This major milestone can be attained.
It’s not a magic number, but when your 401(k) finally hits the $1 million mark, it certainly feels like a major milestone. You’re not there, yet? Not even close? Well, consider the average cost of retirement is $738,400, according to Merrill Lynch’s 2017 Finances in Retirement study. Many retirees need quite a bit more. Your own number will vary depending on your standard of living and lifetime income and savings, so it’s best to use a retirement calculator or meet with a financial advisor. But for now, consider $1 million just because it’s a round number and a decent starting point. How can you get there? We turned to financial planners for their best tips.
Start early.
“You can’t control the market, but you can control your contributions and take advantage of the most fundamental and powerful force when it comes to investing — compounding interest,” says Andrew Almeida, a certified financial planner in Islandia, New York. If you start now from zero and maximize your 401(k) contributions, adding $18,500 each year (the 2018 limit), it will take just shy of 27 years for you to become a 401(k) millionaire. (That calculation assumes a conservative 5 percent annual return.)
Start small and increase your contributions each year.
If you’re like most Americans and cannot afford to stash away $18,500 a year when your career is just starting, begin by making smaller contributions, and each time you get a raise, increase your contribution by 1 or 2 percentage points. One of the keys to saving more is to avoid lifestyle creep, says Jeff Jones, a certified financial planner in Huntsville, Alabama. Don’t immediately upgrade your lifestyle every time you get a raise. Instead, try to live below your means, and notch up your contributions every time your income rises, he says. You can also take all temptation out of this decision by opting into auto-increases on your 401(k) account.
Maximize the company match.
If you work at a firm that offers a company match on your 401(k) contributions, the next important step is to get your contribution high enough that you’re at least maximizing that match. “If you are not taking advantage of the employer match, you are leaving free money on the table,” Almeida says.
Supercharge your contributions.
Next, aim for the limit. Don’t stop at the company match. The 2018 limit on 401(k) contributions is $18,500. Employees over age 50 are also allowed to make additional catch-up contributions of $6,000.
Read the fine print.
It’s easy to take your company’s 401(k) plan for granted and neglect to read the fine print. But you could be making a big mistake, says Nick Barringer, a certified financial planner in Charlotte, North Carolina. He recommends 401(k) participants scan their plan descriptions for specific language that says how your company times its match. Some companies only match contributions on a per-pay-period basis, meaning that if you hit the IRS contribution limit early in the year, you could potentially miss out on free money, Barringer says.
Look for hidden expenses.
Not all index funds are low cost, and not all target date funds are created equal, Barringer says. Check the fund fact sheets for information on underlying expense ratios, risk and portfolio construction. Does the target date align with your own personal goals? Not everyone wants to retire at 65, after all. And if the fees seem high, take it up with HR. “The company should have your best interest in mind and not the person selling the 401(k) platform,” Barringer says,
Diversify your portfolio.
It’s important to spread your risk. Do not own company stock in the 401(k) or tilt it heavily toward one particular asset class. Instead, consider low-cost index funds or target-date funds that are allocated according to your risk tolerance. Usually this means that when you’re young and have a long time horizon, the portfolio should be tilted more heavily toward stocks and less toward bonds and cash. Make sure the underlying stocks represent a variety of industries, sizes of companies and geographies — and are not concentrated in just one sector.
Hold steady and stay calm.
Once you have a diversified portfolio in place, it’s important not to deviate from that course. “Don’t buy and sell frequently based on personal whims or market conditions,” says Kirsty Peev, portfolio manager for Halpern Financial. “Pick a diversified allocation which is suitable for you, and be disciplined. Don’t cave in to excessive fear or euphoria.”
Don’t forget about old plans.
“You might not think you would ever forget about thousands of dollars, but it happens frequently,” Peev says, citing figures from a 2013 ING Direct USA report that showed Americans left approximately $1 trillion in so-called “orphaned” retirement plans. “A common scenario is when an employee leaves their place of work, maybe didn’t realize their employer had contributed money on their behalf, moves a couple of times and doesn’t update their address … and the statements stop following them,” Peev says. “Don’t leave money on the table.”
Avoid taking loans or early withdrawals.
Life often throws curve balls: accidents, sudden medical bills, unemployment, natural disasters. Make sure you have an emergency fund to cover a mishap, so that in one of these events, you don’t immediately need to raid your retirement accounts. “Reaching the mark by retirement is entirely possible for middle class Americans,” Barringer says.
Remember your taxes.
The $1 million goal may not be the right benchmark for everyone. Some workers will need more, and some will require less. Either way, once you start taking out funds from your $1 million 401(k), remember you’ll also owe taxes on those withdrawals. “$1 million in a tax deferred account, like a workplace 401(k), is really not $1 million because you have not paid taxes on that money yet. That can be an unpleasant realization for people.” Peev says. “This is why it is so important to save in both tax-deferred and after-tax accounts.” Consider Roth 401(k)s and Roth IRAs to further diversify your nest egg.
More from U.S. News
7 of the Best Stocks to Buy for 2018
The Top 10 Investment Portfolio for Millennials
6 Reasons to Love Apple Inc. (AAPL) Stock in 2018
11 Steps to Make a Million With Your 401k originally appeared on usnews.com
