Less than 1% of 401(k) participants lands in the elite $1,000,000 club at Fidelity, home of many corporate 401(k) plans. Personal finance columnist Michelle Singletary of the Washington Post calls these $1,000,000+ savers the “Navy SEALs” of retirement saving. They can show the rest of us how to do it the right way.
The number of 401(k) millionaires actually dropped at the end of 2018 as a result of the December market swoon, says Fidelity, who now reports the number is bouncing back due to positive stock market performance in 2019 and employees’ retirement contributions.
So what’s the secret to becoming a 401(k) millionaire, and what lessons can you use to maximize growth in your own retirement accounts? Here’s some pointers from Michelle and from our own client archive.
Start early. If you start working in your twenties, you may spend three or even four decades at work. By starting to contribute as soon as possible, maintaining those contributions consistently from job-to-job and year-to-year, and not taking premature withdrawals when you exit a job, you’ll be on track to crack the $1,000,000 ceiling. The secret is compounding over a long period of time.
Contribute the max. To meet your goals, you need to contribute at least 10% of pre-tax income each year. Aiming for 15% is even better, as financial planning pros like us worry about lower investment returns and great spending needs (longevity at play!) going forward. If we can’t contribute at that level, start with what you can and amp it up by 1% each year. The 2019 contribution limit is $19,000, or $25,000 if you’re age 50 or over by year end.
Capture that match. It’s free money after all. Make sure you contribute at least enough to claim your company’s full employer match (the national average, per Fidelity, is now 4.7% of salary). If you can afford to contribute more, do so. Far too often, we see employees with the means to max their contributions, but who stop contributing once the employer match taps out. Don’t make that mistake. It’s hard to generate the monthly income you need once you’re retired. Contributing only 5% or so to your 40(k), if you can afford to do more, will not get you where you need to be.
Invest well. Recognize that a 401(k) account is, by definition, a long-term commitment to your future. So make sure that the investments you pick can hold up for the long haul. What does that mean? A hefty dose of stocks, with some bonds thrown in to dampen risk. Your 401(k) custodian or financial advisor may have tools to help you find the right allocation, or pick a target-date fund to do the investing for you.
Stick it out. Market up? Market down? Doesn’t matter. Stick with your allocation, and rebalance periodically. Bailing when the market drops is a good way to permanently cut your account balance in half. If you are a nervous investor, adopt a more conservative asset allocation that will avoid the extreme rollercoaster fluctuations. But whatever allocation you adopt, stay the course once you’re on the train.