5 Secrets of 401(k) Millionaires

Saving for retirement today isn't like it was in previous generations. Gone are the days when a pension was standard, replaced by the modern 401(k) plan. The biggest difference? It puts the responsibility of contributing to it on the employees.

But the 401(k) plan can be a powerful wealth-building tool. There are thousands of 401(k) millionaires throughout America, and joining those ranks isn't as complicated as it might seem.

Here are five secrets to maximizing your 401(k) plan and retiring wealthy.

1. Use the 401(k)

This isn't a joke. The most straightforward tip for retiring rich is to actually use your 401(k) plan. According to a CNBC study, 4 in 10 people with access to a 401(k) -- almost half -- don't contribute anything!

You can compound zero dollars as much as you want, but you won't get anywhere. The first step is making sure you're contributing something.

2. Contribute enough

Once you're actively contributing, you must figure out how much you'll need to put into it to reach your goals. Hypothetically, suppose you're 30 and want to retire with $1 million in your account. The average salary in the U.S. is around $60,000 for 30-year-olds. Historically, the stock market returns an average of 10% annually. You mix in some bonds, and your 401(k) grows by an average of 8% annually.

To reach your goal, you must contribute $440 of your monthly gross pay, which is $5,280 or 8.8% of your salary. Calculate how much you must contribute at your age and income to hit your goal. Having a goal should be the first step in any retirement plan. It all comes together from there.

3. Get free money

Some employers offer a match to help encourage employees to save money. It's usually a dollar-for-dollar match or a one-for-two match up to a certain salary percentage. For example, a dollar-for-dollar match up to 4% would mean that your employer would match every dollar you contribute until you cross that 4% threshold.

A dollar-for-dollar match doubles your out-of-pocket money before it even goes to work, so be sure you get all the easy money you can!

An egg with 401k on it atop a pile of currency

Image source: Getty Images

4. Don't touch your funds

It's crucial that you don't interrupt the compounding magic of a retirement account. Not only would withdrawing your funds early incur a potential 10% penalty and taxes, but that money would also cease working for you. There are ways to access your 401(k), including borrowing against it, but just because you can doesn't mean you should. Leave that money alone.

5. Don't be afraid of risk

One of the worst things young workers can do in their 401(k) is get too conservative with how they invest their money. If you are young, you should put very little of your savings into fixed-income funds. Instead, you should invest in stocks that are more volatile than bonds but have far more long-term upside. Otherwise, your money will never grow like it can.

If you're uncomfortable with stock market volatility, remember that most 401(k) plans only allow you to own mutual and index funds. It's very easy to diversify your savings, and you can slowly start to shift toward conservative investments as you age.

Wrapping up

Retiring with a nest egg you're proud of takes work and time, but the formula for success is refreshingly simple. Invest responsibly. Do it early and often in life. And don't mess with any money you put into your 401(k). Don't be reckless, but embrace a little risk and let time do all the heavy financial lifting. It's as simple as that.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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