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Here’s How to Become a 401(k) Millionaire

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How to Become a 401(k) Millionaire

Here’s How to Become a 401(k) Millionaire

There’s nothing more definitive in the journey to financial freedom than hitting the $1 million mark in retirement savings.

A nest egg like that is a near-guarantee that you could surmount any curveball the world throws at you, whether it is an unexpected family emergency or anything else.

While $1 million certainly sounds like a lofty milestone to many, it’s actually quite a common achievement:

  • Millionaire households in the U.S.: 11.3 million (8.95%)
  • Total households in the U.S.: 126.2 million

And contrary to popular belief, to become a 401(k) millionaire, you don’t need to strike it rich with a lucky stock pick, or use a crystal ball to forecast the future of the market.

Your best bet is to simply focus only on the factors you can control.

What You Can Control

Today’s infographic is from Tony Robbins, and it covers key points from his #1 Best Selling book Unshakeable: Your Financial Freedom Playbook, which is now available on paperback.

It shows that the biggest winners in the financial game know that they can’t predict the future, and instead titans like Warren Buffett or Jack Bogle focus intently on the factors they can control, knowing that with the right approach they’ll thrive in almost any market.

What are these crucial factors?

FactorDescription
TimeThe force of compound interest is more powerful over longer periods of time.
DisciplineStaying calm and focused on the long term during periods of turmoil is key.
DiversificationProper asset allocation and frequent re-balancing can position you to weather any storm.
ExpensesExpenses and taxes are silent killers, and must be minimized strategically.

By diligently working to take control of these four factors, your odds of attaining financial freedom are extremely high. Here is each factor in more depth.

1. Time

The power of compound interest is extraordinary, making time your best friend when it comes to building a battle chest of retirement savings.

The current maximum contribution limit for 401(k)s is $18,500 per year, not including what is matched by your employer. If you maxed out on contributions and started investing early, you can hit $1 million before retirement even in sub-optimal market conditions:

Starting ageRequired returns for $1 million at age 65
302.20%
353.45%
405.40%
458.55%
5014.50%

Time can make up for a lack of investing acumen. Wait until later, and things get very difficult – by age 50, you need market beating returns!

2. Discipline

If you’re taking advantage of the power of compound interest over a long period of time, whether that is 20, 30, or 40 years, it is inevitable that there will be bumps in the road:

  • Stock market corrections happen once a year, on average
  • Bear markets happen once in every 3-5 years, on average
  • Bear markets vary in length, but on average last one year

Through decades of investing, the fact is you are going to see bear markets – it is how you handle them that counts.

Even when it’s the most tempting to sell, remember these facts:

  • Bear markets become bull markets
  • The first 12 months of a new bull market can see crucial market gains
  • Nobody can successfully time the market – not even the experts

In other words, having the discipline to hold through the turbulence can be the difference maker – and a key factor you can control in your journey to becoming a 401(k) millionaire.

3. Diversification

Another factor you control is portfolio diversification, and here are four ways diversification can minimize risk:

Diversification TechniqueExamples
AssetsStocks, bonds, and alternative assets like real estate or gold.
SectorsConsumer goods, tech, energy, financials, etc.
MarketsDomestic, international, emerging markets
TimeAdd to investments regularly, because there is never a “right” time to buy

A properly designed portfolio can weather any storm, and re-balancing it on a regular basis will force you to sell assets at market highs, while buying at low points.

4. Expenses

The fees on your 401(k) statement might not seem like much, but even 1% or 2% can make a big difference over the long term.

For example: the value of $1 compounding for 50 years at 5% will be worth $11.50, but if it averages 7% it will be worth $29.50. That’s almost three times more!

Expenses, both seen and hidden, can be a silent killer any portfolio, so keeping them to a necessary minimum can help you get to the promised land.

A Final Word

If becoming a 401(k) millionaire was easy, everyone could do it.

But to be successful, you need to take control over factors like time, diversification, discipline, and costs – ideally with a qualified and experienced financial advisor and partner. Then, you need to stick to the plan and let the market do its work.

Investing is a game of inches. If your returns improve by, say, 2 or 3 percentage points a year, the cumulative impact over decades is astounding, thanks to the power of compounding.

– Tony Robbins

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Investor Education

Visualized: A Step-by-Step Guide to Tax-Loss Harvesting

In Canada, tax-loss harvesting allows investors to turn losses into tax savings. This graphic breaks down how it works in four simple steps.

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An illustrative graphic showing part of the steps in tax-loss harvesting, including selling a $50,000 investment with a $10,000 loss.

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The following content is sponsored by Fidelity Investments

A Step-by-Step Guide to Tax-Loss Harvesting

Market ups and downs can be unnerving, but the good news is that tax-loss harvesting allows investors in Canada to capture tax savings when their portfolio drops in value.

While it sounds complicated, a tax-loss harvesting strategy is actually fairly straightforward. An investor can use capital losses to offset capital gains found elsewhere in their portfolio, leading to a lower tax bill. While there are important conditions to keep in mind, investors can use this strategy to enhance portfolio returns over time by reinvesting these tax savings.

This graphic from Fidelity Investments shows how tax-loss harvesting works and why it may improve tax efficiency in an investor’s portfolio.

Breaking It Down

Consider a person who invested $50,000 in a mutual fund held in a non-registered account that has dropped by $10,000 in value. To help minimize losses, they took the following steps in a tax-loss harvesting strategy.

For the sake of this example, taxes are based on the maximum federal rate and the average maximum provincial tax rate.

  1. Sold investment with a $10,000 loss
  2. Invested $40,000 into a different mutual fund
  3. Used the $10,000 capital loss to offset capital gains realized elsewhere in the non-registered portfolio
  4. Achieved up to $2,550 in tax savings

The investor realized as much as $2,550 in tax savings by utilizing a $10,000 loss against a $10,000 capital gain. Without tax-loss harvesting, this $10,000 capital gain would be taxed at a 50% capital gains inclusion rate ($10,000 X 50% = $5,000). This $5,000 in applicable gains is then taxed at a 51% combined federal and provincial tax rate ($5,000 X 51% = $2,550 in taxes owed).

In contrast, by using tax-loss harvesting, the investor would have achieved up to $2,550 in tax savings.

What’s more, you can reinvest your tax savings over each year—which may help boost portfolio returns over time if the new investment increases in value.

Tax-Loss Harvesting Tips

With a tax-loss harvesting strategy, here are some key tips and considerations to keep in mind:

  • Investment Timeline: A capital loss can be used to offset capital gains not only in the current year, but in the three years prior and/or any year indefinitely in the future.
  • New Investment Type: After selling an investment that’s dropped in value, it’s important to buy a different investment to avoid triggering the ‘superficial loss rule’. Investors can aim to choose an investment with similar long-term returns.
  • Plan for Year-End: In order to achieve a capital loss, plan to sell an investment at least two to three days before the year’s final trading day so the investment settles before year-end.

Together, these tips can help investors strategically execute a tax-loss harvesting strategy.

Tax Made Easier

During volatile markets, investors can seize the opportunity to turn losses into tax savings using tax-loss harvesting as a key tool to help generate higher after-tax returns.

Visual Capitalist Logo

Explore Fidelity’s tax calculator to discover tax-saving opportunities.

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