How many years of reaching the 401(k) cap does it take to become a millionaire? | Smart Change: Personal Finance
(Chuck Salita)
A 401(k) can be an incredibly powerful tool when it comes to building a comfortable nest egg for your retirement. Once registered, the money is automatically invested, directly from your salary. While you’re in the account, the money accumulates in a distinct tax way for your retirement. Additionally, the contribution limits are large enough that becoming a 401(k) millionaire is a possible target for people who start early enough in their careers.
In fact, when it comes down to it, if you’re ready to get past your 401(k) early enough in your career, there may be a path to becoming a millionaire from accumulating a one-year contribution. Of course, while this is computationally possible, there are other ways to achieve it that don’t depend on being able to be too aggressive with your investments very early in your career.
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How can a one-year contribution reach you
If you are under 50, you can contribute up to $20,500 to your 401(k) in 2022. With a 10% rate of return, that individual investment of $20,500 can become $1,000,000 in just under 41 years. Or, in other words, if you are 22 years old and have exceeded a maximum 401(k) for only one year, you have a chance of reaching millionaire status by the time you are 63 years old.
If you are over 50, the good news is that your contribution limit will increase to $27,000 in 2022. The bad news is that even with this higher limit, you are unlikely to be able to reach millionaire status through an ordinary retirement age subscription One year.
Of course, a lot has to go right for this theoretical gain to turn into a reality. First and foremost, your investments will need to generate returns close to this annual level of 10% over the long term. Based on history, such a level of return is out of the question, but there are no guarantees that the future will be as bright as the past.
In addition, when you make a one-time investment in a lump sum, you rely more on future market returns from that individual point in time than on their long-term average returns. In other words, if you make a big one-time buy just before a bear market, you need some serious strong returns just to get back to breakeven before you can start talking about growth.
Even if all of these factors work in your favor, it’s still a challenge to get the $20,500 to invest as a new 22-year-old with all the costs of starting a newly independent life that this involves. This may be possible in some higher paying professions, but for the majority of us, this is a very big hurdle to remove.
approach to the rest of us
Fortunately, there is another path to millionaire status within your 401(k) that is more achievable for the rest of us. This approach involves making regular contributions over time and allowing this mix of new money plus the compound to add up to $1 million from the nest egg.
The table below shows the number of years it will take you to reach a $1 million 401(k) balance starting at $0, based on your age, rate of return, and assuming you maximize your contributions. As you can see, they are faster and Many It’s much more rewarding to get there by making regular contributions than to make one early in your career and hope it all works out for you.
|
annual returns |
under 50 |
age 50+ |
|---|---|---|
|
10% |
17.8 |
15.5 |
|
8% |
19.9 |
17.3 |
|
6% |
22.9 |
19.5 |
|
4% |
27.1 |
22.8 |
Data source: author. Assumes monthly contributions and smooth returns.
Even if you can’t reach the 401(k) limit, start now
For most of us mere mortals, teleporting from $0 to over $1,700 per month in savings is tough. Unless you’ve done something like paying off a large amount of debt to free up cash, you may have to start with less than your 401(k) cap increase. This is totally fine. Start with what you can get rid of now, and increase your contributions as often as you can do so.
Becoming a millionaire is a journey that can easily take decades. The faster you go down the road, the more career ahead you have to let time and multiply the work in your favour. So get started today by signing up to contribute what you can to your 401(k), and start yourself down that path. Take that first step now, then increase your contributions as much as possible, and give yourself the best chance of retiring with $1 million in your 401(k) nest egg.
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