Surveys consistently show that American workers woefully undersave for retirement and are unlikely to have enough money to last throughout their golden years. The good news, particularly for younger workers, is that the rules for how to grow a 401k are fairly simple, once you know what they are.
In fact, professional financial advisors can give you tips to help double your portfolio. Let's dig into those secrets. But first, here are some assumptions that will help the following numbers make sense. (If you prefer, you can recalculate with your own numbers here.)
Income: $50,000. The average college graduate of the class of 2017 can expect a starting salary of $49,785, according to a study by the Hay Group division of Korn Ferry. So, that seems like a fair salary expectation for a young professional.
Starting 401k balance: $60,000. This is approximately the average 401k balance for an income earner in the $50,000 to $74,999 range, according to Vanguard's How America Saves survey.
Average annual investment return: 7 percent. We used the Vanguard Target Retirement 2055 Fund (VFFVX) as a proxy. It is intended for investors with about 40 years left until retirement and is managed by one of the investment industry's most well-respected firms. The five-year average annual return for the fund was 7.54 percent. For the sake of simplicity, we rounded the number down. (Note: Past performance for any investment cannot predict future performance.)
Here are some tips for increasing your retirement savings by boosting your 401k.
1. Sit Back and Wait
Time is your investment's best friend, said Brent Dickerson, owner and a certified financial planner at Trinity Wealth Management in Texas. "The longer you can stay invested in something, the more opportunity you have for that investment to appreciate," he said.
Assuming a 7 percent average annual return, it will take a little more than 10 years for a $60,000 401k balance to compound so it doubles in size. Learn the basics of how compound interest works. That assumes you do not add an additional cent to the starting balance. Not bad for sitting back and doing nothing.
|Let Your Money Ride|
|$60,000.00||7% Average Annual Return|
|Year 1||$ 64,200.00|
|Year 2||$ 68,694.00|
|Year 3||$ 73,502.58|
|Year 4||$ 78,647.76|
|Year 5||$ 84,153.10|
|Year 6||$ 90,043.82|
|Year 7||$ 96,346.89|
|Year 8||$ 103,091.17|
|Year 9||$ 110,307.55|
|Year 10||$ 118,029.08|
|Year 11||$ 126,291.12|
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2. Enroll in a New Employer’s Plan
Job switchers often forget to enroll in a new employer's plan, and that can be a huge mistake. There's an old adage that time in the market is more important than timing the market. That means "success in investing is a function of time and commitment," said Robert R. Johnson, president and CEO of The American College of Financial Services in Bryn Mawr, Pa.
The longer your money is invested in a well-diversified portfolio of investments, the greater your potential for long-term returns. If you do not take action and enroll yourself, you might miss out on the investment potential of those early career years.
3. Avoid Individual Stocks
Warren Buffett, one of the world's best investors, famously coined the top two rules for investing: "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1."
"Not all investments are created equally," said Dickerson, who recommends a well-diversified portfolio built of mutual funds or exchange-traded funds. "While individual stocks can be sexy and attractive, they can also be highly risky and difficult to know when to buy and sell."
The fewer the number of securities held, the greater the assumed risk. Some academics suggest you can mitigate risk by buying at least 15 individual stocks. Others say it takes more than 100.
A mutual fund or ETF will not eliminate investment risk, but the diversification provided from a broader portfolio can decrease potential losses over time. Having fewer losses means you will have less need to play catch-up, and you will be on a faster path to an outsized investment portfolio.
Start Investing: The 10 Best Stocks for Beginners for Under $100
4. Contribute Consistently
When it comes to investing, consistency is the key to growing your 401k balance. At the end of each year, look at your 401k balance and pledge to contribute 7 percent of that amount the following year. If you do that and earn an average 7 percent return each year, you can double your starting $60,000 balance in less than six years.
|Make Consistent 7% Contribution Each Year|
|$60,000.00||7% Average Annual Return||Add 7% of Previous Year's Balance|
|Year 1||$ 64,200.00||$ 68,694.00|
|Year 2||$ 73,502.58||$ 78,647.76|
|Year 3||$ 84,153.10||$ 90,043.82|
|Year 4||$ 96,346.89||$ 103,091.17|
|Year 5||$ 110,307.55||$ 118,029.08|
|Year 6||$ 126,291.12||$ 135,131.50|
5. Automate Your Contribution Increases
Many employers now offer an automated contribution increase feature in their 401k plans. Employees who participate in this feature see their contributions automatically increase each year, usually by 1 percent. Boosting your contribution limit by 1 percent a year can double your 401k balance in just five years.
