Becoming a millionaire doesn’t require a dazzling business idea or a high-paying job - it’s a matter of time, patience and consistency, financial experts say.
Consistent contributions of as little as $100 a month to a 401(k) - a retirement account typically offered by employers - can turn into a $1 million balance, given enough time.
“Start with whatever amount you can afford, even if it feels small,” David Kassir, managing director at Manna Wealth Management, told The Independent in an email.
Not only do small amounts invested over time typically produce good returns, but contributions of any amount leverage one of a 401(k)’s biggest benefits - matching.
Many employers match their employees' contributions up to a certain percentage, essentially giving the employee free money, Kassir said.
Time after time
When projecting how long it takes to become a millionaire, it’s important to understand how 401(k) investment returns work.
Employees typically choose their account’s investment risk level when first opening the account. Choices usually fall into three categories: low, moderate and high-risk. Returns are typically lowest for low-risk accounts and highest for high-risk accounts, Kassir said.
Investing 401(k) dollars in high-risk assets earns around 9 to 10 percent per year, Kassir said. A moderate-risk approach earns around 7 percent per year, and a low-risk 401(k) earns about 5 percent a year.
“My recommendation to clients is that they should plan on earning the average return of the moderate investment option and consider anything more of a bonus,” he said.
If someone started contributions to a 401(k) this month, here’s how long it would take them to become a millionaire, earning moderate 7 percent returns, according to Kassir:
- $100 a month: 58 years
- $200 a month: 49 years
- $300 a month: 43 years
- $400 a month: 39 years.
Savers can speed up the timeline to $1 million by starting 401(k) contributions as young as possible, Kassir said. Employers aren’t legally required to offer 401(k)s to employees under 21, the IRS says, so it’s likely the earliest age one can make a start.
“It's why a 25-year-old who invests a modest amount each month may well reach seven figures, while a 45-year-old investing the same amount probably won't, at least not based on contributions alone,” he said. “Again, it's all about time.”
Independent contractors and self-employed workers aren’t out of luck, either. They can open a self-employed 401(k), according to the IRS.
Millionaire maneuvers
Increasing your contributions over time is one way to get to $1 million more quickly. Kassir recommends sending a portion or all of a pay raise into your retirement account each month.
Ideally, your retirement contributions should equal 10 to 15 percent of your pre-tax income, according to financial firm Charles Schwab.
Typically, employees can increase or decrease 401(k) contributions through their company benefits portal or directly with the financial firm running the 401(k).
Maxing out an employer’s match is also a way to boost contributions, Steven Sarrel, a certified public accountant and partner at financial firm Raines & Fischer, told The Independent in an email. Typically, employers match contributions up to a certain percentage of your paycheck. If an employer matches up to 5 percent, make sure your contributions are set to at least 5 percent.
“Get the full employer match,” Sarrel said. “If your company matches 4% or 5% and you're not contributing enough to receive all of it, you're leaving part of your compensation behind.”
And stay calm during times when the stock market is struggling. Don’t change contribution amounts because your 401(k) balance has hit a rough patch, Sarrel said.
Set your sights high - a million dollars is a solid goal, but don’t stop saving once you reach it, Sarrel added. Continue contributions to shore up retirement savings and help offset inflation’s impact over time.
“The real goal should be building assets to support the lifestyle you want in retirement. Becoming a 401(k) millionaire is a good milestone, not necessarily the finish line,” Sarrel said.
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