Investing

How much you'd need to save per paycheck to become a 401(k) or IRA millionaire

Twenty/20

The number of 401(k) and IRA millionaires — that is, people who have saved more than $1 million in either their 401(k) or IRA — has reached record levels, according to data from Fidelity, the country's largest 401(k) provider.

The financial services firm reported there are more than 233,000 401(k) millionaires as of the fourth quarter of 2019, up 16% from the previous quarter. Over the same period, the number of IRA millionaires grew 14%, to 208,000. Record market returns account for some of the boost, but workers are also saving more — and saving consistently.

Most young workers today may need more than a million dollars to retire comfortably, based on Grow calculations. But don't be daunted. Experts say it may be easier to reach the seven-figure mark than you think — especially if you start early.

How much you'll need to save from each paycheck to become a 401(k) or IRA millionaire

"The cost of retirement is astronomical — it can be overwhelming," says Niv Persaud, a certified financial planner and managing director at Georgia-based Transition Planning & Guidance.

But when you break down how much you need to save per paycheck over your career in order to reach seven figures in your retirement account, things can look more manageable.

For example, let's say you start saving for retirement at age 25 with a goal of reaching $1 million by age 65. Assuming you receive 26 paychecks over the course of a year, and see average annual returns of 7%, you'd need to contribute about $175 per paycheck throughout a 40-year career to hit that goal.

That works out to about $4,550 per year — which is well within annual contribution limits for either a 401(k) or an IRA. In 2020, you can put aside up to $19,500 in a 401(k) and up to $6,000 in a traditional or Roth IRA.

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Taking advantage of an employer match can boost your savings

Better still, if your company provides a 401(k) match, not all of that $175 has to come out of your pocket. A match is free money your employer kicks in to help you save for retirement, based on how much you contribute. The average employer match works out to 4.7% of salary, according to Fidelity, while Vanguard's How America Saves 2019 report found that two-thirds of companies match between 3% and 6% of pay.

For someone earning the average household income of $62,000, saving $4,550 a year works out to a bit more than a 7% contribution rate.

If you contribute 4% of pay to your 401(k), that works out to $2,480 a year, or roughly $95 per paycheck. A 4% employer match doubles your money, resulting in a total contribution of about $190 per paycheck.

That's even more than you "need" for millionaire status: Someone starting at 25 could actually have $1.09 million by 65.

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But there's a catch: 'You'll definitely need more money'

Becoming a millionaire by the time you reach retirement age will put you ahead of many other savers in the U.S. But with Americans living longer in retirement, a million is still likely not enough to get you through your golden years. "You'll definitely need more money," says Persaud.

According to calculations from Grow, a 25-year-old earning $50,000 today and planning to retire at 67 could need about $1.6 million, for example.

For that reason, Persaud suggests, it's smart to make the most of all the retirement savings vehicles available to you, which would include workplace accounts like a 401(k) or 403(b), traditional or Roth IRAs, and taxable brokerage accounts. Aim to put at least enough in your 401(k) to get the full match your employer offers, and be smart about managing those accounts when you switch jobs to keep that money working for you.

Setting up automatic contribution increases can help you scale up over time. Even a 1% boost to your savings rate can make a big difference by the time you retire.

Just don't fall into the mental trap of thinking you'll wait for your next big raise to get started. The sooner you begin investing for retirement, the more you can harness the power of compounding, which means you earn a return not just on your money, but also on the interest it has already accrued.

"An average investor with a longer time horizon is going to have better results than an amazing investor with a shorter time horizon," Joshua Brown, CEO of investment advisory firm Ritholtz Wealth Management, told Grow earlier this year.

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