If your employer does not offer the feature, or you want to boost your contribution level by a higher amount, you can still use this strategy. You will just have to manually increase your contribution amount each year. Talk to your human resources department to find out how your company manages 401k contributions.
|Auto Increase Contribution Each Year|
|$60,000.00||7% Average Annual Return||Increase Contribution by 1%|
|Year 1||$ 64,200.00||$ 68,694.00||(7%)|
|Year 2||$ 73,502.58||$ 79,382.79||(8%)|
|Year 3||$ 84,939.58||$ 92,584.14||(9%)|
|Year 4||$ 99,065.03||$ 108,971.54||(10%)|
|Year 5||$ 116,599.54||$ 124,761.51|
6. Add in Your Employer’s Match
The first rule with saving in your 401k is to contribute at least the amount necessary to maximize your employer's match, said Stephen Vogel, a chartered financial analyst and president of Corvus Capital Management in Nashville, Tenn. "Common employer matches are a 100 percent match up to 3 percent of your income, or a 50 percent match up to 6 percent of your income," he said.
Contribute just enough to collect on your employer's match, and you can double your 401k balance in six years.
|Contribute to Employer Match (3% Contribution, 3% Match)|
|$60,000.00||7% Average Annual Return||Contribution Plus Match (6%)|
|Year 1||$ 64,200.00||$ 68,052.00|
|Year 2||$ 72,815.64||$ 77,184.58|
|Year 3||$ 82,587.50||$ 87,542.75|
|Year 4||$ 93,670.74||$ 99,290.99|
|Year 5||$ 106,241.35||$ 112,615.84|
|Year 6||$ 113,678.25||$ 120,498.94|
7. Track Savings With Pay Raises
Pay raises offer great opportunities to boost your retirement savings, said Jeff Jones, a certified financial planner with Longview Financial Advisors in Huntsville, Ala.
"When review time rolls around, and you receive a raise, increase your employee deferred contribution by 1 or 2 percent, depending on the increase in income," he said.
Workers with the financial flexibility can increase their contribution amounts by the entire amount of their raises. "This (strategy) significantly increases your savings potential while avoiding lifestyle creep," Jones said.
Boosting a 7 percent contribution by 1 or 2 percentage points per year can double a $60,000 balance in four to five years.
|2% Salary Increase Per Year|
|$60,000.00||7% Average Annual Return||Boost Contribution by 2% Per Year|
|Year 1||$ 64,200.00||$ 68,694.00||(7%)|
|Year 2||$ 73,502.58||$ 80,117.81||(9%)|
|Year 3||$ 85,726.06||$ 95,155.93||(11%)|
|Year 4||$ 101,816.84||$ 115,053.03||(13%)|
|Year 5||$ 123,106.74||$ 131,724.21|
8. Use Your Bonus
If you receive a year-end or quarterly bonus, you can use the windfall to "max out your retirement contributions for the year," said Fabian Knopfler, founding partner of Chicago-based Lions Wealth Management of David A. Noyes. Since it is not part of your regular paycheck, you likely will not even miss it.
Talk to your human resources department to find out how bonus dollars are allocated at your company. Some companies might assume you want the same contribution percentage taken from your bonus as you would from regular pay. Other companies might not allow you to use the bonus money toward your 401k at all.
Of course, how much of the bonus goes toward your 401k will determine how long it takes to double your balance.
9. Dream About the Future
For most people, retirement seems far away, Knopfler said. But if you can envision the future, you can get excited about it. If you are not excited, it will be nearly impossible to sustain the long-term momentum it can take to double an investment portfolio.
10. Get Granular About Reaching Your Goal
Finding the money to fund your 401k contributions is not always easy. "Small changes can create significant long-term savings that can be put toward retirement," said Kevin Watt, vice president of national accounts for Security Benefit, a retirement savings and income company.
Curbing a $3 a day weekday coffee habit can add $780 to an annual 401k budget. OK, so it will take a while to double your retirement portfolio this way. Still, over 30 years, the cost of a foregone daily coffee — compounded at 7 percent annually — could add an additional $60,000 to your 401k balance in 27.5 years.
