The most common path to millionaire status doesn’t involve a brilliant business idea or a lucky draw from the lottery. It involves disciplined saving and investing over time — which, admittedly, is far less interesting than launching a hot new app or buying a $2 ticket that’s suddenly worth millions. But boring as it may be, a structured savings plan produces more predictable results than any other moneymaking scheme. Even better, if you have a 401(k), you already have the tools you need to become a millionaire by age 50.
1. Setting your 401(k) contribution rate
Your first order of business is setting up your 401(k) with an appropriate contribution rate. The usual advice is to save 10% to 15% of your salary for retirement. But since you’re on an expedited timeline to reach seven figures by age 50, you’ll need to save more than that.
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Here’s a look at the numbers. Say you are 25. To reach the million-dollar mark by age 50, you need to contribute about $1,600 monthly at an average growth rate of 6%. If you make an average amount of money, your earnings are about $48,000 a year. The $1,600 monthly savings equates to $19,200 annually or 40% of your salary.
So, 40% of your salary is a lot, right? If you’re not saving anything today, that contribution rate likely feels impossible. But stay with me here, because your millionaire goal may be within your reach anyway. The 40% does include whatever you make in employer match, which is typically around 5%. That might lower your portion to 35%. If you can save 20% today, and then increase the percentage annually until you’re hitting the maximum 401(k) contribution, you are on your way to achieving your goal. At some point you’ll have to exceed the $1,600 monthly contributions to make up for starting with a lower number. But if you’re getting raises regularly, this should be affordable.
The allowed 401(k) contribution in 2021, not including employer match, is $19,500.
2. Choosing your investments
After you set up a healthy contribution rate, it’s time to design a portfolio that’ll deliver the growth you need. Above, we estimated a 6% annual growth rate. This is a fairly conservative number, given that the average annual growth of the stock market is 7% after inflation. Targeting growth a touch below that average gives you some leeway in case your 401(k) is charging you plan administration fees. These can range from less than 0.50% to around 1.5%.
With a 1% fee, you’ll need a portfolio that’s heavily invested in equity funds to achieve net growth of 6% or higher. Your 401(k) menu probably offers you various equity funds — hopefully giving you access to large and small companies, both domestically and internationally. Generally, larger, domestic companies will have lower volatility but more modest growth. Smaller and international companies have higher growth potential but come with more volatility.
Resist the urge to go all in on those higher-growth funds. Instead, allocate at least 60% or 65% of your 401(k) contributions to a large-cap fund or S&P 500 index fund. Layer the higher-growth funds on top. You’ll still see volatility, but it won’t be as extreme if your portfolio is anchored by domestic large caps.
3. Wait, watch, and adjust
It’d be great if the work of saving was done once you set up your contributions and investments. But you’ll have better results if you monitor your performance and make adjustments as you move toward your goal. That doesn’t mean you should trade when the market goes sideways — that’s a big no-no. It does mean you might see a reason to lower your exposure to an international fund or put a bit more in the small-cap fund.
Beyond those short-term tweaks, you should also plan on gradually stepping away from your more volatile equity funds and adding fixed-income funds to the mix. This is a defensive strategy to protect your wealth. Over the course of your 25-year savings plan, for example, you might shift from being entirely invested in equities to 60% equities and 40% fixed income.
You worked hard to save that money — stretching your budget for a healthy contribution rate and managing your risk over time. Hang on to your wealth by making sure you’re invested conservatively as you near, and then cross, that seven-figure finish line.