That 401k plan your employer offers as a workplace benefit could be your ticket to riches. Just ask Fritz Gilbert. Saving in a 401k made him a millionaire.
Gilbert started setting aside a portion of each paycheck in a 401k in 1985. By 2013, he had $1 million saved up. He plans to retire in June 2018 at the age of 55 and never work another day in his life. He’s been blogging about his journey to early retirement at The Retirement Manifesto.
Although a recent GOBankingRates survey found that 42 percent of Americans have less than $10,000 saved for retirement, your 401k could make you a millionaire if you make the most of it, as Gilbert did.
Click through to follow his tips and learn how to increase your savings and retire rich.
Start Saving as Soon as Possible
When Gilbert got his first job out of college as a customer service representative, his employer gave him the option of saving in a 401k. “I started saving with my very first paycheck,” he said. That’s played a key role in his ability to become a 401k millionaire.
Gilbert wasn’t earning much — just $21,500 a year — so he didn’t contribute big bucks to his 401k during the early years of his career. But even those small contributions helped his balance grow to $1 million thanks to the power of compound interest. “Those early dollars are the most important because they have the most time to compound,” Gilbert said.
Compound interest is interest calculated on the principal (the amount deposited) plus the interest that is earned. For example, you could have $1 million by age 65 if you started investing $188 per month at age 25 and earned 10 percent annually. If you waited until age 35 to start saving, you’d have to invest $507 per month with a 10 percent annual return to have $1 million by age 65.
“It was the earliest contributions that got me to the millionaire status,” Gilbert said.
Take Advantage of Matching Employer Contributions
Not only did Gilbert get started saving early, but he also contributed enough to get the full 401k matching contribution his employer offered. His employer offered to match 50 cents for every $1 Gilbert contributed up to 6 percent of his pay. So he opted to save 6 percent of each paycheck to get the additional 3 percent contribution from his employer.
“I didn’t think of it as a 50 percent return,” Gilbert said. But now he knows that contributing enough to get his employer’s full matching contribution played a big role in growing his 401k to $1 million.
If your employer matches your contribution, you should take advantage of this workplace benefit. After all, it’s free money, and it will help you grow your 401k faster. For example, if you earn $40,000 a year and contribute just 3 percent of your salary but your employer offers a 50-cent match up to 6 percent of your deferred salary, you’re missing out on $600 in free money.
Focus on Increasing Earnings
There’s only so much you can afford to set aside in savings if you’re not earning a lot — which was the case for Gilbert when he started his career. Even with compound interest, it would be tough to save $1 million by setting aside 6 percent of a $21,500 annual salary plus a 3 percent employer match.
So Gilbert focused on increasing his earnings to save more. By going above and beyond what was expected of him, Gilbert got pay raises and promotions that doubled his salary in the first five years of his career. That was a much better path to creating wealth than trying to increase his savings rate on a lower salary, he said.
Admittedly, Gilbert said it would be harder now for young adults to see that sort of rapid income growth because of wage stagnation. On the plus side, he said, there are so many ways to increase your income now — including side hustles — that weren’t available in the 1980s when he was starting out.
Boost Savings With Each Pay Raise
Avoiding lifestyle inflation with each pay raise was key to Gilbert’s ability to save $1 million. “I’ve seen almost everybody as they make more money spend more money,” he said. To avoid falling into that trap, he increased his 401k contribution with each pay raise.
For example, if he got a 3 percent pay increase, he would increase his 401k contribution by 2 percent and take home an extra 1 percent. So he got a slight boost in take-home pay but a bigger boost in his savings rate. “It’s a really good way to ramp up your 401k without sacrificing your lifestyle,” Gilbert said.
If you don’t think you can afford to contribute to your 401k now, start with your next pay raise, he said. You won’t miss the extra money you’re setting aside in savings because you’re already used to living on your pre-raise income.
Max Out 401k Contributions
By the time Gilbert was in his early 30s, he was contributing the maximum pre-tax amount allowed to his 401k. Maxing out his contributions as soon as he could afford to helped his balance grow to $1 million. Currently, the maximum you can contribute to a 401k from your paycheck before taxes are taken out is $18,500.
