Strategies of a 401(k) Millionaire

photo-1429637119272-20043840c013Recently I met with a client who had over $1 million in her 401(k) at work; let’s call her Joyce, for privacy reasons.

Joyce is not alone.

According to Fidelity Investments, the number of people with 401(k) balances exceeding $1 million nearly doubled in the past two years to 72,000. That’s just a small fraction of the 13 million people who have 401(k) balances with Fidelity, but it makes you wonder, “What’s it take to become a 401(k) millionaire?”

Joyce is a real-life 401(k) millionaire. Here’s how she did it.

Step 1. Joyce started saving early. Becoming a 401(k) millionaire is so difficult that fewer than 1% of all 401(k) savers have done it. Of those that have, nearly all started saving into their 401(k) as soon as it was available. When I have interviewed others who have large 401(k) balances, they all said the same thing “I started saving into my 401(k) with my first job and never stopped.”

Step 2. Joyce worked for a company that has a generous match. While a typical 401(k) match is something like 50 cents on the dollar up to 6% of salary, in Joyce’s case the match is better than that. She receives a 100% match on every dollar she contributes to her plan up to 10% of her salary! The company match can account for 25% – 50% of your account balance over time. However, a recent study by Vanguard Investments showed that among participants in their 401(k) plans, 34% failed to contribute enough to get the full company match. If you want to become anything close to a 401(k) millionaire, you can’t afford to miss the match.

Step 3. She saved aggressively. Implied above is the assumption that you are actually adding money to your 401(k) every paycheck. A generous employer match to your 401(k) contribution does little for you if you are not contributing to your plan. Those with the largest account balances also tend to be the ones who make the maximum annual contribution to their savings plans every year. Rules regarding individual plans can vary, but the IRS allows for a maximum contribution of $18,000 + another $6,000 if you are age 50 or older.

Step 4. She took risks – and they paid off. Stocks may not always beat bonds or other types of investments. In fact, during certain periods (2000 to 2010, for example), bonds clearly outperformed risker asset classes like stocks and stock mutual funds. The so-called “lost decade” was a huge disappointment for many 401(k) investors. Periods like this are the exception rather than the rule, but they do happen. More likely, stocks will out perform other investment options in your 401(k) plan especially if you have a very long time horizon like twenty years or more. I can’t guarantee that the stock funds in your plan will turn you into a 401(k) millionaire, but it will be very difficult without them.

Step 5. Being in the right place at the right time, never hurts. Joyce worked for a successful, publicly traded company whose stock rose considerably. During her career, her company stock rose from about $7 per share to just over $100. Yes, that’s a nice increase, but it’s not unheard of. Here in the Twin Cities there are several companies that have experienced gains like this. Most companies, including Joyce’s, will limit the amount of company stock you can own in your plan. (You can thank companies like Enron for that.) But if you work for the right company, a calculated risk that includes allocating a portion of your 401(k) balance to your company stock can be just the boost your plan needs to cross over the $1 million mark.

Step 6. She never borrowed from or liquidated her 401(k) to pay for other stuff. If you ask Joyce, she will tell you she spends all of her money. The truth is, she has been a diligent saver for many years. She may spend most or all of her take home pay, but what’s in the plan, stays in the plan. She has never made a distribution from her 401(k) for any reason, ever. That’s not always possible for everyone. Sometimes serious financial crises occur, but if you plan to become a 401(k) millionaire you will need to keep your 401(k) distributions to near zero.

Step 7. She stuck to her plan – no matter what. In 2008, Joyce’s 401(k) became a “201(k)” just like everyone else’s. But she never wavered in her plan contributions. Every paycheck, regardless of what happened in the stock market or the economy, Joyce added to her 401(k). Doing so, not only added to her plan balance, but it allowed her to pick up more shares of her favorite investment options when prices were at their lowest. It’s nearly impossible to effectively time the markets consistently, but by adding to your 401(k) consistently with each paycheck you are effectively buying more shares when prices are low and fewer shares when prices are high.

Accumulating $1 million or more in a 401(k) plan – or any plan, for that matter – is very difficult. According to the Fidelity study cited above, 99.4% of us are still working on it. This is how one person did it. Your road to becoming a 401(k) millionaire may be different. But if you max out your plan contributions consistently over your working lifetime, work for a company (or companies) with a generous match, and pair some risk with a little good fortune, it can happen.

Wondering when you will become a 401(k) millionaire? Find out with this nifty little calculator.

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
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