3 Successful Habits of 401(k) Millionaires

By | April 3, 2024

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According to a Fidelity study, of the more than 45 million retirement savers with Fidelity accounts, approximately 422,000 401(k)s and 392,000 IRAs have a balance of $1 million. That is less than 2% of the total.

There’s no magic formula when it comes to building a million-dollar 401(k), and the paths to retirement savings success look different for different people. However, there are some common habits among 401(k) millionaires. Here are three that can help you build your own seven-figure account balance.

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1. 401(k) millionaires contribute more than most people to their accounts

This probably won’t be a big surprise, but one of the common characteristics of 401(k) millionaires is that they contribute a lot of to their accounts.

The Fidelity study found that the average 401(k) millionaire contributes 17.5% of their wages to their 401(k), and that doesn’t include employer matching. Including matching contributions, the average person with a seven-figure Fidelity 401(k) account takes in more than 26% of their annual salary.

There are two main factors that contribute to your final 401(k) balance: the time and the rate at which you contribute. There is obviously no better time to be aggressive with your retirement savings than now. But the savings rate is the x-factor that you control, and that most 401(k) millionaires use to their advantage.

2. 401(k) millionaires aren’t afraid of the stock market

One of the most common mistakes people make with their 401(k) is being too conservative with investments. Many plans offer ‘safe’ pension investments, such as money market funds or fixed income (bond) funds. But the best place for the bulk of your retirement savings – especially if you’re a decade or more away from retirement – ​​is in the stock market.

In fact, the average 401(k) millionaire holds three-quarters of their account in stocks and stock-based mutual funds. Stocks will rise and fall over time, but they almost always do well in the long run. Since 1965, the S&P 500 has achieved an average annualized return of more than 10%.

3. 401(k) millionaires almost never withdraw loans from their accounts

Most 401(k) plans allow active participants to withdraw loans from their accounts in amounts up to $50,000. And at first glance it may seem like a pretty good way to borrow money. After all, interest rates on 401(k) loans are typically very low, and not only that, but you’ll be paying as well yourself back.

However, there is one major problem with this logic. The stock market has historically generated returns of 10% per year (or close to it) over long periods of time, and it is not rare for the S&P 500 to rise 20% or more in a given year. Taking money out of your retirement account and paying yourself back can give you a much lower return on your investment than simply leaving it in the account.

According to Fidelity data, 17.6% of 401(k) participants have an outstanding loan on their account. And while the ability to take out a 401(k) loan is certainly a nice safety net in the event of a financial emergency, it should be more of a last resort than many people consider it.

Not an exhaustive list

These are just some of the best practices you can implement to build a million-dollar 401(k) account of your own. It can also be helpful to start as early as possible, investing in IRAs and other investment accounts and avoiding early withdrawals at all costs.

That said, there is no magic formula or incredible luck involved. The best things you can do to build a million-dollar 401(k) are pretty simple: start saving as soon as possible, invest a double-digit percentage of your paycheck, and avoid taking money out of your account. write it off before you retire. .

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3 Successful Habits of 401(k) Millionaires was originally published by The Motley Fool

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