Gilbert’s employer also allows after-tax contributions to a 401k up to a maximum of $50,000. He’s been contributing that maximum amount for the past five years, he said, which has helped his balance grow beyond the $1 million mark.
Don’t Be Afraid to Make Lateral Moves in Your Career
Another way Gilbert increased his earnings was a willingness to make lateral career moves. It sounds counterproductive, but taking positions in his company that didn’t always come with a pay increase actually helped him get better promotions down the road.
That’s because by moving from department to department, he gained a better understanding of how his company worked. “It was because I made those moves that I was able to get into more senior positions,” Gilbert said.
Just keep in mind that changing jobs just for a pay raise isn’t always worth it if you lose access to a 401k or workplace retirement plan in the process — especially one with an employer match. Check the vesting schedule for your matching contributions to make sure you don’t need to stay in your job for a certain period of time to receive what your employer contributed.
Living within in his means has played a key role in Gilbert’s ability to become a 401k millionaire. When he was starting out, he drove a $500 Subaru and lived in a basement apartment with a roommate. He’s continued to live frugally, even after getting married, having a child and climbing the career ladder. That’s allowed him to max out his 401k contributions to have enough to retire comfortably.
“I would much rather make minor lifestyle adjustments early than make radical lifestyle adjustments later,” Gilbert said. “If you can’t afford to save, what are you going to do when you’re 65 — live on cat food in a mobile home?”
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Watch Out for 401k Fees
Retirement plans such as 401ks charge fees to cover the cost of administering the plan and managing the plans’ investments. “Just like returns compound, fees compound,” Gilbert said. The higher the fees, the more they’ll eat into your investment returns.
Learn More: 15 Hidden Fees to Watch Out for in Retirement
For example, if the fees and expenses on your account are 1.5 percent, your balance will be 28 percent smaller at retirement than if the fees had been just 0.5 percent, according to the U.S. Department of Labor. Gilbert said he’s been fortunate because his employer’s 401k has low fees. If you have a 401k with high fees, contribute enough to get your employer’s full match if it offers one, Gilbert said. You could then open a Roth IRA with a low-fee investment firm such as Vanguard.
Keep Investments Simple
To become a 401k millionaire, you don’t have to get lucky by picking a hot stock that soars. “I’ve always kept it simple,” Gilbert said.
He invested in low-cost mutual funds, primarily stock funds, in his 401k. If your 401k plan offers a target-date fund or index fund, either can be a good place to start. A target-date fund adjusts your holdings of stocks and bonds automatically over time to reduce your risk as you near retirement age. An index fund tracks a major market index, such as the S&P 500, and typically has low fees.
Understand: What the Stock Market Is Doing to Your 401k
Stay the Course
Not only did Gilbert start saving early, but he also continued to set aside money for retirement throughout his career. “I’ve never gotten a paycheck that I haven’t contributed to a 401k in 33 years of work,” he said.
Even during stock market downturns, he didn’t get scared, stop contributing or pull his money out of the market. In fact, he increased his contributions when the stock market fell. “I was high-fiving my wife every day because you’re buying cheap,” Gilbert said. He took advantage of the drop in prices to buy more shares. That helped his account balance grow more when the market bounced back and played a key role in getting his savings to $1 million.
Click through to learn 30 different ways you can retire earlier.
About the Author
Cameron Huddleston is an award-winning journalist with more than 18 years of experience writing about personal finance. Her work has appeared in Kiplinger’s Personal Finance, Business Insider, Chicago Tribune, Fortune, MSN, USA Today and many more print and online publications. She also is the author of Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances.
U.S. News & World Report named her one of the top personal finance experts to follow on Twitter, and AOL Daily Finance named her one of the top 20 personal finance influencers to follow on Twitter. She has appeared on CNBC, CNN, MSNBC and “Fox & Friends” and has been a guest on ABC News Radio, Wall Street Journal Radio, NPR, WTOP in Washington, D.C., KGO in San Francisco and other personal finance radio shows nationwide. She also has been interviewed and quoted as an expert in The New York Times, Chicago Tribune, Forbes, MarketWatch and more.
She has an MA in economic journalism from American University and BA in journalism and Russian studies from Washington & Lee University.