Lesson 2: Put increases on autopilot
Lesson 2: Put increases on autopilot
Many 401(k) millionaires adopt a set-it-and-forget mindset, taking advantage of auto-escalation features that increase their contribution rate by a set amount each year. Of the approximately 9 million Fidelity plan participants who increased their savings rate in 2023, about three-quarters did so automatically.
Under SECURE 2.0, a federal law enacted in 2022 to bolster retirement savings opportunities, workplaces that have established retirement plans since Dec. 29, 2022, must automatically enroll eligible employees and increase contributions by 1 percent each year. If your 401(k) plan has been around longer, you’ll need to let your plan manager know that you want to auto-escalate your rate.
Lesson 3: Save aggressively
401(k) millionaires don’t scrimp when it comes to putting money into their plans. Their personal saving rate is about 17 percent of their pay, not including any employer match.
Not everyone can save at that level from day one. One way to catch up is to up your rate when you get raises or bonuses. By immediately directing that higher pay into your retirement account, you don’t give yourself a chance to miss it.
It’s not just how much money you save — it’s how you invest it. The younger you are, the more you may want to focus on high-return investments like stocks. For somebody who’s in retirement or really close to retirement, there certainly can be valid arguments for having a modest portion of your money in bonds. But for younger workers and people who can see leaving the money in these plans for decades, not just years, they really should skew the mix pretty heavily towards stocks.
Lesson 4: Keep a separate emergency fund
Life happens, and things come up that you weren’t planning for. Whether they affect your home, your car, or your health, those things often cost a lot of money. If you don’t have any emergency savings, you might be tempted to take money out of your 401(k) when the unexpected occurs.
By following these lessons, you can set yourself up for a more secure financial future and potentially join the ranks of 401(k) millionaires. Putting increases on autopilot, saving aggressively, and keeping a separate emergency fund are key steps to building wealth and ensuring a comfortable retirement.
