1 Retirement Savings Hack That Has Created Many Millionaires, and Will Continue to Make More

There are millions of millionaires in America. According to the 2024 Global Wealth Report from UBS, "In 2023, the U.S. was home to the highest number of millionaires, nearly 22 million people. In percentage terms, the U.S. hosts 38% of the world's millionaires, Western Europe 28%, and China 10%."

If you're not among the many American millionaires and you're wondering how you might become one, keep reading -- because there's one powerful hack that might help get you there.

Image source: Getty Images.

Roads to riches

So how have people gotten wealthy? When my colleague Adam Levy reported on millionaires in America, he found that "By far the two biggest sources of wealth for most millionaires ... are investments, particularly in retirement accounts, and their primary residence."

He noted that the average millionaire recently had about $810,000 saved in retirement accounts. Here are the two main kinds of retirement accounts -- if you're not already making use of one or both, you might want to start:

IRAs

IRA accounts are tax-advantaged retirement accounts that let you invest in just about any stock or fund in an IRA held at a good brokerage. The maximum contribution amount for IRAs is $7,000 for 2024, plus a $1,000 "catch-up" contribution for those 50 or older. Note that if you have multiple IRAs, you can contribute a total of $7,000 (or $8,000 if you're 50 or older) to them.

So that might be $7,000 plunked in one, or, say, $3,500 into each of two IRAs, or some other arrangement. For 2025, IRA contribution limits remain unchanged. These might not seem like huge sums, but you can definitely become a millionaire with just an IRA.

401(k)s

401(k) accounts are offered by many employers these days. (Know that 403(b) and 457 accounts are quite similar.) For 2024, the contribution limit is $23,000, plus an additional $7,500 "catch-up" contribution for those 50 or older -- bringing that total to a hefty $30,500. For 2025, 401(k) contribution limits rise to $23,500, with the catch-up contribution remaining $7,500.

Unlike IRAs, a 401(k) typically offers a limited menu of investments. As long as there's a low-fee broad-market index fund in there, though, such as one tracking the S&P 500, you can do perfectly well. Also, know that many employers offer matching contributions, adding to employee contributions. A common formula is to match 50% of contributions, up to 6% of your salary. So if you earn $100,000 and contribute $6,000, your employer will chip in another $3,000 -- of free money.

Traditional vs. Roth

Both 401(k)s and IRAs come in traditional and Roth varieties, and it's important to understand the difference. With a traditional account, if you contribute, say, $7,000 to it in one year, your taxable income is reduced by that sum -- shrinking your tax bill. With a Roth account, your contributions don't reduce your tax bill for the year of contribution, but if you follow the rules, you can later withdraw funds from the account tax-free.

Now let's look at just how these accounts -- or even your regular, taxable brokerage account -- can make you a millionaire.

Powerful math that can make you rich: Compounding

The secret, the big hack, that makes many millionaires is simply this: investing meaningful sums for many years and then letting compounding work its magic.

Compounding is a glorious thing. Here it is, in a simple example: Imagine that you invest $10,000 and you earn 10% in the first year. So you gain $1,000 and end up with $11,000. The next year, you earn 10% again, adding $1,100 and ending up with $12,100. Another year and another 10% -- you gain $1,210 and end up with $13,310.

Do you see how your money is not only growing, but growing by more each year? That's compounding at work. Since the overall stock market has averaged annual gains of close to 10% over long periods, let's be a little conservative and model growth at 8% -- because your portfolio might average less -- or more -- than 10% over your particular investing period. Here's how your money might grow:

Data source: Calculations by author.

Clearly, becoming a millionaire is very possible -- as long as you are investing meaningful sums regularly and as long as you have some time ahead of you. You can perform better than the numbers in the table above if you can regularly sock away more than $15,000. Note, too, that your earliest invested dollars are your most powerful ones, as they have the most time to grow.

Investing effectively

It's easy to just assume growth of 8% or 10%, but how might you aim for that? Well, one of the best ways is via low-fee index funds. An index fund invests in pretty much the same securities as the index it tracks -- such as the S&P 500 -- so it delivers close to the same returns. Here are some solid S&P 500 index funds to consider:

• Vanguard S&P 500 ETF (VOO -1.04%)
• iShares Core S&P 500 ETF (IVV -1.08%)
• SPDR S&P 500 ETF (SPY -1.05%)

So go ahead and aim for millionaire status. Using the power of compounding, you very well might attain it and perhaps even become a multimillionaire -- and even if you fall a bit short, you'll have improved your future financial security.