major lessons:

1. Live on Less Than You Make

This is simple but crucial advice. If you’re spending more than you’re making, and you haven’t amassed true wealth, you may be on a harmful path in terms of your financial future.

When you live on less than you make, you can save or invest the surplus.

2. Save Before You Invest

For some, the term “emergency fund” can be abrasive, especially in 2021 with such historically low interest rates.

But by definition, you can theoretically lose every dollar you invest. When you save, you aren’t putting your money at risk.

Everyone incurs unexpected expenses at times. That includes a job loss or medical issue. Having an emergency fund helps you avoid having to borrow money or charge things to a credit card without having the funds to pay off the card at the end of the monthly billing cycle.

3. Prioritize Investing for Retirement

Our society seems increasingly reliant on instant gratification.

But putting off saving for retirement means you’ll have fewer years to earn a return on your investment. Discipline is key when it comes to long-term financial planning.

“The highest priority is to save for your own retirement: the highest priority!” Clark says.

Bonus: Consider Investing Your 401(k) Money in a Target Date Fund

Notice that in all three of the hypothetical income/investment scenarios I laid out earlier in this article, I assumed a 7% annual ROI.

You won’t be able to get any ROI if you put funds into a 401(k) plan but don’t invest those funds. That’s obvious. But what investment option should you choose?

Clark highly recommends putting all your 401(k) dollars in a target date fund.

These funds typically are named in increments of five years (2030, 2035, etc.). Pick the fund that’s closest to the year you plan to retire. The fund will reallocate your investments to remove risk the closer you get to retirement.

Your company will choose a custodian for your 401(k) plan, which is an investment company such as Vanguard, Fidelity or Schwab. Your cost in administration fees and expense ratios will vary based on the custodian.


Final Thoughts

There’s no one-size-fits-all solution to fund your retirement. But if you have access to a workplace 401(k) plan with a company match, consider yourself fortunate.

A 401(k) retirement account is a great way to save and invest a substantial amount of money for your retirement each year.

The more years you save for retirement, and the more years you max out your 401(k) contributions, the easier it will be to fund your post-work life.


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