Want to Become a Millionaire with Your 401(k)? 3 Tips Every Retiree Should Know

One of the best ways to make sure you’re as financially prepared as possible for retirement is to use retirement accounts. If you’re planning to save and invest for retirement (which you are), you might as well get tax breaks along the way—it’s an unbeatable double benefit.

The most popular retirement account is the 401(k), primarily because it’s offered through employers and allows you to passively put money aside without much thought. When people set their retirement savings goals—$1 million is a common goal—it’s common to wonder if that can be achieved with your 401(k) alone.

Simply put, for many people, the answer is yes. Here are three things you need to know to become a millionaire with your 401(k) plan.

1. Young workers don’t need to max out their 401(k) savings to reach $1 million

In an ideal world, everyone would earn enough money each year to reasonably max out their 401(k). Unfortunately, that’s simply not the case. As of 2024, the 401(k) contribution limit is $22,500, or $29,000 if you’re 50 or older. For comparison, the median income in the United States is well under $40,000.

The good news is that you don’t need to max out your 401(k) to become a millionaire with this plan; you just need time. Here’s the approximate number of years it would take you to reach $1 million at an average annual return of 10%:

Author’s calculations. Years rounded to the nearest whole year.

In each scenario above, contributions are below the current annual limit and still managed to reach $1 million within a reasonable career timeframe. Of course, not everyone has access to a 401(k) throughout their career, which can be time-limiting, but it shows how possible it is to become a millionaire with a 401(k).

It’s also worth noting that duration can change dramatically (in either direction) depending on your annual returns. I used 10% in our example because it’s roughly in line with the S&P 500 average over the long term, but you should never use past performance to guess future performance.

If you have access to a 401(k), take advantage of it early, even if you think your contributions won’t be “big enough” to make a real difference.

2. Low-cost index funds may be your go-to option

Your 401(k) plan gives you a set of investment options to choose from. You can’t invest in just any stock or exchange-traded fund (ETF) like you would in a brokerage account or IRA. Typically, these options include market-cap index funds (large, mid, small), which you should take advantage of because of their low cost.

Actively managed options, such as target-date funds (which automatically rebalance to become more conservative as you approach retirement), can be expensive. A passively managed index fund, however, shouldn’t be.

On paper, a few hundredths of a percentage point difference may seem insignificant, but even small differences can add up to thousands of dollars over a career. Contributing $12,000 a year and earning an average annual return of 10% versus an average of 9.5% is a difference of more than $37,700 over 20 years.

3. An employer contribution is one of your best friends

An employer match is a 401(k) benefit that you won’t receive with other retirement accounts, such as IRAs. As the name suggests, an employer match involves your company matching your 401(k) contributions up to a certain percentage. Companies often match between 3% and 6%, but the percentage and criteria depend on the company.

The minimum amount you should contribute to your 401(k) is the maximum amount your employer will match. If it matches up to 3%, the minimum amount you should contribute is 3%. If it’s 5%, make that your minimum. Either way, contributing less than your employer’s maximum is leaving “free” money on the table. Think of it as an instant 100% ROI.

A matching contribution from your employer can help you become a millionaire with a 401(k). Let’s say someone makes $100,000 and their employer matches up to 5%. That’s an extra $5,000 put into their 401(k) each year that now has a chance to grow and compound. According to the Rule of 72, an investment can double in value in about 7.2 years, with an average annual return of 10%.