How Many Years of Maxing Out a 401(k) Does It Take to Become a Millionaire? † Smart Change: Personal Finance

(Chuck Saletta)

Your 401(k) can be an incredibly powerful tool when it comes to building a comfortable nest egg for your retirement. Once you sign up, money gets automatically invested, directly from your paycheck. While in the account, the money compounds in a tax advantaged way for your retirement. In addition, contribution limits are large enough that becoming a millionaire just from your 401(k) is a feasible goal for folks who start early enough in their careers.

Indeed, when it comes down to it, if you’re willing to max out your 401(k) early enough in your career, there may even be a path to become a millionaire from the compounding of a single year’s contribution. Of course, while that’s mathematically possible, there are other ways to get there that don’t rely on being able to be super aggressive with your investing quite that early in your career.

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How a single year’s contribution might get you there

If you’re younger than 50, you can contribute as much as $20,500 to your 401(k) in 2022. At a 10% rate of return, that single $20,500 investment can become $1,000,000 in just under 41 years. Or in other words, if you’re 22 years old and max out your 401(k) for just a single year, you’ve got a shot at reaching millionaire status by the time you’re 63.

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If you’re over age 50, the good news is that your contribution limit rises to $27,000 in 2022. The bad news is that even with that higher limit, it is not likely that you’ll be able to reach millionaire status by a typical retirement age from a single year’s contribution.

Of course a lot has to go right for that theoretical gain to turn into reality. First and foremost, your investments will need to deliver returns near that 10% annualized level over the long haul. Based on history, that level of return is not out of the question, but there are no guarantees that the future will be as bright as the past has been.

In addition, when you make a one-time, lump-sum investment, you are much more dependent on the market’s future returns from that single point in time than you are on its average long-term returns. In other words, if you make your large, one-time buy just before a bear market, then you need some seriously strong returns just to get back to break-even before you can start talking about growth.

Even if all those factors work in your favor, there’s still the challenge of coming up with $20,500 to invest as a 22 year-old new-hire with all the newly independent-life start-up costs involved in that. It might be feasible in some high-salary occupations, but for the majority of us, that’s a pretty high hurdle to clear.

An approach for the rest of us

Fortunately, there is another path to reach millionaire status within your 401(k) that is much more achievable for the rest of us. That approach involves making regular contributions over time and letting that combination of new money plus compounding add up to a potential $1 million nest egg.

The table below shows how many years it will take to get to a $1 million 401(k) balance starting from $0, based on your age, rate of return, and an assumption that you’re maxing out your contributions. As you can see, it’s both faster and much more feasible to get there by making regular contributions than to make a single contribution early in your career and hope everything works out in your favor.

Annual Returns

Under Age 50

Age 50+

10%

17.8

15.5

8%

19.9

17.3

6%

22.9

19.5

4%

27.1

22.8

Data source: author. Assume monthly contributions and smooth returns.

Even if you can’t max out your 401(k), get started now

For most of us mere mortals, instantly going from $0 to over $1,700 per month in savings is a tall order. Unless you’ve just done something like pay off a substantial amount of debt to free up cash, you might have to start with a smaller amount than maxing out your 401(k). That’s perfectly fine. Get started with what you can sock away now, and increase your contributions as you’re able to do so.

Becoming a millionaire is a journey that can easily take decades. The sooner you get on the path, the more of your working career you have ahead of you to let time and compounding work in your favor. So get started today by signing up to contribute what you can to your 401(k), and get yourself on that path. Take that first step now, then increase your contributions as you can, and give yourself the best shot you can of retiring with a $1 million nest egg in your 401(k).

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Chuck Saletta 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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