If your goal is to accumulate a large amount of wealth in time for retirement, then a 401(k) plan could be your ticket to meeting that objective. The great thing about 401(k)s is that they come with generous contribution limits — much higher than those offered by IRAs.
But if you're hoping to amass $1 million or more in your 401(k) plan, you'll need the right strategy. Here's how to set yourself up with the nest egg you're hoping for.
1. Start saving early
When it comes to growing a lot of wealth for retirement, time is really your most powerful weapon. And so it pays to start funding your 401(k) from a young age — even if you're not able to max out.
In fact, let's say you're never able to max out your 401(k), but rather, you consistently contribute $500 a month to your savings over a 45-year period. If your investments deliver an average annual 8% return, which is several percentage points below the stock market's average, you'll end up with a rather impressive $2.3 million.
2. Claim your full employer match
Many companies that offer 401(k) plans also match employee contributions to varying degrees. If your company offers a match, it pays to contribute enough to your 401(k) to snag that match in full. Otherwise, you'll effectively end up forgoing free money.
Remember, too, that when you claim your full company match, that's money you also get to invest. And so over time, getting a few thousand dollars a year from your employer could go a long way.
In fact, let's say your employer puts $3,000 a year into your 401(k), and your plan delivers an 8% average annual return. That will leave you with over $1.1 million after 45 years based on your employer contributions alone.
3. Avoid costly investments
You get a choice as to how you invest the money in your 401(k). You generally can't buy individual stocks, but you can choose what type of funds you want to put your money into.
Most 401(k) plans offer a mix of actively managed mutual funds and index funds. With the former, you can expect to incur higher fees because you're paying for the expertise of stock-picking experts.
But actively managed mutual funds aren't guaranteed to outperform index funds, which are set up to simply match the performance of the different market indexes they're tied to. And so you could end up losing money needlessly to fees without benefiting from stronger returns.
That's why you may want to stick to index funds in your 401(k). Saving all of that money on fees could lead to additional wealth over time.
Gear up for your dream retirement
The right approach to your 401(k) could set the stage for a very comfortable retirement. If your goal is to end up with a million-dollar nest egg, it pays to start funding your 401(k) as early as possible, snag your full employer match, and avoid pesky investment fees that eat away at your returns.
The $18,984 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $18,984 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.