Originally Published in Fulton Living Magazine
Americans can become millionaires in many ways – including real estate, business, inheritance, etc. However, I believe the surest path for most Americans is simply by saving and investing, and effectively using your company’s 401k plan. So here is a clear 10-step path to joining the ranks of America’s 401(k) millionaires:
Sign up for your 401k and do it TODAY.
If your company offers a match, ALWAYS contribute at least the full match, because it is an instant 100% rate of return. For example, to get a 3% match from the company, you need to contribute 3%, which is a 100% rate of return. Irrespective of market performance, the company is putting in for you the same amount that you are. ALWAYS CONTRIBUTE AT LEAST UP TO THE MATCH, it’s hard to beat from a rate of return perspective.
After you are putting in the minimum to capture the maximum match, save as much as you can. The only caveat here, is if you have other more important short-term priorities or financial obligations. For example, if you need to put extra money towards buying a new home, or medical expenses those may take priority. Or if you have high interest debt, like credit card debt at 15%, it may make more sense to pay that off before putting extra money into the 401k. Once those are paid off, redirect what you were paying towards those expenses or higher interest debt into the 401k!
Take 20 minutes to see if a Financial Planner or CPA can help determine if you are better off using a Roth 401k or a Traditional 401k – the difference in taxes between now and later can really make a difference.
Focus on your asset allocation and investment mix and start with a bias towards growth and stock allocation. Too many 401k investors hold far too much of their account in bonds, which should be kept to a minimum for those trying to accumulate long-term wealth. To get to millionaire status, you will need to be more of a stock owner, not a bond lender.
Don’t market time! Every time you get paid, invest each pay period, no matter what is happening in the markets! IGNORE THE NOISE! Don’t pay attention to the up and down movement of your account. Make automatic contributions each pay regardless of how the market is doing right now.
If you have the cash flow to do so, accelerate your contributions as early in the year as possible. For example, if your plan is to max out your 401k for the year, and you can do it in 6 months instead of 12 months, this gives your money more time to grow. However, before doing this, check with your HR representative to ensure that you won’t lose any of your company match by doing this.
Pay attention to costs of the funds and get familiar with the costs of each funds and have a bias towards lower cost funds.
Utilize funds that represent indexes. For example, you could incorporate funds that represent the S&P 500 index or International Indexes. Make sure you have diversification across the main asset classes – Large Cap, Mid Cap, Small Cap, International Developed Markets, International Emerging Markets, Real Estate, Commodities.
Wait until you reach full retirement age (at least 59.5 years old) to withdraw your funds, so you won’t pay a penalty for an early withdrawal. Let tax-deferred compounding work for you as long as possible!
If you follow these tips, for a few decades, it is almost certain you will become a millionaire!
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.
