My current 401(k) recently crossed the $100k threshold. Watching any financial account grow is exciting, but I was particularly excited to see my 401(k) hit six figures because I have been at my current job for less than three years! I started my current job in May 2021, and my three-year anniversary of working for my current employer is later this month.
Why is this so exciting to me? Here are the 401(k) contribution limits during the years in which I have had this job:
2021: $19,500
2022: $20,500
2023: $22,500
2024: $23,000
Given these contribution limits, the maximum contribution I could (and did) make to my 401(k) from May 2021 through April 2024 (prorating for the partial years) was $63,666.67. Through the magical powers of 401(k) plans, that $63,666.67 I contributed became more than $100,000! That is more than $36,333.33 extra that I never had to save but now enjoy as part of my overall net worth, after just three years of work.
So what magic made my 401(k) about 50% larger than my contributions alone?
Enjoy that Employer Match
My employer offers a generous 7% match on 401(k) contributions. This means as long as I contribute at least 7% of my salary to my 401(k), my employer will contribute an additional 7%. This is free money beyond my salary! For a person making $100,000 a year, that 7% match means their employer contributes an extra $7,000 a year to their 401(k).
A 401(k) match increases when your salary increases because a percentage match is based on your salary. This adds value to any promotion you receive, assuming you are contributing to your 401(k)! My salary grew in the time I worked for my current employer, through both regular annual performance increases and my promotion in 2023. As a result, my employer’s contributions grew from just over $8,000 a year to more than $10,000 a year.
My employer contributed an average of $9,146.87 each year to my 401(k) since I started working for them in 2021. This means that my employer provided me an extra $27,440.62 in free money for my 401(k) since I started working there.
But, you may notice that still does not get me to or beyond $100K:
My contributions + Employer Contributions = Total Contributions
$63,666.67 + $27,440.62 = $91,107.29
So there still is something else that must account for the extra money!
A Negative: Management Fees
Not only is that $91,107.29 below $100k, there are also management fees on my 401(k) that decrease the total. When investing in a Roth IRA, brokerage account, or any other account where you choose the platform, you can opt to invest in funds with the lowest expense ratios possible. An expense ratio is the fee required to pay for any management and operating expenses. The lower the expense ratio, the more money you have invested rather than paying for fees.
Selecting funds with low expense ratios is always possible for your personal investments. However, 401(k) choices can be more limiting because you must often select from a basket of funds chosen by your employer. The expense ratios on the funds offered by my employer are higher than what I would consider acceptable in my private investing, but it is worth accepting those fees because my employer offers that wonderful 7% match.
To reconcile this, I look at the employer match and fees together and accept that I actually have about a realized 6% match after considering the less-than-optimal expense ratios. That is still a lot of free money, even if it brings that $27,440.62 down to about $23,520.53. The high match is worth accepting higher expense ratios than I would tolerate in personal accounts because the match is still free money.
However, taking into account management fees, this brings down the total money in my 401(k):
My contributions + Employer Contributions – Management fees = Total Contributions
$63,666.67 + $27,440.62 - $3,920.00 = $87,187.29
That means some magical power has to account for almost $13,000 to justify why my 401(k) is up to $100,000 in less than three years. That magical power is market growth and the beginnings of compound interest.
Market Growth and Compound Interest
The total stock market fluctuates. Sometimes it goes down for an entire year, or even a few years. Other times it goes up more rapidly than you can imagine. You can never predict what the market will do over a short period of time like a few months, a year, or even three years. But you can predict one thing: Historically, the market has consistently gone up over time when measured across decades.
Here is what the past three years of the S&P 500 looked like, while I contributed to my 401(k):
To summarize this graph as an investor experiencing it, it felt like the market fell off a cliff the second the calendar ticked over from 2021 to 2022, and it just kept falling throughout the year. Despite this year-long decline, the market growth from the end of 2022 to the present more than made up for the decline and rose to higher levels than the market experienced at the end of December 2021.
I contribute to my 401(k) each pay period. This means that each dollar I contributed in May 2021 has grown in value, even though they initially fell in value in 2022. Additionally, those dollars I contributed to my 401(k) in mid-2022 have grown significantly. All of this money has experienced compound interest: As it accumulated interest (through dividends and capital gain distributions) and reached new highs, the interest then experienced growth as well!
Then why not try to invest when the market is at a low? Predicting market lows is nearly impossible, but you can use a strategy known as dollar-cost averaging. Dollar-cost averaging just means investing consistently as you earn money over time. For 401(k)s this tactic is particularly important since employers may only offer your full match if you contribute consistently. Even if you could predict when the market hits a low, it is usually not worth forgoing a $10,000 annual employer match.
Even if you start investing in a 401(k) right before a decline in the market, it will go up eventually, and all the money you invested while the market was low will experience more growth than money invested when the market is high.
Taken as a whole, the three-year period during which I invested was neither an excessively bearish or bullish market. It was pretty typical, with slightly lower-than-average returns overall. Despite lower-than-average returns, compound interest worked its magic. It turned $87,187.29 into more than $100,000 to bring my 401(k) above the six-figure mark in just three years. Even low levels of compound interest result in surprising growth.
Position Yourself for Luck
I did everything right to make my 401(k) hit $100k in less than three years. I contributed the maximum, worked for a company with a good employer match, negotiated a higher salary to increase my match, and contributed consistently to maximize the probability of growth through dollar-cost averaging. Even if you follow all these steps, you will not always end up with a $100k 401(k) in less than three years. While the market will rise over your entire career, you have to be lucky to experience growth over a particular three-year period. The market fluctuates, and you cannot change whether you start investing at the beginning of a bear market.
But you definitely cannot hit $100k in your 401(k) without following the steps that I did. While not every three-year period will experience the level of growth that I did, more three-year periods do experience this growth than do not. Even if you are below $100k after three years, you will still likely be far above $200k by year six if you let compound interest work its magic over greater lengths of time.
To be clear, making educated financial decisions based on probability is not the same as gambling. I am confident enough in this that I am actually writing this article in advance before my 401(k) has hit $100k. My 401(k) got up to $99,779.96 before dropping a bit, but I have enough contributions coming in before this article is published, that I anticipate it crossing the threshold. (Edit: I can now confirm that the $100K mark was passed on May 3, 2024!)
My 401(k) may go back below $100k, and it may be $150k by the end of the year. We have no idea what the market will do this year. But it will end up growing over time thanks to compound interest. The market can only magically grow our wealth if we invest in it. Make yourself eligible for some luck by investing as much as possible, consistently over time.
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