Want to Become a 401(K) Millionaire? More and More People Are Doing It.

401(K) Millionaire

Becoming a 401(K) millionaire is possible. It’s not necessarily easy. However, more and more people are succeeding.

What is a 401(K) Millionaire?

If you’ve never heard of the time before then you might wonder exactly what it means to be a 401(K) millionaire. It isn’t complicated. In fact, it’s exactly as the name suggests. A 401(K) millionaire is someone who has at least $1 million in their retirement account.

The Number of 401(K) Millionaires Is on the Rise

According to CNBC, the number of 401(K) millionaires increased by 35% in the first quarter of 2019 (as compared to the previous year). The main reason for this is because of the large number of baby boomers who are hitting that seven figure mark. The average 401(K) millionaire is 60 years old.

How to Become a 401(K) Millionaire

If you want to become a 401(K) millionaire then you have to get a grip on your money immediately. The younger you are when you start setting that money aside, the more likely it is you’ll reach that seven figure retirement target. That said, here are some key tips that anyone can use to increase their 401(k) savings.

Max Out Your Contributions

The most important thing that you can do is to contribute as much as you’re allowed to contribute to your 401(k). Your allowed employee contribution amount changes from year to year. In 2019, you can contribute $19,000.

However, if you’re over the age of 50, then you’re allowed to contribute a little bit more so that you can “catch up.” In 2019, you’re allowed to contribute $6000 extra.

Remember that the numbers tend to increase every year so always check what the latest possibilities are.

Moreover, make sure that you’re maximizing employer contributions. Take advantage of any options you have at work for your employer to contribute up to the maximum amount. In 2019, the maximum employer contribution is $37,000. Go talk to HR today.

Make Smart Investments

When investing your money, it’s important to consider your age and how long it will be before you retire. If you’re young, then invest in equity-based mutual funds. They offer higher risk but bigger reward. Hang on through the ups and downs.

However, as you get older and approach retirement age, it’s time to switch to more conservative investments. That’s when you want to put more money into cash and bonds.

One smart option is to invest your 401(k) money into a target-date fund. You set the target retirement date. Then professionals manage your investments for you with that goal in mind. They’ll follow the same rules as above (riskier investments early on and more conservative ones later) so that you don’t have to worry about the details so much.

Don’t Count Yourself Out

You don’t have to be rich in order to become a 401(K) millionaire. Although it’s best if you start young, don’t count yourself out if you’re older. Even if you don’t reach that seven figure target, aiming to do so can help you maximize your retirement income.

Know What You Need to Save To Become a Retired Millionaire

Use a millionaire calculator in order to get a realistic picture of what it would take for you to have $1 million or more at retirement. You’ll enter:

  • Current age
  • Target retirement age
  • Amount currently invested
  • Savings per month
  • Expected rate of return
  • Expected inflation rate

This gives you your expected savings at retirement. However, you can play around with the “savings per month” number until your expected savings reaches $1 million. Then you know how much you need to save to reach that million mark. While this doesn’t specifically determine your 401(k) amount, it gives you a good idea of how much other savings you’ll have to add to your 401(k) to become a millionaire at retirement.

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401K Drawbacks: Don’t Forget That Money Is Taxed When You Use It

401k drawbacks

More and more people are focused on growing their 401K retirement savings. That’s a great thing. You need to have money when you retire. You want to have a diverse array of retirement income options. Maxing out your 401k contributions is a wise thing to do. However, there are 401K drawbacks. You shouldn’t forget about those as you plan for your future.

401K Money Is Taxed When You Withdraw It

People frequently seem to forget that one of the biggest 401K drawbacks is that you have to pay taxes on that money. You don’t pay taxes when you deposit it. People love that part. In fact, contributing to your 401K plan is a great tax benefit when you’re still working.

However, when you reach your retirement and start using that money, you’ll have to pay taxes. That can be a huge shock if you haven’t planned for it in advance. The money is taxed as though relative to your income. Therefore, if you’ve done a great job of setting yourself up with a high level of retirement income, you could find that you have to pay more than a third of your 401K withdrawal money to taxes.

