How To Double Your 401k

How To Double Your 401

Last week Fidelity announced that participants in its 401s had doubled their money over the past 10 years. Woo-hoo! And all this time you thought it had been a lost decade. Fidelity’s press release read:

Fidelity Investments, the nation’s No. 1 provider of workplace retirement savings plans, today released 401 data showing that pre-retiree participants who continuously held a 401 plan with Fidelity for the past 10 years more than doubled their account balances.

As Beth McHugh, vice-president of market insights at Fidelity explained , the key thing they did right was to keep saving. In other words, they and their employers poured in money faster than the bear market drained it away. “It proves that there’s wisdom in sticking to old fashioned buy-an-hold, especially with regard to retirement,” McHugh said.

What it doesn’t prove, however, is that 401s were a great success. A back-of the-envelope calculation based on data provided by Fidelity yields an internal rate of return of 0.5%. portfolios.) When inflation is running 2.3% annually, as it did over the past decade, earning 0.5% is a nothing more than a slow way to get poor.

Average 401 Balance By Age

Retirement savings grow with compound interest, which means account balances increase with time. Like other types of retirement accounts, money saved in a 401 grows like a snowball, with interest earning interest on itself. The older you are, the more time you’ve had to build up your savings.

Note: In 2022, employees can contribute up to $20,500 in their 401. Employees over 50 can contribute an additional catch-up contribution of $6,500.

With compounding interest, the earlier money is put into an account, the more opportunity it has to grow, and the greater the possible returns. In retirement accounts like 401s, building retirement savings early means a greater opportunity for growth.

Here’s the average amount people have saved for retirement by age group, according to Vanguard’s data.

While a large disparity in savings exists, women often need greater retirement savings than men to retire comfortably. Women tend to live longer and could therefore need more long-term care than men, which could require greater spending in retirement.

Extra Benefits For Lower

The federal government offers another benefit to lower-income people. Called the Saver’s Tax Credit, it can raise your refund or reduce the taxes owed by offsetting a percentage of the first $2,000 that you contribute to your 401, IRA, or similar tax-advantaged retirement plan.

This offset is in addition to the usual tax benefits of these plans. The size of the percentage depends on the taxpayer’s adjusted gross income for the year and tax-filing status. The income limits to qualify for the minimum percentage offset under the Saver’s Tax Credit are as follows:

• For single taxpayers , the income limit is $34,000 in 2022.
• For married couples filing jointly, it’s $66,000 in 2021 and $68,000 in 2022.
• For heads of household, it maxes out at $49,500 in 2021 and $51,000 in 2022.

Don’t Miss: How To Roll My 401k Into An Ira

What Should You Do With Your Invested 401 Money

While those three steps are enough on their own to potentially enable you to double your money, making an initial investment in the plan is just the first stage of building your wealth. Once it’s socked away, it needs to be put to use in a way that it can potentially increase in value for you. Typical 401 plans only allow you to invest in mutual funds or exchange-traded funds. Even with those restrictions, you may very well have some great options to choose from.

If you’re several years or more away from retirement, look for low-cost, stock-focused investments, like S& P Depository Receipts . The S& P Depository receipts attempt to track the S& P 500 index — which consists of 500 of the largest publicly traded U.S. companies — and it does so with a tiny 0.09% expense ratio. That Exchange Traded Fund and many other S& P 500 index trackers give you broad U.S. market exposure at a very low cost, creating a great opportunity to build wealth over time.

As you get closer to retirement, it becomes important to shift the money you’ll need to spend in the next few years into shorter term assets with higher certainty than stocks. You’ll be giving up the higher potential returns that stocks offer, but you’ll have a greater chance of that money actually being there when you need it.

When It Comes To Investing There Are Very Few Sure Things In The Market Indeed The General Rule Is That The More Certainty You Want In The Rate Of Return You Receive The Lower The Rate Of Return You Need To Accept In Exchange For That Higher Certainty

Despite that reality, there is one very easy option available to many people that will enable them to double their money by investing it.

That easy way to double your money? Invest in your Traditional 401 plan at work. If you have a decent match on that plan and benefit from the tax deduction you get from investing in the plan, you can potentially turn $1 of spending money into $2 of investments, just by contributing.

Recommended Reading: Can I Do A 401k On My Own

Ways To Double Your Money

May 27, 2021 by Retirement

Are you looking to double your money? With interest rates so low, its hard to use a bank account to make any significant amount of money these days.

In order for investors to potentially double or even triple their money, theyll often have to take on some risk for that potential reward.

To achieve this level of returns over time, there are a number of options that come with limited risk. Meanwhile, those looking to shoot the lights out have their share of high-risk, high-reward options to choose from, too.

Below are five possible ways to double your money, ranging from the low risk to the highly speculative.

The Average 401 Balance By Age Income Level Gender And Industry

• The average 401 balance is $129,157, according to Vanguard’s 2021 analysis of over 5 million plans.
• But most people don’t have that much saved for retirement.
• The median 401 balance is significantly lower at $33,472, more reflective of how most Americans save for retirement.

