Everyone has their own retirement plan, and $1 million might not be the ideal target for you. Regardless of your specific goal, every saver can benefit from studying the strategies of those who have successfully accumulated substantial savings, particularly by fully leveraging the benefits of a 401(k) as a retirement tool.
Lesson 1: Start early (and get the match)
Fidelity’s 401(k) millionaires are primarily composed of Baby Boomers and Generation X individuals, with the youngest Gen X members reaching 44 years old this year. “These are individuals who have been saving diligently for many years,” Shamrell notes. “They didn’t achieve their wealth by simply picking a hot stock and seeing instant results. Instead, they have adopted a long-term strategy to reach their financial goals.”
Lesson 2: Put increases on autopilot
Many 401(k) millionaires employ a set-it-and-forget-it strategy, utilizing auto-escalation features that automatically boost their contribution rates each year. According to Shamrell, among the roughly 9 million Fidelity plan participants who raised their savings rates in 2023, about 75% did so through automatic adjustments.
Under SECURE 2.0, a federal law enacted in 2022 to enhance retirement savings opportunities, employers with retirement plans established after December 29, 2022, are required to automatically enroll eligible employees and increase their contributions by 1 percent annually, up to a cap of 10 to 15 percent. If your 401(k) plan has been in place for a longer period, you will need to inform your plan manager if you wish to implement auto-escalation for your contribution rate.
Lesson 3: Save aggressively
401(k) millionaires don’t hold back when contributing to their plans. They typically save about 17 percent of their income, excluding any employer match, according to Shamrell.
Saving at that level from the start isn’t feasible for everyone. To accelerate your savings, consider increasing your contribution rate whenever you receive raises or bonuses. By funneling that additional income directly into your retirement account, you avoid the temptation to spend it elsewhere, says Benna.
“I personally found this strategy effective with our plan,” he notes. “If we had to save after covering all our bills and mortgage, it would have never worked.”
It’s not just about how much you save, but also how you invest it. For younger individuals, focusing on high-return investments like stocks is often recommended, says Eric Tyson, a former financial planner and author of *Personal Finance for Dummies*.
“For those nearing or in retirement, there are valid reasons to allocate a portion of your money to bonds,” Tyson adds. “However, younger workers who can leave their money invested for decades should heavily favor stocks in their investment mix.”
Lesson 4: Keep a separate emergency fund
“Life is unpredictable, and unexpected events often arise,” Tyson says. Whether these issues involve your home, vehicle, or health, they can be costly. Without an emergency savings fund, you might be tempted to withdraw funds from your 401(k) when faced with unforeseen expenses.
According to a report from Empower, a major plan provider, both loans and hardship withdrawals from retirement accounts increased each quarter in 2022 and 2023. This trend is partly due to rising inflation and high interest rates driving up everyday expenses and credit card debt. The report found that more than a quarter of working Americans anticipate needing a loan or hardship withdrawal within the next six months.
The downside of such withdrawals is twofold. First, you will likely face income taxes on the amount withdrawn, along with a 10 percent penalty if you’re under 59½. Second, removing money from your 401(k) means missing out on potential compounding returns. Building an emergency savings fund can help you manage unexpected expenses without tapping into your retirement savings.
Lesson 5: Make up for lost time
If you’re mid-career and haven’t saved as much as you’d hoped, it’s still possible to build a substantial nest egg. One effective way to boost your savings is by utilizing catch-up contributions once you turn 50. This year, you can contribute an additional $7,500, allowing individuals aged 50 and older to deposit up to $30,500 into a 401(k), compared to $23,000 for those younger.
Starting in 2025, those between the ages of 60 and 63 will be able to make even larger catch-up contributions, up to $10,000 or 50 percent more than the age-50 limit, whichever is greater. This new catch-up tier is a feature of the SECURE 2.0 law.
Lesson 6: Stay the course
The longer you invest in a 401(k) plan—or any investment account—the more you benefit from compounding returns. Fidelity data shows that Gen Xers who have consistently contributed to their 401(k) plans for 15 years have an average balance of $543,400.
Remaining committed to your investment strategy also means not letting market volatility disrupt your saving habits. For example, while the S&P 500 fell by 18 percent in 2022, it rebounded with a 26 percent gain in 2023. Those who maintained their savings rate through the downturn saw substantial returns on their 401(k) contributions when the market improved.
“The markets will fluctuate throughout your career,” Shamrell explains. “You shouldn’t adjust your strategy based on short-term market movements, and this group exemplifies that approach.”
