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Want to Be a 401(k) Millionaire? 4 Tips All Retirees Should Know.

For the record, most people don’t have a million-dollar 401(k) account. There’s usually just not enough income or enough time to grow a work-sponsored retirement plan into a seven-figure stash. Even for people at or over the age of 65, mutual fund company Vanguard reported that their clients’ average 401(k) balance in 2022 stood at just a tad over $230,000.

For a handful of lucky investors though, a 401(k) worth a million bucks (or more) isn’t a mere myth. They’ve done it. Time did most of the heavy lifting, mind you, but it is possible.

Here’s a rundown of four smart things these folks might have done that you can easily do for yourself with your workplace-offered retirement savings plan.

1. Qualify for your company’s maximum matching contribution

Did you know most employers that offer 401(k) retirement savings accounts will also chip in some of their own money to your account? It likely won’t be a life-changing amount. In most cases, a company will match between half and all of your own contribution, up to a maximum of 6% of your wages. Last year’s average contribution was on the order of 4.8%, according to mutual fund company and plan manager Fidelity.

Still, it could be worth a few thousand dollars’ of free money every year if you’re willing to make sizable contributions of your own. That’s an easy (and quick) 100% return on your investment. That additional money could be worth six figures in the future, if collected consistently and invested well over time.

2. Choose an S&P 500 index fund

It’s no coincidence that retirement plan managers like the aforementioned Fidelity and Vanguard predominantly offer their own mutual funds as investment choices within a 401(k) plan. Like most other funds, however, the bulk of these mutual funds will trail the performance of a benchmark such as the S&P 500.

Standard & Poor’s data-digging indicates that over the course of the past five years, nearly 79% of large-cap funds offered to U.S. investors underperformed the S&P 500. For the past 10 years, the figure ratchets up to more than 87%. Over the past 15 years, 88% of U.S. large-cap mutual funds underperformed compared to the S&P 500.

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The solution? Don’t try so hard to beat the market by picking a company’s actively managed funds. Improve your odds — and raise your likely returns — by owning index funds that are only designed to mirror the performance of benchmarks like the S&P 500 index. A single index fund based on the S&P 500 is arguably adequate in and of itself, in fact. While not always, index funds also usually boast lower expense ratios, which otherwise crimp your overall returns with a particular fund.

3. Don’t leave your contributions as cash

Many 401(k) retirement account plan managers will now automatically assign a generalized fund allocation for enrollees who don’t make such a choice, but that’s not always the case. Make sure you know what’s happening with your money.

If you don’t pick investments, your money might simply be swept into a money market fund, which offers very little in the way of returns.

4. Consider using a Roth 401(k)

Last but not least, you may want to find out if your workplace’s 401(k) plan offers a Roth option.

The chief difference between a Roth 401(k) and a traditional 401(k) account is simple enough. That is, contributions made to traditional 401(k) accounts are tax deductible for the year in which they’re made, but withdrawals made from these accounts are taxable. Conversely, contributions made to a Roth 401(k) account don’t reduce your taxable income when you’re making them, but withdrawals from a Roth 401(k) come out tax-free. Generally speaking, you’ll want to incur any tax liability associated with a workplace retirement plan when your tax rates are going to be their lowest.

You won’t always know when this will be, of course — you can only make your best educated guess. If it ends up being the wrong one, that’s OK. You’re still saving and growing your money, which is more than plenty of other people can say.

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James Brumley 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.

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