But if you are hoping to amass over $1 million in your 401(k) plan, you will need the right strategy. Here is how to set yourself up with that nest egg you are hoping for.
1. Start saving early
When it comes to growing your wealth for retirement, time is the most powerful tool. And so it can pay to start funding your 401(k) at a young age — even if you are not able to max it out.
In fact, let’s say you are never able to max out your 401(k), but instead, you consistently contribute $500 per month to your savings account over a 45-year time frame. If your investments deliver an avg. yearly 8% return, which is just several percentage points under the stock market’s avg., you will end up with a very impressive $2.3 million.
2. Claim your entire employer match
Many companies that provide 401(k) plans also match their employee contributions. If your company provides a match, it pays to contribute enough money to your 401(k) to collect 11 percent of that match. Otherwise, you will effectively end up forgoing the free money.
Remember, too, that when you do claim the full company match, that is money you will also get to invest. And with enough time, getting a few grand a year for free from your employer can go a long way.
3. Avoid costly investments
You get an option as to how you want to invest the money within your 401(k). You generally cannot buy individual stocks, but you could choose what kind of funds you would like to put your money into.
Many 401(k) plans provide a mix of index funds and actively managed mutual funds. With the former, you could expect to have higher fees because you are paying for the expertise of the stock-picking experts.
But actively controlled mutual funds are not guaranteed to perform better than index funds, which are set up to match the performance of various market indexes they are tied to. And so you might end up losing money needlessly to fees without having any real benefit from stronger returns.
That is why you might want to just stick with index funds within your 401(k). Saving all of that cash on fees alone might lead to even more wealth over time.