According to a new survey, more people are becoming 401(k) millionaires. The number of Fidelity 401(k) savings accounts with a balance of $1 million or more reached 133,000 last year. That’s up from 89,000 in 2016. With more balances reaching $1 million, there’s bound to be people wondering how they can reach that big milestone, too. It doesn’t happen overnight, but financial advisor Brad Allen shares things on the Retirement Ready radio show we can all do to increase our retirement savings and get closer to reaching that goal.
1. Collect the Company Match
About 75% of companies that offer a 401(k) retirement plan, offer a matching program. If you work for an employer who offers a company match, you need to make sure you are contributing enough to get that match. The problem is, 20% of American workers are not contributing enough to get the company match.
It’s important to understand your company’s matching program to ensure you are meeting the requirements. The matching formulas vary; there are four common options: a percentage match, fixed match, a blanket contribution or a multi-tier formula. The most common match is a fixed match, or dollar for dollar, on the first 6% of an employee’s contributions. I recommend contributing 10-15% of every paycheck to your 401(k). If you can’t manage that, you need to be contributing enough to get the company match.
2. Automate Contributions
After you’ve made sure you are contributing enough to get your company’s match, automate your contributions. The most efficient way to save for retirement is to make automatic contributions direct from your paycheck into your 401(k) or other retirement account. If the money is going straight from your paycheck into a retirement savings account, you likely won’t be tempted to spend it. It’s also important to increase your savings over time. This can be automated as well. Consider contributing an additional 1-2% every 6 months or a year. A small increase will not be very noticeable from your paycheck, but it will make a big difference in your account balance!
You can max out your 401(k) contributions at $18,500 a year for 2018. Don’t forget catch-up contributions! If you are age 60 or older, you can contribute an additional $6,000 for a maximum yearly contribution limit of $24,500. Keep these numbers in mind if your goal is to contribute as much money as possible to your 401(k) every year.
3. Avoid Penalties
If you want to become a 401(k) millionaire, I suggest never withdrawing money from your account before you need the money in retirement. If you withdraw from your 401(k) before age 59 ½, that money will be taxed as regular income and you will pay a 10% penalty. There are a few exceptions to early withdrawal penalties. I recommend consulting your financial professional if you are considering taking money from your 401(k).
On the flip side, you will also get hit with a penalty if you don’t withdraw money after age 70 ½. If you do not take your required minimum distributions after that age, you could face stiff tax penalties. The RMD rules for traditional 401(k)s can get complicated. It’s important to understand the rules to make sure you aren’t paying penalties, which decrease your balance.
4. Resist the Urge to Splurge
It might be tempting to “live in the moment,” but when you’re saving for retirement, it is important you strike a balance. Take a close look at your budget – how much money is left over every month? How much of that money should be put into retirement savings accounts? A solid financial plan will spell that out for you. Proper planning will bring you peace of mind.
When Can We Retire?
According to a recent report, 81% of Americans do not know how much money they will need in retirement. While $1 million sounds like a lot, planning for retirement is more than just a number; it’s very personal. I’ll outline three major expenses retirees face. Keep these in mind to make sure you have enough money saved:
Healthcare can be one of the biggest costs in retirement. Medicare is designed to cover many of your healthcare costs, but it doesn’t cover everything. Eye exams, hearing aids and most dental care is not covered by Medicare. A 65-year-old couple retiring today is expected to spend an average of $275,000 out of pocket on healthcare expenses. This number doesn’t take into account the cost of long-term care! People are living longer. Long-term care expenses, and the need for long-term care insurance, will vary from person to person. Beyond your current health and insurance coverage, when you retire also plays a big role in how much you will spend on healthcare in retirement. There are a lot of healthcare decisions to make when planning for retirement. It’s crucial that these expenses are part of your financial plan.
Inflation is defined as a sustained increase in the general level of prices for goods and services. If you ignore inflation, you are sabotaging your retirement savings. Think about it this way – the price your parents paid for a gallon of milk is a lot less than you pay now. Inflation will impact your retirement savings in two ways. First, it eats away at your savings by reducing your purchasing power. If your annual budget for this year is $60,000 and you want to buy the exact same goods and services in 5 years, it is going to cost you more in the future. Your dollar will not go as far in 2023 as it does today. Inflation will also impact your retirement savings through your budget. Retirees are no longer working. Therefore they are on a fixed income. Assuming the long-term average inflation rate, your budget will need to be adjusted by about 3% every year. You cannot expect to spend the same amount of money each year and have your needs met in the exact same way.
3. Lifestyle Expectations
Depending on how you and your partner want to spend your golden years, $1 million might not be enough. This is an important discussion to have when sitting down with your financial advisor to plan for retirement. If one of you wants to spend the first 5-10 years in retirement traveling the world, and the other expects to stay close to home to be near family, your goals and expectations are very different. And the amount of money you will need to meet those expectations is very different. It’s important to set these lifestyle expectations while in the planning phase so you know how much money you are able to spend in retirement.
The Retirement Ready radio show is featured every Saturday on WTMJ 620 AM at 1:00 pm. We will bring you information on: Social Security options, retirement trends, options to retire with life changes and achieving a secure financial future. Listen live here: WTMJ 620AM LIVE
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification does not guarantee profit nor is it guaranteed to protect assets. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Drake & Associates does not offer tax or legal advice.