8 Key Signs You’re on Track To Become a 401(k) Millionaire

For many Americans, the status of being a millionaire is one that’s steeped in the trappings of wealth and success. A millionaire isn’t just any old person, they’re a hustler of the highest order. Because to get that second comma in your net worth, you’ve got to do more than just show up at work every day and punch your time card like some average Joe.

Or not. Actually, if you’re looking for a good lesson on “what it really takes” to become a millionaire, try going to the AARP’s 401(k) calculator and plugging in the median American salary ($61,937 per the U.S. Census 2018 Community Survey). Then, put the settings to some pretty ordinary levels — say someone who works from 25 until they retire at 65, sets the 401(k) contribution rate at a steady 6% for that whole time, and ends up averaging an 8% return on their portfolio. That would give the person in this rather unremarkable test case a net worth at age 65 of … $1 million. Or, $1,003,954, to be precise. And that’s not even including an employer match — that same worker getting a full match up to 5% would be worth a cool $1.84 million by the time they call it quits. So, if someone wants to become a millionaire, the secret trick is earning an average amount of money, setting your 401(k) contributions a touch higher than the norm and then waiting. You won’t get the cover of Forbes, but it spends just the same.

If you dream of becoming a millionaire and you’re also patient enough to do it the way that has the highest probability of ultimate success, all you really have to worry about is being consistent with your saving and enjoying your life as much as humanly possible while sticking to that plan. As such, here are a few simple ways to check in on whether or not you’re on track to becoming a millionaire.

Last updated: June 9, 2020

Many people can let the question of what they’re investing in become an all-consuming question, but the truth is that good budgeting and bad investing will likely outperform the reverse any day of the week and twice on Sunday. Sure, making smart investments matters, but there are a lot of really easy ways to make smart investments. Being able to keep that drip, drip, drip of savings coming in — not to mention not letting overspending create the sort of debt that sends savings drip, drip, dripping in the other direction — is going to matter more to your net worth in the long run.

There’s no one “right” budget that’s going to work for every family, so you should be ready to find an approach that’s right for your life. However, just by having a clear sense of how much you earn and spend each month and a plan for keeping both those figures where you want them to be more months than not, you’re already on the right track.

You can also go with the basic 50/30/20 budget, wherein you’re spending no more than half your income on basic necessities and saving at least 20% of your income, leaving the remaining 30% to spend on the things you and your family enjoy.

To demonstrate how important budgeting can be, let’s examine two hypothetical test cases. One is someone earning the median salary for the United States who manages to stick to that budget consistently for their entire 40-year career — setting the amount of their savings routed to their 401(k) at 10%. Then, as an alternative, let’s imagine someone who’s earning twice as much but spending freely. They eventually get themselves into a sweet hedge fund that doubles the 8% return of the lower-income friend, but they don’t really make room to save until they’re 50 — and even then they just sock away 5% of their income.

Given one person is earning twice as much — and then getting double the other’s returns — you might assume the rich one wins out, in spite of being way behind in the budgeting department. But you would be wrong. The person making the average amount will have some $1.67 million in their 401(k) by age 65, while their free-spending counterpart will have a little under $350,000.

Yes, you have probably seen this particular piece of financial advice many times before, but it’s worth mentioning again in this context. Life has a way of throwing you curveballs — something that 2020 has reminded Americans of in a big way — and keeping your finances on track through fat times and lean times requires having some cushion to protect yourself. If your long-term plans don’t account for things going a kilter every once in a while, they aren’t very good long-term plans. Keeping money in a savings account that you can easily draw on in times of need is what allows you to avoid raiding your 401(k) when you get laid off or you discover your house desperately needs a new foundation.

Just how much you “need” in an emergency fund is up for debate. Many experts advise having at least six months of spending socked away to be sure that unexpected expenses don’t lead you to tap into your retirement savings or run up debt. However, others feel it might be much less.

