5 Secrets of 401(k) Millionaires

There are nearly 500,000 401(k) millionaires in the U.S., according to Fidelity. Yet the average 401(k) balance remains far lower at $127,100.

If you hope to join the former group, you'll need the right investment strategy. Here are five things that could help you join the 401(k) millionaires club by retirement.

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1. Contribute early and often

Set up regular paycheck deferrals to your 401(k) as soon as you're eligible and can afford to do so. Traditional advice says to save 10% to 15% of your income for retirement each year, but it's fine if you start with less. Your early dollars will become some of your most valuable because they'll be invested the longest, so don't put off saving simply because you don't think your small contributions today matter.

Most people shouldn't have to worry about 401(k) contribution limits, though high earners should keep an eye on them. You can contribute up to $23,000 to a 401(k) in 2024 or $30,500 if you're age 50 or older. These limits may rise in 2025, but the IRS hasn't announced them yet.

2. Claim your 401(k) match whenever possible

Claiming your 401(k) match should be your top retirement savings priority each year if you can afford to do so. If you fail to claim your match, you'll miss out on that money and the burden of saving for your future will rest entirely on your shoulders.

Check with your employer to find out how much you must contribute to get the whole match. Divide this by the number of pay periods in the year to figure out how much you must defer each paycheck.

You may also want to inquire about the vesting schedule if you're new to the company and don't plan to stay there long. If you quit before you're fully vested in the plan, you'll forfeit some or all of your employer match. However, your personal contributions are always yours to keep.

3. Minimize your investment fees

Most 401(k)s give you a choice between a variety of mutual funds or index funds your employer chooses. These vary in terms of risk tolerance, performance, and the fees they charge. You must weigh all these factors when deciding which is right for you.

It's easy to forget about fees because they come directly out of your account, but they chip away at your profits over time. Try to keep your total fees below 1% of your assets each year. Most mutual funds charge expense ratios, which are listed as percentages in your prospectus. This indicates what percentage of your invested assets in the fund you'll pay to the fund manager each year.

Index funds are a great low-cost investment option if they're available to you. They diversify your money among several hundred companies, and some only charge expense ratios of 0.03% -- that's $3 for every $10,000 you have invested in the fund.

4. Avoid emotional investing

Seeing their portfolios lose value can tempt some people to sell what they see as "poor performers," but this isn't always the best move. All stocks experience some ups and downs. A bad quarter isn't necessarily an indication of a bad stock. It's important to think about the stock's long-term growth potential when deciding whether to keep it in your portfolio.

If you're tempted to make decisions based on recent performance, it's best to limit how often you check your portfolio. A few times a year is fine for most people.

5. Keep your money invested as long as you can

For most 401(k) investors, contributions are only a small part of the account's final value. Most of your money will come from earnings on your investments. The longer your savings are invested, the more earnings you'll generally have. That's a big part of why early retirement contributions are so valuable.

Maximizing your earnings also means avoiding early withdrawals. Taking money out of a 401(k) before you've reached age 59 1/2 will trigger income tax, as well as a 10% early withdrawal penalty in most cases. Even a 401(k) loan will hurt the growth of your savings, even if you pay back your balance with interest over time. Whenever possible, save for emergencies and other financial goals outside of retirement accounts so you don't have to raid them early.

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