A 401 account is an employee-sponsored retirement vehicle that allows you to contribute pre-tax income towards your retirement. A 401 lets you lower the amount of income you’re taxed on and lets your funds grow tax-free.

In 2020, the average 401 account balance was $129,157, an increase from 2019’s $106,478 average, according to Vanguard data.

Each year, Vanguard analyzes account data from 5 million retirement accounts. Across these accounts, the typical account balance varies widely by the method used to calculate it while the average 401 savings balance is well over $100,000, the median account balance is much less at $33,472, according to Vanguard’s latest data.

The amount you save up toward retirement depends on how long you’ve been saving and how much of your annual income you can afford to put away. The Vanguard data broken down by demographics demonstrates as much, showing a wide range of average account balances across various age ranges, income levels, industries, and gender. Here’s a breakdown of those balances.

Read Also: Can My Wife Take My 401k In A Divorce

Will My 401k Double In 10 Years

Asked by: Alanna Lynch II

The longer you can stay invested in something, the more opportunity you have for that investment to appreciate, he said. Assuming a 7 percent average annual return, it will take a little more than 10 years for a $60,000 401k balance to compound so it doubles in size. Learn the basics of how compound interest works.

How Much Should I Contribute To My 401

As long as you can afford to do so, it’s often advised that you contribute to your 401 to at least maximize your employer’s contribution. Often, the employer’s contribution maxes out at a defined percentage set by your company. If your company has a generous match, you may be limited by IRS contribution limits.

In addition to making sure you at least get your company’s match, consider contributing more if you have enough cash flow. Whatever you set aside will receive favorable tax treatment and has the potential to appreciate in value.

Also Check: Can I Use 401k To Pay Taxes

What Is A Good Monthly Retirement Income

Median retirement income for seniors is around $24,000 however, average income can be much higher. On average, seniors earn between $2000 and $6000 per month. Older retirees tend to earn less than younger retirees. It’s recommended that you save enough to replace 70% of your pre-retirement monthly income.

The Benefits Of Starting Early

One of the greatest assets any investor has is time. The longer your account balance has to grow, the greater your chance of achieving your savings goals. How much you put aside to save is, of course, importantbut when you start saving may be more important.

Here’s a look at two different investors. Investor A saves $5,000 a year between ages 25 and 35, then stops saving altogether. Investor B saves $5,000 a year between ages 35 and 65. Investor B has saved three times as much as Investor A.

However, Investor A will have a larger balance at age 65. The reason that Investor A comes out ahead is the effect of compounded earnings over time. Investor A has given her account an extra 10 years to grow, and the compounded returns that the account experiences actually outweigh any future contributions that are given less time to grow. Starting early gives you the best chance to save for a secure retirement.

Or consider this example from Peter J. Creedon CFP®, ChFC®, CLU®, chief executive officer of Crystal Brook Advisors, New York, NY:

Don’t Miss: Can You Transfer Your 401k Into Ira Without Getting Penalized

Adjust Only As Needed

In the past, major market moves may have prompted you to rebalance your asset allocation, but that may not be the case this year.

Stocks have fallen a bit more than bonds, but the fact that both have fallen makes rebalancing a bit less crucial than would be the case if just one asset class had fallen, Benz says.

In fact, the best response in this kind of market environment may be to sit tight and do nothing, which can help you avoid overreacting to market swings, according to Benz. Thats especially true if you started out with a reasonable asset mix.

But if you intended to adjust your allocations anywayperhaps adding more bonds as you near retirementits easy to do. Just shift enough money from your stock funds to your bond funds to reach your ideal asset mix. Your 401 plan may even offer an online rebalancing tool that will do this for you. Or you could switch to a target-date fund, which will give you all-in-one diversification and do your rebalancing automatically.

Enroll In A New Employers Plan

Job switchers often forget to enroll in a new employers plan, and that can be a huge mistake. Theres an old adage that time in the market is more important than timing the market. That means success in investing is a function of time and commitment, said Robert R. Johnson, president and CEO of The American College of Financial Services in Bryn Mawr, Pa.

The longer your money is invested in a well-diversified portfolio of investments, the greater your potential for long-term returns. If you do not take action and enroll yourself, you might miss out on the investment potential of those early career years.

Recommended Reading: How To Transfer Your 401k From One Company To Another

Take Your 401 With You

Most people will change jobs more than half-a-dozen times over the course of a lifetime. Some of them may cash out of their 401 plans every time they move, which can be a costly strategy. If you cash out every time, you will have nothing left when you need itespecially given that you’ll pay taxes on the funds, plus a 10% early withdrawal penalty if you’re under 59½. Even if your balance is too low to keep in the plan, you can roll that money over to an IRA and let it keep growing.