One interesting take comes from economists  Emily Gallagher and Jorge Sabat, who’s 2019 study “Rules of Thumb in Household Savings Decisions” found that the traditional wisdom might have been asking people to keep too much of their savings in their emergency fund. They found that — for a low-income household — $2,467 stashed away should be enough to cover most contingencies and the benefits of saving after about $2,500 produced diminishing long-term returns.

At the end of the day, you’re safer with a larger emergency fund, and with so many good options for excellent high-yield savings accounts, you can actually earn a pretty decent return on that money. Still way less than you would if it’s in your 401(k), but pretty solid when you consider you’re also getting Federal Deposit Insurance Corp. protection for that cash. But, if you are someone who’s on a tight budget and/or doesn’t have an emergency fund, setting a goal of $2,500 is a pretty solid starting point — and, knock on wood, might end up being more than you ever need.

Imagine a person, let’s call them Ruth, who’s 35 and has just inherited $2,500 from their long-lost uncle. Ruth has no emergency fund, but she decides she would much rather stick the money in her 401(k) than start an emergency fund. However, just a month after she transfers her cash to her 401(k), she gets laid off unexpectedly and winds up putting $2,500 on her credit cards while she spends a few months finding a new position.

If one assumes about a 20% annual percentage rate on her credit card, if Ruth just sticks to the minimum payments of $75, she’ll spend the next four-plus years paying that debt off and ultimately pay $1,180 in interest in the process. A pretty high price tag for just failing to keep a little extra cash in reserve for hard times.

Another pitfall for many retirement investors is letting themselves get sucked into the trap of trying to time the market. You watch the news every day, searching for signs that the time is right to pull all your money out of the market to avoid a crash or borrow big so you can invest while things are hot. This is, unequivocally, a bad idea.

The smart way to “time the market” would be what’s known as “dollar-cost averaging” — or, to normal people, making regular contributions of the same amount. You see, by investing a set amount of money in the markets on a regular schedule, you’re essentially averaging things out yourself. When markets are down, the same amount of money will go further and buy more stock, setting you up for when they eventually bounce back. And when prices are high during boom times, you’ll be getting less stock, giving you something of a built-in throttle that automatically responds to market conditions.

Do you have a 401(k)? Is there a set percentage of every paycheck diverted to said 401(k)? Congratulations, you’re already a successful practitioner of dollar-cost averaging. That’s really how simple it is. However, while dollar-cost averaging is an approach that can work for any portfolio, sticking to ETFs and index funds tracking major American indices — like the S&P 500, for example — is going to be safer, generally speaking, than trying to pick specific stocks.

One of the best cases for dollar-cost averaging is made by data scientist Nick Maggiuli in his article “Even God Couldn’t Beat Dollar-Cost Averaging” for the website Of Dollars and Data. In it, Maggiuli breaks down how even if you’re someone who manages to PERFECTLY time your stock purchases to the bottom of the market after a dip or crash, you would still lose out to the investor who just keeps plugging the same amount in month after month, whether markets are good or bad.

So, since you are, presumably, not God, you should probably just stick to dollar-cost averaging as your way of trying to “time” the markets.

This is, unfortunately, one factor over which you don’t necessarily have the most control, but as you could see with the example from the introduction, it matters a lot. Simply put, when your employer offers a program for matching some or all of your 401(k) contributions, it’s like you’re getting a raise. It might not feel that way since you won’t actually get to spend any of it for another decade or two, depending on your age, but in a very real sense, it is free money for you. Free money you could be leaving on the table if you’re failing to save for your retirement.

If your employer offers to match any portion of your 401(k) contributions, do whatever you need to do to ensure you can afford to take full advantage of it. No matter how tight your budget might be otherwise, carving out an extra percent or two is essential. There’s just no other way around it.

And even if you’re not getting matching contributions, be sure that’s something you’re asking about on your next job hunt. Of all the benefits employers offer to entice the best employees to their team, few if any are likely to match the long-term value of this one. And if you’re ever stuck between two good offers? You could do a lot worse than letting whichever has the more generous 401(k) match be your go-to tiebreaker.