Even if it takes a while, an extra $60,000 is nothing to sneeze at. Don't want to give up your coffee? Consider the cost of happy hour with co-workers, a new pair of jeans or whatever splurge you might not need.
|$3 Per Day Coffee, 20 Days Per Month|
|7% Average Annual Return||Total|
|Year 1||$ 720.00||$ 50.40||$ 770.40|
|Year 2||$ 1,490.40||$ 104.33||$ 1,594.73|
|Year 3||$ 2,314.73||$ 162.03||$ 2,476.76|
|Year 4||$ 3,196.76||$ 223.77||$ 3,420.53|
|Year 5||$ 4,140.53||$ 289.84||$ 4,430.37|
|Year 6||$ 5,150.37||$ 360.53||$ 5,510.90|
|Year 7||$ 6,230.90||$ 436.16||$ 6,667.06|
|Year 8||$ 7,387.06||$ 517.09||$ 7,904.15|
|Year 9||$ 8,624.15||$ 603.69||$ 9,227.84|
|Year 10||$ 9,947.84||$ 696.35||$ 10,644.19|
|Year 11||$ 11,364.19||$ 795.49||$ 12,159.68|
|Year 12||$ 12,879.68||$ 901.58||$ 13,781.26|
|Year 13||$ 14,501.26||$ 1,015.09||$ 15,516.35|
|Year 14||$ 16,236.35||$ 1,136.54||$ 17,372.90|
|Year 15||$ 18,092.90||$ 1,266.50||$ 19,359.40|
|Year 16||$ 20,079.40||$ 1,405.56||$ 21,484.96|
|Year 17||$ 22,204.96||$ 1,554.35||$ 23,759.30|
|Year 18||$ 24,479.30||$ 1,713.55||$ 26,192.85|
|Year 19||$ 26,912.85||$ 1,883.90||$ 28,796.75|
|Year 20||$ 29,516.75||$ 2,066.17||$ 31,582.93|
|Year 21||$ 32,302.93||$ 2,261.20||$ 34,564.13|
|Year 22||$ 33,022.93||$ 2,311.60||$ 35,334.53|
|Year 23||$ 36,054.53||$ 2,523.82||$ 38,578.35|
|Year 24||$ 39,298.35||$ 2,750.88||$ 42,049.23|
|Year 25||$ 42,769.23||$ 2,993.85||$ 45,763.08|
|Year 26||$ 46,483.08||$ 3,253.82||$ 49,736.90|
|Year 27||$ 50,456.90||$ 3,531.98||$ 53,988.88|
|Year 28||$ 54,708.88||$ 3,829.62||$ 58,538.50|
|Year 29||$ 55,428.88||$ 3,880.02||$ 59,308.90|
|Year 30||$ 60,028.90||$ 4,202.02||$ 64,230.92|
11. Accept Setbacks as Part of the Equation
Overall market conditions play a significant part in how quickly an individual can double his or her 401k balance, Watt said. In the first half of the current decade alone, the S&P 500 stock index — widely considered a proxy for U.S. stock market performance — has recorded returns as high as 32.15 percent (in 2013) and as low as 1.36 percent (in 2015).
Market performance is unpredictable, and it is likely that even the most well-thought-out investment portfolio will take a hit from time to time. Still, in the long run, a well-diversified investment portfolio is likely to go up.
That is particularly true if an investor puts money in no matter the current state of the market, a strategy known as dollar-cost averaging. When you regularly have money taken from your paycheck and put into a 401k plan, you are dollar-cost averaging.
12. Live Beneath Your Means
Watt said investors should not count on factors outside their control — such as salary increases, bull markets and favorable interest rates — to boost their portfolio totals. "A more realistic solution is for Americans to begin living on 80 percent of income now and save the remaining 20 percent for retirement," he said.
While 80 percent of income might not seem like enough to live on, it is worth noting that financial professionals generally calculate a retirement income stream by assuming a retiree will live off of 80 percent of his pre-retirement income.
Contributing 20 percent is a super-speedy way to double your 401k balance. Using the rules established above, it will take three years to double — and just a little more than six years to quadruple — a $60,000 balance.
Of course, there's no way to predict how the market will perform from year to year. But it is important to understand that long-term results are often the result of setting an effective strategy and then sticking to it.
|Invest 20% Per Year|
|$60,000.00||7% Average Annual Return||20% Contribution|
|Year 1||$ 64,200.00||$ 77,040.00|
|Year 2||$ 82,432.80||$ 98,919.36|
|Year 3||$ 105,843.72||$ 127,012.46|
|Year 4||$ 135,903.33||$ 163,084.00|
|Year 5||$ 174,499.88||$ 209,399.85|
|Year 6||$ 186,714.87||$ 224,057.84|
|Year 7||$ 239,741.89||$ 287,690.20|