How your 401(k) could make you a millionaire. via CNBCMakeIt
That 401k plan your employer offers as a workplace benefit could be your ticket to riches. Just ask Fritz Gilbert. Saving in a 401 made him a millionaire.
Compound interest is interest calculated on the principal plus the interest that is earned. For example, you could have $1 million by age 65 if you started investing $188 per month at age 25 and earned 10 percent annually. If you waited until age 35 to start saving, you'd have to invest $507 per month with a 10 percent annual return to have $1 million by age 65.
So Gilbert focused on increasing his earnings to save more. By going above and beyond what was expected of him, Gilbert got pay raises and promotions that doubled his salary in the first five years of his career. That was a much better path to creating wealth than trying to increase his savings rate on a lower salary, he said.
By the time Gilbert was in his early 30s, he was contributing the maximum pre-tax amount allowed to his 401. Maxing out his contributions as soon as he could afford to helped his balance grow to $1 million. Currently, the maximum you can contribute to a 401 from your paycheck before taxes are taken out is $18,500.
Just keep in mind that changing jobs just for a pay raise isn't always worth it if you lose access to a 401 or workplace retirement plan in the process — especially one with an employer match. Check the vesting schedule for your matching contributions to make sure you don't need to stay in your job for a certain period of time to receive what your employer contributed.Living within in his means has played a key role in Gilbert's ability to become a 401 millionaire.
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