One way to illustrate the choice you’re making is to consider just how much you’re giving up by not having those matching funds. So, let’s take that average U.S. salary ($61,937) and look at what the value is of taking that 5% in your paycheck versus directing it to your 401(k) and getting a full employer match for that amount.

Let’s imagine Erica, a swinging single gal on the make. At age 30, she’s thinking it’s time to live large and decides she’d rather get paid more now than start her 401(k). Erica’s paychecks are going to come out to $2,581, with a take-home pay of $1,922 (based on payroll taxes in California). Five percent of her check ($129.05) translates to about $95 in money she can actually spend right now.

However, if Erica opts in for the employer matching, she gets to route the full $130 or so into her 401(k), along with another $130 or so from her employer. Assuming Erica averages about 8% returns from her portfolio, her decision comes down to this: take $95 now, or $3,816.10 35 years from now.

There’s a lesson underlying the importance of not trying to time the markets: You cannot predict or control them. No one can, really. The nature of the shifting marketplace makes it inherently chaotic — and that’s before you even consider the effects of the sort of generational crises like the one America is facing now.

Your portfolio is going to be building up value for roughly 40 years, all so you can spend about 20 years (or more, knock on wood) slowly winding it down. The amount of uncertainty contained in that long of a time frame is utterly mind-boggling. There is, however, one factor over which you’ll always assert a significant amount of control: you. You won’t be able to predict the next financial calamity, but you will be able to ensure you have the sort of habits that will keep you on firm financial footing through it all.

Are you the sort that’s checking your 401(k) balance every day? When there’s a market crash, do you agonize about how much you’ve just lost and start thinking you need to do something before it gets worse? Well, these are not great habits. Sure, knowing your 401(k) balance and checking in on its rate of return are important, but not if it’s pushing you to make rash decisions. You have to be ready for bad markets, because over that 60-year life of your portfolio, history would dictate there’s going to be several. And the best way to do that is to just stick to the plan with a sustainable budget and regular 401(k) contributions.

The S&P 500 has averaged a return of about 10% a year over the course of its existence. Some years it’s a lot more, and some years it’s a whole lot less, but over time it keeps smoothing out to roughly that number. Now, you might think that through research and shrewd investing you can beat the market over time, perhaps setting you up for an early retirement by picking the right stocks and maybe creeping that average up closer to 15%.

But you are wrong. In fact, even professional mutual fund managers armed with an army of analysts poring over mountains of data have, as a group, consistently failed to beat average market returns for any sustained period of time.

That might be pretty disappointing news with regards to your dreams of becoming an ace stock picker, but it should be reassuring news about how much expertise you really need to invest. If you’re willing to stick with low-cost index funds or ETFs that will just match market returns — good or bad — year after year, you can expect to do about as well as someone who spends their every waking hour studying stock charts.

The funds that rely on passive investment strategies usually come in the form of either index funds or ETFs — and they serve essentially the same purpose for the average investor. Check with your 401(k) provider to be sure that the vast majority of your stock investments are going into ETFs or index funds that track well-known stock indices like the S&P 500. Over the long run, you won’t raise any eyebrows with your returns, but you will also get the sort of steady growth that will help you reach that million-dollar goal.

One of the important things to understand about ETFs and index funds is that they have much, much lower fees than actively managed mutual funds that are picking stocks to try and beat the market. And while the size of the fees involved don’t sound huge — fractions of a percent, as often as not — they add up over time in a very big way. Over the course of your career, just a few hundredths of a percentage point — “basis points,” in banker lingo — can end up meaning hundreds of thousands of dollars. And if the mutual fund you wound up paying those extra basis points to invest in just matches or, God forbid, underperforms the S&P 500, well, that winds up being a lot of money you paid for nothing.

Before you invest in any fund, be sure you know its “expense ratio.” It’s a percentage and it’s basically how much of the fund the company holds back each year to pay themselves. For index funds or ETFs, they’re really just following some mathematical formulas so they tend to be really low. For mutual funds, they have to pay all those fund managers, analysts and researchers, so they tend to be a little higher.

