Three secrets of 401(k) millionaires

Becoming a millionaire through a 401(k) pension is the retirement dream for many Americans.

Yet many people don’t even come close to that amount: According to retirement provider Vanguard, the average retirement account for clients 65 and older is just $272,588.

The median balance is even much lower, at $88,488. This shows how much the largest accounts can influence the average.

Those who have managed to save the coveted seven-figure sum of money in their 401(k) retirement funds are now revealing the three secrets that helped them do it.

1. Maximize your contributions EVERY year

Building a million-dollar retirement account is difficult even for high-income earners because of contribution limits.

In 2024, employees will be able to contribute up to $23,000 per year to a 401(k), up slightly from $22,500 in 2023.

The ceiling is adjusted each year based on inflation. In 1994, the ceiling was only $9,240.

This means that if an employee had contributed the maximum amount each year in accordance with the increasing limit, he or she could have contributed a total of $449,480.

This percentage could be increased by employer contributions. Many companies pay up to 6 percent of the employee’s salary.

2. Make wise investment decisions

While making the maximum contribution is a good start, you need to make the most of the money to maximize returns.

This means that choices have to be made to maximize growth and minimize risks.

The options for low-cost index funds have expanded rapidly over the years.

Most of the larger platforms offer at least a few passively managed funds that track the S&P 500, for example.

Actively managed funds are also an option, but these often underperform the rest of the market and carry higher costs, which can erode returns.

Many 401(k) millionaires knew that by choosing simple, low-cost funds, they could let the market do its work.

According to Vanguard, the average retirement account for people over 65 is worth $272,588

3 times

Becoming a millionaire through your 401(k) retirement plan isn’t something that happens overnight. It’s a long-term project that takes decades.

At a 10 percent annual stock market return and maxing out your deposit, it would still take at least 20 years to open a million-dollar account.

Compound interest and bank stock market returns over decades can do much of the heavy lifting.

For example, a $10,000 investment in the S&P 500 in 1994 would be worth about $180,000 today, according to mutual fund firm Hartford.