3 Secrets of 401(k) Millionaires

Retiring with at least $1 million is a goal for many. Sadly, most people don’t achieve it, at least not via retirement accounts. Only about 3.2% of American households had at least $1 million saved in retirement accounts, according to an analysis by the Employee Benefit Research Institute of Federal Reserve consumer data from the end of 2019.

It’s not inside information or special savings accounts that separate those with $1 million saved for retirement from the average person trying to build a nest egg. There are a few simple secrets that allowed them to far exceed the average person’s retirement account balance. Here are three secrets of 401(k) millionaires

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1. They always get their full company match

The biggest benefit by far of a 401(k) for most workers is their company match, which can boost your annual retirement savings by up to 100%. Some companies will match your contribution dollar for dollar up to a certain percentage of your salary, while others will only match half your contribution but usually match a higher percentage of your salary. Some mix and match.

Be sure to read the details of your 401(k) plan and ensure you’re contributing enough to get your full match. Anything less is leaving money on the table.

It’s worth noting that the amount you need to contribute to get the full company match is often far less than the contribution limit for a 401(k). In 2024, you can contribute up to $23,000 (or $30,500 if you’re 50 or older) to your plan. But you can reach $1 million by retirement with much smaller contributions.

If your contribution and the company match add up to about 10% of your salary, you’ll be well on your way to millionaire status. Even if you have an average salary, that savings rate can add up over a 40-year career if you compound your earnings with good investments.

2. They pay attention to fees

One of the biggest drawbacks of 401(k) plans is that they often have very high fees, relative to other retirement savings accounts. Fees will differ from company to company, but the average person at a large company pays about 0.84% of their 401(k) assets in fees, according to the 401(k) Averages Book.

Those fees add up fast. Just as compound interest can work for you when you earn it, it can also work against you when you pay it. A 0.84% drag on your investment returns can cost tens or even hundreds of thousands over the life of your career.

There are three types of 401(k) fees: administrative, investment, and service. You can’t do much to control the first one, but you can mitigate or sometimes eliminate the impact of the others.

Service fees are those charged for using features of the 401(k), like a loan option or participant-directed account. Those are optional choices, and if you never use them, you’ll never pay the fee. That said, those features can sometimes be worth the fee.

The bigger impact comes from investment fees, which are charged by the funds in your 401(k). If you can find a fund with a low expense ratio, you’ll likely be able to keep your total fees well below average. The good news is that funds with low expense ratios often turn out to be broad-based index funds, which historically have outperformed actively managed funds when you factor in fees.

It’s best to get rid of any fees as soon as possible. One way to do that is by rolling over an old 401(k) into an IRA. Most IRAs don’t charge any fees and offer more investment options, often with lower expense ratios.

3. They don’t interrupt their investments

The biggest secret of 401(k) millionaires is that they allow their investments to work for them for a very long time.

Saving in your 401(k) is like spinning a flywheel. At first, it’s really difficult to spin the wheel. You feel like you’re putting a ton of money into your 401(k) and barely anything is happening. But as you keep saving, it gets easier and easier to spin the wheel.

A few years in, you start to notice the impact of your investment returns on your account balance. Eventually, the wheel can turn itself. Even if you don’t contribute an extra dime to your 401(k), the amount of your investment returns has a meaningful impact on your account balance year after year.

The only catch is you can’t impede the momentum of the flywheel. You can’t withdraw funds from your 401(k).

Unless you have a very good reason to take money out of your 401(k), like a true emergency, it’s never a good idea to make a withdrawal before retirement. The IRS discourages that behavior by imposing penalties. Not only will you disrupt the flywheel, impeding your progress toward $1 million, but you’ll often pay a fine to do so.

Heed the wise words attributed to Charlie Munger: “The first rule of compounding is to never interrupt it unnecessarily.”