Matt Frankel, The Motley Fool
·4 min read
According to a study by Fidelity, out of more than 45 million retirement savers with Fidelity accounts, about 422,000 401(k)s and 392,000 IRAs have million-dollar balances. That's less than 2% of the total.
There's no magic formula when it comes to building a million-dollar 401(k), and the paths to retirement savings success look different for different people. However, there are some common habits among 401(k) millionaires. Here are three that could help you build a seven-figure account balance of your own.
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1. 401(k) millionaires contribute more than most to their accounts
This probably won't come as a big surprise, but one of the common traits of 401(k) millionaires is that they contribute a lot to their accounts.
The Fidelity study found that the average 401(k) millionaire contributes 17.5% of their pay to their 401(k), and that's not including employer matching. Including matching contributions, the average person with a seven-figure Fidelity 401(k) account has more than 26% of their annual salary flowing into it.
There are two main factors that contribute to your eventual 401(k) balance -- time and the rate at which you contribute. There is obviously no better time to get aggressive with your retirement savings than right now. But the savings rate is the x-factor that you're in control of, and one that most 401(k) millionaires use to their advantage.
2. 401(k) millionaires aren't afraid of the stock market
One of the most common mistakes people make with their 401(k) is being too conservative with investments. Many plans offer "safe" retirement investments, such as money market funds or fixed-income (bond) funds. But the best place for most of your retirement savings -- especially if you're still a decade or more away from retiring -- is in the stock market.
In fact, the average 401(k) millionaire keeps three-fourths of their account in stocks and stock-based mutual funds. Stocks will go up and down over time, but over the long term they almost always do well. In fact, since 1965, the S&P 500 has delivered average annualized returns of more than 10%.
3. 401(k) millionaires almost never take out loans from their accounts
Most 401(k) plans allow active participants to take loans from their accounts, with amounts of up to $50,000. And at first glance, it might seem like a pretty good way to borrow money -- after all, the interest rates on 401(k) loans are typically very low, and not only that, but you are paying yourself back.
However, there's one big problem with this logic. The stock market has historically generated returns of 10% per year (or close to it) over long periods of time, and it isn't rare to see the S&P 500 rise by 20% or more in a given year. By taking money out of your retirement account and paying yourself back, you're setting yourself up for a much lower return on investment than you're likely to get by simply leaving it in the account.
In fact, 17.6% of 401(k) participants have an outstanding loan on their account, according to Fidelity's data. And while the ability to take a 401(k) loan is certainly a nice safety net to have in a financial emergency, it should be more of a last resort than many people treat it as.
Not an exhaustive list
These are just a few of the best practices you can put in place to help build a million-dollar 401(k) account of your own. It can also be beneficial to start as early as possible, invest in IRAs and other brokerage accounts, and avoid early withdrawals at all costs.
Having said that, there's no magic formula or incredible luck involved. The best things you can do to build a million-dollar 401(k) are quite simple -- start saving as soon as possible, invest a double-digit percentage of your pay, and avoid taking any money out of your account before you retire.
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We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Matt Frankel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
3 Successful Habits of 401(k) Millionaires was originally published by The Motley Fool
