Under 30? Here's Your 4 Step Plan to a $1 Million 401(k) by 60

April 25, 2021

Are you young and already dreaming of retiring a millionaire?

Under 30? Here's Your 4 Step Plan to a $1 Million 401(k) by 60

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Under 30? Here's Your 4 Step Plan to a $1 Million 401(k) by 60

While it may come as a surprise, setting a goal of a seven-figure nest egg is not only doable for most Americans, but it's actually a good idea. A million dollars saved will produce only around $40,000 in retirement income for most people. And, because of inflation, it isn't the fortune it might seem to be at first glance.

The good news is, there are just four steps you need to take to become a 401(k) millionaire over time. Here's what they are.

a person sitting at a table using a laptop: Older couple reviewing financial paperwork.

1. Sign up for your 401(k) by age 30

The sooner you start investing, the easier it is to become a millionaire.

That's because you have more time to make contributions to your retirement accounts, so you can inevitably make more of them. And the sooner your money is invested, the sooner it can begin earning returns. The money your investments make can be reinvested and start earning returns too -- which accelerates the growth of your nest egg.

If you hope to become a 401(k) millionaire by the age of 60, you'll likely want to begin putting money into your account at least by age 30, or sooner if possible. While it's possible to amass a million-dollar nest egg if you start later, it'll require much larger annual investments.

2. Invest at least $8,820 annually including your employer match

Gallery: 15 Social Security Facts to Help You Plan for Retirement (The Motley Fool)

Learning the truth about Social Security is a key part of retirement planning

When you're making your retirement plans, it's inevitable that Social Security will play a role in them. But you need to understand the full truth about these benefits, how you earn them, and how much income they'll provide you.

To make sure you don't get off course in your efforts at.a secure retirement, here are 15 Social Security facts you absolutely need to know.

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1. You need to work at least 10 years to become eligible for Social Security

In order to be eligible for Social Security retirement benefits, you need to have earned at least 40 work credits.

You can earn a maximum of four per year, so you must have at least a 10-year work history to receive retirement income from the Social Security Administration based on your own career record.

2. Social Security benefits replace only around 40% of pre-retirement income

Social Security benefits are not designed to provide 100% of the income you need as a retiree. Most experts recommend being able to replace at least 70% of your pre-retirement income, and many seniors need more than that.

Your Social Security benefits will replace just 40% of pre-retirement earnings. You'll need to have supplementary savings to provide the other money you need to enjoy life in your later years.

3. The average Social Security benefit is just $1,543 per month

4. Automatic benefit cuts could occur in 2035 if lawmakers don’t act

Social Security's trust fund is in serious financial trouble. It's projected to run dry in 2035 (or earlier) without action on the part of lawmakers.

If the trust fund runs short, Social Security will still be able to pay benefits out of payroll taxes being collected. Unfortunately, these can't fund all the promised payments, and seniors will be looking at around a 24% benefit cut.

While such a large reduction in benefits probably won't happen, it's possible that actions lawmakers take will result in you receiving less money than expected. You need to take that risk into account when making retirement plans.

5. Your full retirement age is at least 66 and 2 months

You can start Social Security benefits at age 62, but if you want your standard benefit, you'll need to wait several years longer until your full retirement age (FRA).

FRA is between 66 and 2 months and 67, depending on birth year. You need to know your FRA so you can decide when claiming benefits makes sense for you financially.

6. Claiming Social Security benefits early could reduce checks by up to 30%

When you start Social Security checks ahead of your full retirement age, benefits are reduced by a small amount for every single month. This happens due to early filing penalties.

Early filing penalties can add up, with those who claim Social Security at 62 facing a 30% cut to benefits if their full retirement age was 67.

Planning to retire early could mean accepting much smaller Social Security checks if you'll need to start your benefits in order to leave the workforce.

7. Waiting until 70 is necessary to maximize the amount of benefits you’ll receive

Maxing out your Social Security checks can provide more financial security later in life since these benefits are guaranteed to last for life. But to get the maximum monthly check, you'll actually need to wait until 70 to claim benefits.

That's because delayed retirement credits that boost your monthly pay become available for each month you wait after FRA (but only until age 70).

If you want the largest possible check, you'll either need to work much longer than average or need money to fund retirement prior to claiming your Social Security at 70.

ALSO READ: Sorry to Say: You Probably Shouldn't Claim Social Security at 62

8. You’ll need to work at least 35 years to avoid shrinking your benefit amount

Your Social Security benefit amount will be determined by both your age when you claim benefits and your earning history.

Specifically, your standard benefit equals a percentage of average wages in the 35 years your earnings were the highest.

Those who don't have a 35-year work history are still subject to the same calculation. They just have some years of $0 wages included in it, which results in a lower benefit amount.

Planning to work for 35 years (or more, if you earn more money later in life) is key to getting the highest possible monthly checks.

9. Social Security benefits could be partly taxed

If you're anticipating that you'll be able to keep your entire Social Security benefit, it will probably come as a surprise that you may lose some of it to taxes. In fact, as many as half of all retirees owe federal taxes on Social Security checks. And some states collect taxes on benefits as well.

