Who Wants to be a 401(k) Millionaire?

Who Wants to be a 401(k) Millionaire?

Beth Dworken Krasnow

 

My 24 year old niece has just started the next phase of her life – her career! She is a third grade teacher and trying to learn how to navigate the real world. Job?  Check.  Work clothes?  Check.  School Politics?  Check.  Planning for Retirement?  What?

Arica is luckier than most of the Millennial Generation entering the workplace: her favorite uncle is an investment advisor specializing in Retirement Plans and Investments.  When Favorite Uncle sat down with Arica to help her choose her investments, she was amazed to learn that if she saves properly, and invests wisely, she can retire a MILLIONAIRE!

Yes, that’s true! You don’t have to make a million dollars a year to retire a millionaire.  Let’s take Arica for example.  The average wages of a starting teacher in the Cleveland suburbs is $49,000.  If Arica starts contributing a minimum of 5% of her salary Day One, she receives a minimum raise of 2.5% per year, and the market returns an average of 8.5%  - Arica will retire with $1,092,956! This is all on a teacher’s salary.  

How can you retire a MILLIONAIRE? Follow these five easy steps.

Start Early.  That’s easier said than done if you’re too old to start early. However, that just means you have to adjust. While Arica can accomplish her goals by contributing only 5% - you may have to contribute more. Get creative – you can make it work.

Contribute as Much as You Can. Again, easier said than done.  If you’re a 20-something, try to pay yourself first.  Priority one when it comes to your paycheck is to save as much as you can.  Once you do that, you will know what you have left for housing, clothes, expenses, and martinis. If you’re 40, determine the maximum you can afford to contribute and stick to it.

Employer Matches are Golden.  When it comes to 401(k) millionaires, a study by Fidelity Investments found that 28 percent of the assets in their accounts were from their employer and that this boosted their annual savings by nearly $4,600. Don’t leave money on the table!

Invest & Stay in the Market.  People, who invested $1,000 in the S&P 500 at the beginning of 2008 and again at the start 2009, were back in positive territory by the end of 20091.   Sure, they suffered steep losses (and likely lost some serious sleep) as stocks cratered during the financial crisis. Yet, they also enjoyed a dramatic rebound in U.S. stocks as the system stabilized. The S&P 500 is up over 200% since the bottoming out in March 2009.  Stay the course. This is a long-term commitment, so don’t jump ship when the water gets a little rocky.

Lastly, Rollover Your 401(K) When Changing Jobs. Do. Not. Cash. Out.  Once you withdraw those savings, they’re gone and “can be very difficult to replace,” says Ken Hevert, Senior Vice President of Retirement Products at Fidelity. “While it can be pretty tempting to cash out your 401(k) and use the money to pay off a car or your credit card bill, you may want to think twice before doing so, and weigh the impact of that decision.” The power of tax-advantaged accounts such as a 401(k) is that they allow for pretax contributions to compound without taxes eroding that growth. Over time, earnings can generate their own earnings, helping you accumulate more money than you would in an ordinary taxable account.

Follow these easy steps and you, too, can be a 401(k) Millionaire!  If you need help or have further questions, we are here to help!  

 

[1]according to a new analysis by financial technology firm CircleBlack.


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