401(k) Retirement Planning: How To Save $3 Million

Looking to turbocharge your retirement planning? Here’s how to save $3 million in your 401(k) account and in your additional retirement accounts.

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First of all, why $3 million? Members of 401(k) plans tell Charles Schwab that, on average, they expect to need $1.9 million in retirement savings.

But the latest government figures show inflation running at 7.5%. That’s its highest rate in 40 years.

Still, let’s say inflation subsides. Federal Reserve interest-rate hikes dampen demand for goods and services. Likewise, economic growth slows as we get further away from rock bottom of the coronavirus pandemic. Even if inflation falls to a 4.68% annual pace, 10 years from now it will take $3 million to equal the purchasing power of today’s $1.9 million, according to smartasset.com’s inflation calculator.

401(k) Retirement Planning: Aim How High?

Besides, who doesn’t want a bigger nest egg? In fact, more and more middle-class couples are doing exactly that — building balances of $5 million to $10 million in their 401(k) plans and other retirement savings, Clark Kendall, CEO of Kendall Capital in Rockville, Md., told IBD recently.

So what does it take to build a 401(k) balance of $3 million? It is quite doable with proper retirement planning.

The easiest scenario requires you to start early in your work career.

Start Your 401(k) Saving Early

Let’s say you start saving at age 25. Let’s also say that you delay dipping into your 401(k) until age 72. Why that age?

Age 70 is when you become eligible for your maximum starting Social Security benefits. By itself, the two-year delay after age 70 does not add anything to your starting benefit.

But your benefits are based on the 35 years in which you earned the most. So reporting high income in your seventies can mean replacing two lower income years from earlier in your working career.

In addition, it gives your retirement savings in tax-sheltered accounts like a 401(k) two more years to grow without being taxed.

So that extra time can turbocharge your overall retirement planning.

If Your 401(k) Earns 7% A Year

A second factor in building your nest egg is the rate of return on your savings.

Let’s assume your portfolio grows 7% a year on average in a 401(k) account. That’s reasonable. The broad stock market has actually grown faster. U.S. large-cap stocks averaged 10.39% growth annually between 1926 and this recent Jan. 31, according to Morningstar Direct. That includes recent market volatility.

It also includes the Great Depression, the Great Recession, the Crash of 1929, the Crash 1987 and World War II.

Payoff From Solid Retirement Planning

So, what happens to your 401(k) balance’s growth if you start at 25 and keep going until age 72?

If you start to save at 25, to build $3 million in retirement savings by the time you reach 72, you have to sock away just over $156 per week, or about $8,134 a year to your 401(k), according to the investment goal calculator at buyupside.com.

That amounts to 15% of an annual salary of $54,227. That’s reasonable for a 25-year-old now.

And 15% is the annual rate of contribution that virtually all financial advisors recommend.

If you get a 401(k) matching contribution from your employer of, say, 3%? Then all you need to kick in is 12% of your salary. $8,134 is 12% of a $67,782 salary.

If Your 401(k) Starts At Age 35?

How hard would it be to build up $3 million in retirement savings if you start later than age 25?

If you don’t start to save until age 35, then you’ve got to sock away nearly $17,041 a year, or $328 at the weekly rate.

That’s more than chump change. But it’s actually still below the current cap on annual 401(k) contributions.

If the $17,041 is 12% of your pay, you would be earning $142,008 a year.

That’s still doable, but harder than if you start 401(k) saving at age 25.

Poor 401(k) Retirement Planning

If you delay the start of retirement saving until much later — let’s say age 45? You’d be setting a stiff challenge for yourself.

You’d have to invest $37,377 a year in weekly contributions of $719.

If that’s 12% of your pay, you’d be earning $311,471 a year.

A 401(k) contribution of that size would be more than 37% of a $100,000 yearly salary.

In any case, it would radically exceed today’s age-45 annual 401(k) contribution cap of $20,500.

The most additional money you could divert into an IRA would be $6,000.

The remaining $10,877? You’d have to put that to work in a taxable investment account. Your annual earnings would get hit with federal income taxes. As a resident of many states, you’d also get a state income-tax bill.

And you wouldn’t get an assist from your employer. There is no such thing as a company match for IRA contributions or investments in taxable accounts.

How Can You Save $3 Million?

Let’s turn that into a brief summary. Here’s how much you must sock away weekly and annually to save $3 million in a 401(k) account by age 72, while your savings compound at 7% a year, if you start savings at different ages:

Proper 401(k) Retirement Planning

Bottom line? The earlier you start your 401(k) saving, the less income you’ll need to set aside to hit $3 million. “Younger investors have the benefit of time on their side,” said Senior Wealth Advisor Nilay Gandhi of giant 401(k) provider Vanguard. “This enables them to spread out their savings and risk over a longer duration and benefit from decades of employer contributions.”

Roger Young, a Thought Leadership Director for T. Rowe Price, suggests these tips for savers:

• If you haven’t already begun, just start saving, no matter how little.
• Contribute enough to qualify for your employer’s maximum company match.
• If you can’t contribute 15% a year including company match, start small and increase your contribution by one percentage point a year.
• Try to devote one or two percentage points of any bonus or pay raise to savings.

Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and active mutual fund managers who consistently outperform the market.

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