Planning for retirement is a long road and there’s no precise way to tell exactly how much money you’ll need to have saved. There’s no guarantee that a million-dollar 401(k) balance will carry you through your retirement but having that much saved certainly helps. These four steps will help you approach retirement with confidence.
1. Start early
The more time you give your retirement savings to grow, the more wealth you’re likely to end up with. It’s really that simple. Imagine you contribute $300 a month to your 401(k), which may be doable even on an average salary. If you give yourself a 30-year savings window and your 401(k) investments deliver an average annualized 7% return — a rate that’s just below the stock market’s average — then you’ll wind up with about $340,000.
2. Always contribute enough to claim your full employer match
Getting free money in your 401(k) is a good way to help your wealth increase. To that end, always contribute at least enough of your paycheck to snag your employer match in full. Consider this scenario: If your employer contributes $1,500 a year to your 401(k) over 45 years, assuming the 7% annualized rate of return we used earlier, those extra matching dollars alone could add about $429,000 to your total balance.
3. Invest aggressively
Playing it too safe with your 401(k) could cost you. If you want a shot at that 7% average annualized return we keep referencing, you’ll need to load up on stocks. Now you won’t find individual stocks in a 401(k), so you’ll need to choose funds that are stock-based.
4. Avoid paying excessive fees
The mutual funds and exchange-traded funds you hold in your 401(k) will come with a number of annual fees. The combined cost of those fees is a measure called the expense ratio — simply, the total percentage of the money you have in the fund that its managers extract in fees each year.
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