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7 Steps to a 7-Figure 401(k)

7 Steps to a 7-Figure 401(k)

When I left my job this year, I looked at my 401(k) and saw I had achieved a milestone: my balance hit $1,000,000.

By the way, I’m only 45 years old.

I’m an outlier. I know it. I’m in the retirement business, so I’ve seen the data on individual 401(k) balances. I understand investment theory and long-term investing. And I’ve studied behavioral finance — why we act the way we do when it comes to saving and spending.

Here’s what I’ve learned:

1. Start saving early

I started saving in my 401(k) when I was 22 years old. I wasn’t making very much money: I was an administrative assistant, paying off big student loans, and living in pricey San Francisco. I lived very simply. And my little 401(k) went to work for me, growing and compounding. Start saving, even if just a little, now.

2. Invest in a diversified portfolio

I was lucky; from the start, I put my money in a target date fund. It’s a diversified portfolio that spreads money across stocks and bonds throughout global markets. It automatically changes your investment allocation as you age to lock in gains and protect you from losses. The fund I picked is designed to take me to and through retirement in 2040! Your 401(k) plan likely has a target date fund or a managed account that will manage your investment for you over time.

3. Save as much as you can

As I moved up in the company, I started earning more, and contributing more to my 401(k).

Research shows you’ll need to save 10-20% of your salary each year to have enough for retirement. At a minimum, make sure you save enough to get your company match — it’s “free" money — and strive to save 15%.

Many 401(k) plans have a feature called auto-escalation. If you’re signed up for it, your savings rate will be automatically increased by 1% each year. This is a helpful tool if you don’t feel you can save more today, but think you could tomorrow.

Saving for retirement means forgoing other things. Even today I drive a car that has over 225,000 miles on it (go, Prius!), a kitchen that is begging for a remodel (ignoring it!) and actively use my library’s free resources (sorry Netflix and Hulu!).

4. Stay the course

Because my investments are diversified and I understand their long-term goals, I don’t sweat the market moves. Dot-com bust of 2000? I stayed fully invested. Financial crisis of 2007-2009? I stayed fully invested then, too. When I retire in 2040 and look back at my return stream, those market events will be little blips on a long line of growth.

Though it’s tempting to trade in volatile markets, even the best professional investors aren’t consistently good at it. If you move to cash and don’t reinvest before the market rebound, you’ll have an investment loss, and you’ll need to save more to make up for it.

5. Don’t treat your 401(k) like a bank account

My 401(k) is there to help me afford a dignified retirement. I don’t tap it. It’s off-limits.

But I see people taking loans from their 401(k)s for non-essential reasons. Need to pay off that fancy vacation? Making payments on a new car and need the extra cash? Want to buy a house that’s more than you can afford? No, no, no! Don’t touch your 401(k)! If you have your money in a diversified portfolio, it’s working for you — even if it’s only a small sum.

But if you have a hardship — a true emergency — there are rules which allow you to tap your 401(k). And if there is truly no other choice, your future self and I will understand if your present-day self needs help.

6. Know the advantage of a 401(k) before you lose it

I left my job this year. Sure enough, my mailbox started to fill with fancy invitations for IRA rollovers. I did my research on what I pay in my 401(k), and I compared it to other options in the IRA market: no IRA can beat it. Luckily, I know that I can leave my money in my (now previous employer’s) 401(k) plan, and that’s what I did.

7. Be realistic. It still might not be enough (!)

A million dollars sounds like a ton of money. But I know it's not enough. I live in Silicon Valley, which is a very expensive place to retire. My family has great longevity, so I’m expecting a long life—and hopefully a healthy one, because I’m watching health care costs soar. And, not everyone in my household saved for retirement as religiously as I did.

So, I’ll still be saving and investing in my diversified portfolios, driving around in my trusty car and hanging out with family and friends in my totally un-renovated kitchen.


Laraine McKinnon runs strategic consulting firm LMC17. She spent 23 years at BlackRock and predecessor firms BGI and Wells Fargo Nikko, specializing in retirement readiness. Laraine is an Advisor for Betterment for Business, a leading "robo-advisor." and is the author of the forthcoming book “Known: How to Create a Great 401(k).”

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