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    Become a Millionaire with your 401k Retirement Plan

    When asked how to become a millionaire, most people would say "Invest in Real Estate!" While this may partially get you there, you might have the position where you have a Cash Rich house but a Cash Stripped bank account. In order to retire with a good standard of living, you need to balance out real estate investments and have enough 401k retirement plan savings.

    In the year 2004, the average household savings in USA averaged 0.8% of disposable income (income after all your expenses have been paid off). This rate has been the lowest since the Great Depression and the past 3 decades have seen savings rates of over 7%. Why is this 0.8% rate so low? Is it because Americans are just bad at saving money, or too much of our disposable income is going towards paying off our homes? In order to reach your goal of having $1 million upon retirement, here are a few suggestions:

    Make Maximum 401k Contributions Every Year

    Utilize your 401k Retirement Plan to the max by contributing as much as you can. The maximum 401k contribution limit for 2005 was $14000. Furthermore, you can also contribute $4000 to a Roth IRA or a Traditional IRA for the year 2005 ($4500 for people over the age of 50 under the Catch Up Provision).

    For example, lets take an average investor by the name Peter. Peter is 40 years old and makes $60,000 a year Gross Salary. Peter contributes $4000 a year into a Roth IRA account, and contributes 5% of his salary to a 401k plan. He also takes advantage of the fact that his employer is willing to make a 5% Match Up Contribution of his Gross Wage into his 401k Retirement Plan. Here is a summary of the above data:

    401k Contributions Roth IRA Contributions
    Self Contributions:
    5% x $60,000 = $3000
    Annual Contributions of $4000

    Employer Match Up Contributions:
    5% x $60,000 = $3000

    No Employer Match Up Contributions
    $6000 Per Year x 25 years @ 10% Interest Compounded Annually = $649,090.59
    $4000 Per Year x 25 Years @ 10% Interest Compounded Annually = $432,727.06

    Therefore, if you add $649,090 + $432, 727 = $1,081,817

    You are now officially a Millionaire!

    Now lets look at a different scenario. Imagine Peter had started saving towards his retirement at a very young age. Here is a table summarizing the data:

    Starting Age Annual Contributions Annual Return Value at Age 65
    25 $10,000 10% $4,868,518.11
    30 $10,000 10% $2,981,268.05
    35 $10,000 10% $1,809,434.25
    40 $10,000 10% $1,081,817.65
    45 $10,000 10% $630,024.99
    50 $10,000 10% $349,497.30
    55 $10,000 10% $175,311.67

    From the above table, you can see that if Peter started contributing $10,000 from the age of 25, he would have a huge lump sum of $4,868,518 at the age of 65 (upon retirement). You bet, $4.8 million is a huge sum of money to have upon retirement!

    However, if Peter started investing at only 45 years old, he would only have $630,024 at the age of retirement (65).

     

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