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The Tip Jar: Millennials, this product is your best chance of being a millionaire

You'll never BELIEVE what it is.
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Firstly, an apology.

I completely clickbaited the headline in order to lure you in. I don't make a habit of it and I don't like it when it happens to me, but that headline was 100 percent, intentional clickbait.

But wait! There's a reason for it. Would you have clicked on the story if you knew I was talking about the 401(k)?

If you would, then kudos and you deserve my apology, but there's plenty of evidence out there that young people are not engaging with their retirement plans. Business Insider notes less than a third of under-25 workers participate in their employer's 401(k) plan.

I know, it's hard. Your budget is probably stretched as it is and I don't blame you for wanting to spend what little disposable income you have on enjoying your life.

But the argument for starting retirement saving early is clear, and I'm not joking that it's the best chance you have of becoming a millionaire.

Sure, you could start a successful business, or work your way into the upper echelons of executive management, or win the lottery. But the rich aren't called 1 percenters for nothing.

Using retirement saving as a platform to eventual wealth is a possibility open to far more Americans. Even if you don't reach the $1 million mark, not taking advantage of your employer's 401(k) plan means you're effectively giving away free money.

How the 401(k) works

The 401(k) is a pre-tax retirement savings account offered by most employers. You agree to pay a percentage of your salary into the account and this is deducted from your wages before it can be taxed by the government.

So if you earn $50,000 a year and agree to contribute 5 percent, you'll pay around $2,500 a year into your account.

But wait, there's more, because in most cases your employer will also pay into the account (that free money I was talking about). Zenefits notes that right now employers most commonly offer to match employee contributions up to 6 percent.

Using the same example, your employer would therefore also contribute $2,500 a year (5 percent of your salary). So you'd be saving 10 percent of your pre-tax salary for retirement at the cost of just 5 percent.

(Note: A 401(k) is totally different from an IRA. So if you've got one of those, check out this previous guide I wrote.)

How does it make you $1 million?

There are two secret ingredients: time and compound interest.

A 401(k) is something you would ideally be saving into for the entirety of your working career, so if you start in your early 20s you should have 40 years to build up the bulk of your retirement savings, increasing the amount you save as your salary (ideally) rises.

And then there's compound interest. The money you save into a 401(k) is invested, with your plan providing an array of investment options when you sign up.

The returns on the investments get proportionally bigger the more you save. Your investment gains roll over each year, and as you contribute more.

Philip Bergstrom, a certified public accountant with Steven Fosters Financial Advisers in Bloomington, told me it's "hard to understate" the benefits of compound interest. He gave the following example of how someone could make a million.

Say you start saving at 25 and save, on average, $400 a month for 40 years, which your employer tops up with an extra $300 a month – that's $700 a month total.

Assuming your investments grow at a rate of 5 percent a year, you would retire with $1.073 million in your 401(k).

Here's the kicker: After 40 years, the amount you and your employer had contributed to the account would be just $326,000. Compound interest, via the 5 percent investment growth, accounts for the remaining $747,000.

On the other hand, if you leave it till you're 35 years old to start saving into a 401(k), saving $700 a month with 5 percent investment growth would leave you with just $585,000 when you reach 65 – that's $488,000 less!

If you wanted to catch up to reach the million mark, Bergstrom says you'd need $1,300 a month going into your 401(k) instead of $700.

But does it really make me a millionaire?

If you're asking: when I retire can I withdraw it all and blow it all on a Ferrari? The answer is, "Probably, but you shouldn't."

You can start withdrawing from 401(k)s penalty free from the age of 59 1/2, but bear in mind, you're subject to tax in retirement. So withdrawing it all in one go will see you get hit with a higher tax bill.

On the other hand, keeping it invested and withdrawing what you need to enjoy your retirement should limit the amount you hand over to the IRS.

So no, you don't suddenly find yourself with a million dollars in disposable income that provides the instant gratification of a lottery win. It's a long, gradual process, you don't get to enjoy the fruits of it until you're 65, and even then you have to make it last through retirement.

It sounds depressing doesn't it? But bear in mind that you need this money to see out the final 20-30 years of your life in comfort, and it's hard to put a price on that.

On a positive note, by the time you retire you'll probably have paid off your mortgage and be relatively debt-free. So you can finally book that river cruise through Europe that – by the time you're 65 – you'll be desperate to go on.

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