On the plus side, if you’re in a lower income bracket post-retirement than you were before you retired, then you may have set yourself up for some success. You’ll still need to pay taxes on that money, of course, but the hit might not be as big as it would have been if you didn’t set that money aside. There are clearly pros and cons.

Plan Ahead for Withdrawing Your 401K Money

The big question isn’t whether or not to set aside money in your 401K. If you have the option, the benefits outweigh 401K drawbacks. The issue is that you simply have to plan ahead. Make sure that you’re fully aware of how much money you’re going to have to pay to taxes when the time comes.

The biggest problem is if you fail to think about taxes when you mentally plan for your retirement years. If you just look at what’s in your 401K and assume that’s how much money you’ll have when you retire then you’re going to be in for a shock. Make sure that you’re thinking realistically about how you’ll use that money each year and what amount of it will go to taxes.

Other Tips for Minimizing 401K Drawbacks

You might want to look now to see if you should have a Roth 401K instead of or in addition to your traditional 401K. That money gets taxed ahead of time, which means that you won’t have to worry about paying taxes on it once you’re in retirement. If you have the ability to maximize contributions to both types of accounts now then you’ll set yourself up well for financial success in retirement.

Then, once you’re in retirement, make sure that you use the Roth 401K money first. Or for that matter, use any money that isn’t taxable in retirement. You want to withdraw as little money as possible that will require you to pay taxes. Pay attention to your tax bracket and the impact that withdrawals will have on that. As long as you plan in advance, you can minimize 401K drawbacks and make the most of your money.

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When to Invest in TreasuryDirect.Gov: Savings Bonds, Notes, and More

treasurydirect.gov

TreasuryDirect.gov is one of the simplest tools that you can use to park small or large amounts of cash. You can make your money work for you. And yet, many people have overlooked this tool. If you’re not familiar with it or haven’t made the most of it, yet, then you might want to take a gander. There’s a good chance it’s a smart tool for you to use to diversify your investments and boost your savings.

What is TreasuryDirect.gov?

TreasuryDirect.gov is a website that allows you to quickly begin investing your money. You can use it to purchase:

  • Treasury Bills
  • Treasury Notes
  • Floating Rate Notes
  • Treasury Bonds
  • Saving Bonds
  • Treasury Inflation-Protected Securities (TIPS)

The site cuts out the middle man so that you make the purchase directly from the government.

It’s Right For You If You Are A Beginner Investor

If you are new to investing, then this is a great place to start. Once you’ve put aside some emergency funds in a savings account and maxed out your retirement contributions, you need to take a next step. Treasury investments are an easy and smart next step. They are backed by the government, so they are quite secure. Here are some other reasons that beginner investors like them:

  • You earn more money than you would with a regular savings account but the risk is not much higher.
  • There are several options for investing so you get your feet wet with trying out different choices.
  • There are no fees, and you might not even have to pay taxes on the interest you are. It’s financially smart.
  • Plus you can start investing with just small amounts of money. You can get bonds with as little as $25.

If You May Need Access To Your Money Then It’s A Good Time to Invest

One of the reasons that people keep large sums of money in savings is because of the fear that they’ll need that cash. You may have a big expense planned, such as buying a house. Or perhaps you work in the gig economy and aren’t sure how long your income will stay steady. Either way, you don’t want to get your money all tied up for years in long-term investments. So you stick it in savings.

However you don’t earn much interest with a regular savings account. You get the security of being able to always access your funds but you lose out on growing your money. TreasuryDirect.gov investments offer you a little bit more of a financial gain. However, your money isn’t tied up for long periods of time. You can make investing choices through the site that allow you to easily get your money out without penalties.

TreasuryDirect.Gov is Good if You Have a Lot of Cash to Park

Perhaps you just got a big inheritance. Wherever it came from, you have a big sum of cash. You want to earn a decent return on it. However, you don’t want to get too hard at tax time. TreasuryDirect is a good answer. Oftentimes the investments don’t require you to pay taxes, particularly state taxes, so you get to keep what you earn. The more money you invest, the more money you’ll get back. So even though you can start these accounts with as little as $25, they’re a great choice for people with significantly more money to invest.

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