But here’s a neat trick: Every mutual fund has a target index that it measures its performance against. That index will, almost without fail, have at least a couple different ETFs or index funds that track its performance. It’s easy enough, then, to see how much extra you’re paying for that mutual fund. Not to mention, you can compare its performance to that index over the last 20 to 30 years (because that’s how long you should be thinking) and get a better sense of whether there’s any chance it’s going to be worth it for you.

Spoiler alert: It very rarely is.

The cost of even tiny fees really, really adds up. Because it’s not just the cost of the fee, it’s the fact that the money that goes to those fees also isn’t sitting in your account earning interest and/or investment returns every month until you retire. And that makes it extremely costly.

Take, for example, that person earning an average salary who reaches the status of a 401(k) millionaire by age 65. Then, change that rate of return to 7.5% to reflect an additional 0.5% in fees charged by their hypothetical mutual fund manager or financial advisor. The value of their portfolio by age 65 is just $878,040 — or around $120,000 below what they should expect for just another half percentage point in annual returns.

In investing, one asset is more valuable than any other: time. No matter how much you might want to believe that you can focus on investing and saving for retirement later, the simple fact is that you can end up with a lot more in your retirement fund than someone who’s invested way more than you, provided your savings have more time to grow. So, if you haven’t started saving for retirement yet, start. Regardless of age. Whatever you put away now will grow exponentially over a decade or more, so don’t wait! The sooner you start, the better you’ll do.

Unfortunately, time is the one asset you also can’t get back. There are a lot of mistakes in investing, but waiting too long is the one that leaves you with one of the hardest roads back from. However, that doesn’t mean that you’re doomed if you’re 40 and just now realizing what a 401(k) is.

The key thing to remember is that going harder at the beginning means taking the most advantage of the time you do have left. Consider earmarking any and all potential windfalls for your account as one lump sum set aside like that can really help you start to juice your annual investment gains.

Imagine two twin sisters — Gaby and Molly — who both receive a $10,000 graduation gift from their grandmother at age 18. Gaby decides that she wants to get a car and spends her $10,000 on that, while Molly shows an astonishing level of foresight in deciding to plop the entire amount into an S&P 500 ETF. After that point, Gaby becomes a model citizen and has a long, successful career, earning $100,000 a year. She sets her 401(k) contribution level at 10% when she hits age 45, so she spends 20 years routing $10,000 into the same S&P 500 ETF each and every year for 20 years. Meanwhile, Molly decides to pursue a career as a roadie for touring folk singers and never manages to save another penny for the rest of her life.

Who’s in better shape come retirement? The one earning six figures and making regular 401(k) contributions, or the underpaid folk roadie who has decided to save money exactly once in her life? Guess what, it’s Molly by a long shot. Assuming the S&P 500 kept averaging the same 10% return through it all, Molly’s $10,000 will have grown into $881,974.85 over 47 years. Gaby, meanwhile, might have siphoned some $200,000 from her income with those regular 401(k) contributions, but her total only reaches $572,747.70 by the age of 65.

So, of all things, don’t underestimate the importance of time. Even if you are planning on making up ground later in life, it’s still worth trying to find a way to set aside as much as you can right now.

For a lot of people, figuring out whether they’re on track for that million dollars in their 401(k) is all a matter of checking the numbers, calculating the necessary growth rate, and then setting a target date. And for some, that’s going to work just fine. However, the simple fact of the matter is that life is chaotic, and markets are among the most chaotic parts of life. You might get laid off from your job, the markets might go into an extended tailspin, you might get pregnant with septuplets, you could even discover you’re just a much happier person earning a lot less money at a job that fulfills you on a personal level.

However, while these other factors are wont to change in rapid and unpredictable ways, your commitment to making saving a regular part of your life is something you can hold steady with. Rather than agonizing over investment decisions, focus on the things you can control and the habits you can develop to help you get to your ultimate goal.

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