Investing in IRAs and 401(k) May Be the Best Way to Build Net Worth

Today, high net-worth individuals are defined as those who have at least $1 million dollars in investible or liquid assets. It’s a goal many people think they will never be able to attain. But it could be easier than you think.

Accumulating net worth involves earning a high salary and having multiple investment streams. But retirement investing also plays a major role, and it’s something we all have access to. According to statistics, 55% of the overall wealth of most high-net-worth individuals comes from their IRA and 401(k) plans.

Maxing Our Retirement Accounts Can Help

Maxing out your retirement plan is an effective strategy when it comes to building net worth. In 2022, the maximum amount you can contribute to a 401(k) plan is $20,500, although workers over 50 can add another $6500 a year to that number.

While meeting these numbers may not be realistic for everyone, it’s advisable to get as close as possible. Your earnings will automatically roll back into your account, gaining compound interest, so you earn money on your investment as well as your gains. As a bonus, the contributions are tax-deferred and lower your taxable income.

If you can’t afford to max out your 401(k), you should at least contribute enough to match your employer, or you are leaving free money on the table.

Traditional and Roth IRAs can also help you grow wealth. They allow you to contribute a total of $6000 between accounts in 2022. Investors over 50 can contribute an extra $1000 for a total of $7000.

IRAs are a great option for people with employers that don’t offer 401(k)s. Traditional IRAs are recommended as they will put you in a lower tax bracket when you retire. This is because taxes are delayed until you withdraw funds from your account later in retirement.

Roth IRAs are best for those that are currently in a low tax bracket. This is because they require you to pay taxes upfront. Later in retirement, your withdrawals will be tax-free.

How to Max Out Your Retirement Accounts

Maxing out your retirement accounts is a good way to increase net worth, but not everyone has the funds to do so. It can be especially tricky for people looking to raise the thousands of dollars needed to max out a 401(k).

While contributing $20,500 a month is not easy, here are some tips that can bring you closer to your goals.

● Check Your Budget: Check your budget to determine how much more you can contribute to your 401(k). If there’s any wiggle room, contact your plan administrator to request an increase in your contribution rate.

● Sign Up for Direct Deposit: Sign up to have your contributions automatically deducted from your account. That way, you won’t miss the money, and you won’t be tempted to spend it elsewhere. You must deduct $1708 a month to max out your account by 2022 standards.

● Put Bonuses Towards Your 401(k): If you get a bonus at work, you can put it towards your 401(k) as well. Since it’s money you didn’t expect to have, it’s not likely you will miss it.

● Set Specific Goals: You may not be able to contribute $1708 a month to your 401(k), but it’s a good idea to come up with a specific amount each month rather than contributing ‘as much as you can’. This will help you stick to your goals.

How Much Do I Need to Save?

The amount you need to save for retirement will vary from person to person. It depends on the living expenses in your region and how much you spend. You will also need to consider the uncomfortable subject of how long you are going to live.

Fortunately, there are many retirement and life expectancy calculators available online that you can use to determine your financials.

You may also consider the 80% rule. Some experts believe that most people will be able to live comfortably if they have access to 80% of their pre-retirement income. So, if you are making $100,000 a year, you should be able to live comfortably on $80,000 a year after retirement.

Final Thoughts

Growing net worth may not be as difficult as you think. Investing in retirement funds could be the key. How much can you set aside to boost your personal value?