If you’re moving to a new job, you may also be able to roll over the money from your old 401 to your new employer’s plan if the company permits this. Whichever choice you make, be sure to make a direct transfer from your 401 to the IRA or to the new company’s 401 to avoid risking tax penalties.

How Much Should You Contribute To Your 401

When youre young, its hard to visualize your life in 30 or 40 years and predict how much money youll need.

Just a couple of decades ago, pensions were common benefits offered by many employers, and life expectancies were much lower making it easier to finance your retirement.

Today, employers offering pensions are less common, the future availability of Social Security is less certain and, more importantly, people are living longer.

While your grandparents may have lived only 10-15 years in retirement, odds are your retirement years may span 20 to 30 years! Thats a much longer period youll need to finance.

For that reason, many experts recommend investing 10-15 percent of your annual salary in a retirement savings vehicle like a 401.

Of course, when youre just starting out and trying to establish a financial cushion and pay off student loans, thats a pretty big chunk of cash to sock away. You may need to begin at a smaller percentage and set a higher number as your ultimate goal.

Here are a few considerations to keep in mind:

Also Check: How To Rollover A 401k Without Penalty

Can You Lose Money In A 401

Yes. Because your 401 will be invested in various assets , your portfolio will be exposed to market risk. If the stock market crashes, the stocks component of your portfolio will also go down in value. This is why it is responsible to begin shifting into less-risky assets like bonds as retirement approaches. Note, however, that even bonds can lose money, such as in a rising interest rate environment.

Develop Other Sources Of Income

Think about other ways you can secure sources of income in retirement outside of collecting Social Security and withdrawing from your 401k. This will not only prevent you from having all your retirement eggs in one basket, but it is also something to consider if your 401k balance is lower than youd like. Where can you invest and how can you optimize your portfolio for greater returns? Consider other ways you can supplement your retirement income, and speak to your financial advisor about what solutions could work for you.

You May Like: How Do You Roll Your 401k Into An Ira

Rolling Over To A New 401

The first step in transferring an old 401 to a new employer’s qualified retirement plan is to speak with the new plan sponsor, custodian, or human resources manager who assists employees with enrolling in the 401 plan. Because not every employer-sponsored plan accepts transfers from an outside 401, it is imperative for a new employee to ask if the option is available from the new employer. If the plan does not accept 401 transfers, the employee needs to select one of the three other options for the 401 account balance.

If the new employer plan accepts 401 transfers from other companies, there is often a substantial amount of paperwork that must be completed by the employee. The paperwork is provided by the new plan sponsor or human resources contact and requires the name, date of birth, address, Social Security number, and other employee identifying information.

In addition, the 401 transfer form must provide details of the old employer plan, including total amount to be transferred, investment selections held in the account, date contributions started and stopped, and contribution type, such as pre-tax or Roth. A new plan sponsor may also require an employee to establish new investment instructions for the account being transferred on the form. Once the transfer form is complete, it can be returned to the plan sponsor for processing.

A transfer from one 401 to another is a tax-free transaction, and no early withdrawal penalties are assessed.

Less Than 25 Years Old

• Average 401 balance: $6,718
• Median 401 balance: $2,240
• Contribution rate: 8.1%

Although many people younger than 25 years old are new to the workforce or are not in a job where a 401 plan is offered, their average 401 balance increased 23 percent in 2020 compared to 2019, and 49 percent of those who are eligible for a 401 plan are participating in it. This indicates that this generation is indeed planning for retirement early on.

Read Also: How Do You Pull From Your 401k

Average 401k Balance At Age 65+ $458563 Median $132101

The most common age to retire in the U.S. is 62, so its not surprising to see the average and median 401k balance figures start to decline after age 65. Once you reach age 65, there are still several considerations for your retirement, even if you are no longer working and accumulating wealth. Some of these include making decisions about Medicare, creating a plan around withdrawing money from your retirement accounts, and evaluating any additional insurance needs.

What To Do In Your 40s

One thing that’s definitely on the minds of people in their 40s: How am I doing?

If you are dissatisfied with your financial progress, there is still time to step it up. It can be a tough spot to be in, but the solution is to increase savings and be willing to take on some risk in a diversified portfolio.

At age 40, according to Fidelity, you should have saved about three times your annual salary in your retirement account. If you make $60,000, your goal should be to have $180,000. By your mid 40s, you’ll want to have four times your salary saved.

There’s never a good time to save, but as you get older, you also realize that retirement is coming. Even though you might be paying or saving for college tuition, caring for your parents, this is a time to save and invest aggressively.

“This age group needs to immediately max out their 401 to the degree they’re able to,” says David Schneider, a CFP and founder of Schneider Wealth Strategies. He recommends investing fairly aggressively: “Retirement could be 20 years away,” he said. “There’s plenty of time for the stock market to recover .”

Make sure your cash reserve is always healthy. “If it gets used, top it off,” Boneparth says. At this point, you definitely know what your goals are, and hopefully you have achieved many of the short-term ones.

Read Also: Can I Invest In 401k And Ira