Whether you're taxed depends on how high your provisional income is. That's half your Social Security checks plus all taxable income and some nontaxable income. The thresholds at which benefits become taxable isn't adjusted based on inflation, either, so a growing number of retirees are going to face a tax bill.

You need to be prepared for that when estimating the amount of income you'll have as a senior.

ALSO READ: Want to Avoid Paying Taxes on Social Security? Here's How

10. Social Security spousal benefits aren’t available until your spouse claims them

If you aren't eligible for Social Security benefits based on your own work history, it's possible to qualify based on the work record of a spouse.

Spousal benefits could equal up to 50% of your husband or wife's full benefit -- but you can't claim them until your spouse has claimed his or her benefits.

That's why coordination with your spouse is essential when deciding when you should both get benefits.

11. Delayed retirement credits can’t be earned on spousal benefits

If you are claiming benefits on a spouse's work history, there's no benefit to waiting until age 70 to start getting checks.

Since you can't earn delayed retirement credits on spousal benefits, there's no reason to put off starting your benefits once you've reached your full retirement age.

12. You could shrink spousal benefits by claiming Social Security early

If you're the higher earner in your household, starting your benefit checks prior to your full retirement age won't just reduce your Social Security income. Survivor benefits could be impacted as well.

The death of a spouse is a huge financial shock for retirees. While the last surviving spouse gets to keep the higher of the two benefits either partner was receiving, this could still mean a huge reduction in annual income.

If you've shrunken your widow's survivor's benefits by claiming your checks early, you'll only exacerbate the financial damage resulting from your death.

13. Divorced spouses may be entitled to spousal or survivor benefits

Divorce doesn't mean giving up your chance at spousal or survivor benefits. As long as your marriage lasted at least 10 years, you should still be entitled to claim Social Security on your spouse's work history.

Understanding the rules for eligibility for these benefits can be important both for timing your divorce if you're close to the 10-year mark and for determining the amount of income Social Security can produce for you.

14. Working while collecting benefits could reduce your checks

If you claim Social Security prior to full retirement age and continue to earn a paycheck, Social Security checks could shrink once your earnings hit a certain threshold.

The rules for how much you can earn before benefits are affected can change annually. But you need to know that you may not be able to get both your full benefit and earnings from work when you're determining how you'll support yourself as a retiree.

ALSO READ: Your Guide to Working While on Social Security

15. Social Security benefits are losing buying power

While retirees receive cost-of-living adjustments (COLAs) in some years, those haven't kept pace with the inflation seniors face. That's because the measure used to determine COLAs underestimates the amount seniors spend on healthcare and housing.

Unfortunately, the result of this is that Social Security benefits have lost about 30% of their buying power over two decades. There's no sign this trend will change, and it could get worse, so it's becoming more important than ever not to be overly reliant on Social Security checks.

Make sure you understand the truth about Social Security

Armed with knowledge about these 15 Social Security facts, you can make a more informed choice about the income benefits will provide -- and about when you can expect to start your Social Security checks.

This is crucial to making a successful retirement plan that gives you the money you need in your later years.

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17/17 SLIDES

If you start investing by age 30, you should be able to amass around $1 million in savings by age 65 if you contribute at least $8,820 to your 401(k) every year (assuming an 8% average rate of return). That's around $735 per month.

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At first glance, that may seem like a lot. But it's important to remember a few things.

First, most companies offer an employer match, so your company may give you part of that money. Say, for example, that your business matches 100% of your contributions up to 3% of your salary. The exact amount of your match would vary based on your earnings. If you made around $40,000 per year, your company would give you up to $1,200 in free money for retirement. That means you'd only have to contribute $7,620 out of your own pocket.

And this contribution is made with pre-tax dollars, so it doesn't reduce your taxable income as much. If you're in the 12% tax bracket, a $7,620 contribution would save you around $914 in taxes, so it would only reduce your take-home pay by around $6,706.

All of that means you'd actually be reducing the amount of money you bring home by about $558 per month, or about 17% of your income. That's not an unreasonable amount. It'll also get easier to save that much as your income grows (although, ideally, you'd increase the amount you invest as your income goes up).

3. Choose the right mix of investments

Your $8,820 in annual retirement savings would turn into $1 million by age 60 only if you earned an 8% average annual return on investments. If you earn less than that, you won't hit your savings target of having a seven-figure nest egg by age 60 unless you invested more.

The rate of return you're likely to earn depends on what you invest in. If you're too conservative, you may earn a much smaller return and would need to put aside a far larger amount of money each month. On the other hand, if you take too many risks, you also risk losing money and not making your goal.

Most 401(k) accounts have a limited pool of investment options. You may be able to invest in a target-date fund that provides you with an appropriate mix of assets. However, many people do better by choosing funds within their 401(k) accounts themselves. Take the time to look into all your options and consider what investment strategy would work best for you.

4. Leave your money to grow

Once you've invested your money, it's imperative you don't take it out or you could jeopardize your chances of hitting millionaire status. While 401(k) loans or withdrawals may seem tempting during times of financial hardship, leave your retirement funds alone and let them grow for the long term.

By following these four steps, you should have around $1 million by the age of 60 and can start getting ready to leave the workforce and enjoy a retirement free of financial worries.