Contributing to Your 401(k) in Your 20s Could Make You a Millionaire

This post is sponsored by Blooom. Blooom is an SEC-registered investment adviser company that helps regular people understand their workplace retirement plans. The company also helps customers select the right mix of funds, so they can minimize fees and invest for the long run.

Everyone wants to become a millionaire, but today fewer than one in 20 people in the United States hold this illustrious status. Think you could never become a millionaire? Think again. If you’re in your 20s and you have a 401(k), becoming a millionaire could be within your grasp.

Consider a typical 25-year-old who is struggling to get ahead. Maybe she’s earning $40,000 per year. Our heroine doesn’t earn a ton of cash. However, she’s got one wealth building trick up her sleeve. Her employer matches 50 percent of her 401(k) contributions up to 6 percent.

Knowing the importance of investing early and often, our heroine puts aside $200 per month (that’s 6 percent of her salary). She also captures that sweet $100 per month match from her employer.

Assuming that her portfolio earns an 8 percent return and that she continues to contribute to the account for 40 years, she will achieve millionaire status by age 65.

Even better, our heroine will barely have to work for this money.

No, she isn’t exploiting people or robbing them blind. Rather, her little money minions (also known as compound growth) are doing the hard work for her.

By the time our millionaire heroine unwraps her first Werther’s Original in retirement, over 90 percent of her portfolio will have come from investment growth instead of her 401(k) contributions.

Blooom, an investment company that helps regular people manage their 401(k) accounts, wants lots of people to achieve millionaire status. The company can’t guarantee investment returns, but it can help you minimize fees in your 401(k) investment portfolio. It can also help you select the mix of funds that is the most likely to propel you toward your retirement goal.

So if you haven’t already started, should you start contributing to your 401(k)?

Manage Your Retirement Savings Plan Start by Getting a Free Analysis

4 Reasons Your 401(k) May Be the Perfect Investing Vehicle

The 401(k) is one investment account among many. Does it really make sense to contribute to it? The answer depends on your personal situation. That said, if your employer offers a matching contribution, you should almost always take advantage of it. Here are four reasons that a 401(k) may be the perfect place to start investing.

1. You’ll Never Be Tempted to Spend the Extra Money

I’m sure you love budgeting as much as the next person, which is to say you hate it. But not being a lover of spreadsheets doesn’t mean you’re destined to eat cat food in retirement. When you enroll in your 401(k) at work, the money you invest will come straight out of your paycheck. You’ll never see it, so you won’t miss it or feel tempted to spend it.

2. That Sweet Employer Match

Does your employer offer a match on your 401(k) contributions? If so, it’s crazy to leave that money on the table. A 50 to 100 percent match is a guaranteed 50 to 100 percent return on investments. Even Ponzi schemes (which are an illegal form of fraud) don’t offer that high of a return.

Take advantage of that match — your future retired self will thank you.

3. You Get to Keep Your Money

Every time you earn a dollar, Uncle Sam wants a piece of it. Unless you’re interested in a life of crime, you have to pay those taxes. But there are a few legal forms of tax evasion — including 401(k) contributions.

When you put money into your 401(k) as a pre-tax contribution, you don’t have to pay income taxes on the contributions or the growth until you spend the money in retirement. (Just don’t spend the money before age 59 ½ or you’ll pay a 10 percent penalty on top of the tax you’ll owe.)

4. It Can Be Easy to Manage

Figuring out exactly how to invest your 401(k) isn’t exactly the easiest task. In fact, it’s the type of thing that you might accidentally put off until later, only to find out your money is in a suboptimal money market account or an expensive target-date retirement fund.

Thankfully, Blooom takes away a lot of the headache associated with managing your portfolio.

When you connect your 401(k) account to Blooom, it will do a free analysis of your investment portfolio and your fees.

It will also help you identify an investment strategy that makes sense for you.

Want more than a free analysis? For a flat fee, Blooom will regularly optimize the mix of funds in your portfolio while working to keep your fees low. After all, when it comes to investing, you get what you don’t pay for.

See How Your 401k Stacks up in Minutes Start by Getting a Free Analysis

3 Actions That Will Propel You Towards Millionaire Status

1. Don’t Cash Out Your 401(k)

During the early phases of your career, you might change companies every few years. It can be tempting to cash out your small workplace retirement plan to pay off debt or fund a big move. Don’t do it!

Staying invested is key to achieving that millionaire status. Even a few thousand dollars can grow to a hundred thousand dollars or more by the time you retire. When you leave a job, roll over your existing 401(k) into the new 401(k) plan.

If you’re confused or overwhelmed by the paperwork, call your former 401(k) provider and ask the representative how to roll over your account. Tell the person you speak with that you don’t want to cash out the account because you’re investing for the long run.

2. Stay Invested for the Long Run

Trying to figure out how to invest your 401(k) can be confusing, and staying the course during market turmoil is even more difficult. But Blooom can help take the guesswork out of long-term investing. The company will automatically rebalance your portfolio for you. That means your portfolio will stay invested for the long run, even if the stock markets take a plunge.

3. If You Can’t Save a Lot, Save a Little

In 2019, the maximum you can contribute to your 401(k) is $19,000. But if you’re earning an average salary, investing that much may be out of reach (at least for now). That doesn’t mean you shouldn’t invest in your 401(k) at all. Instead, do everything in your power to get your employer’s full match. When you’re earning more or you’ve paid off some debts, you can revisit your 401(k) contributions and start inching your way up to maxing out your account.

Saving a little bit each month can add up to a lot of money down the road, especially when you start to consider the effect of compound growth.

Blooom is currently offering CentSai readers the chance to sign up for an annual membership for just $99! Use promo code: REEETIRE.