Today on the show, Brian and Bo are discussing an article from Fidelity on the 5 habits of 401(k) millionaires. It’s an important topic to talk about, as the responsibility of securing a financially stable retirement is largely in the hands of employees these days. Knowing what habits can help you save is crucial.
Many people don’t think it’s possible to become a millionaire, especially when you’re making less than $150,000. Brian and Bo go through each habit and state how it is possible to achieve millionaire status if you follow these 5 guidelines.
The Parameters of Fidelity’s Study
The average age of the millionaire in Fidelity’s sample pool was 59. They had been working for over 30 years, and they had earned less than $150,000. Fidelity looked at their accounts from 2000-2012.
1. Save Early On
We all know the importance of compound interest. It can’t be stated enough. If you contribute to your 401(k) steadily for 30-40 years, you’ll amass a nice nest egg to retire on.
The counterpoint? Most people aren’t staying at the same company for 30 to 40 years. But while it’s unlikely most people will stay with a company that long, as long as you have a steady, lengthy career and always make it a point to contribute, you can get there.
2. Contribute a Minimum of 10-15%
Fidelity found that the average employer contribution was 5%, and that millionaires deferred 14% of their salary on average ($13,300 annually). The employee contribution + the deferred salary = an annual 19% savings rate.
The counterpoint argued a 19% savings rate is completely unrealistic for most people. That may be true if you struggle to identify your financial needs and separate them from luxuries and wants. Saving 20% — or even more — of your salary is necessary if you want to have enough saved up to retire on.
3. Meet Your Employer Match
This is common advice and for good reason. Any time you’re not contributing up to the amount your employer will match, you’re leaving free money on the table.
Fidelity found that of the millionaires they studied, 96% were in a plan that offered an employer contribution, but not all employees opted in. If you want to reach millionaire status, rethink that: 28% of contributions in the average millionaire’s account came from an employer.
And again, the argument against this point: people can’t control if their employer offers a 401(k) match. While true, it’s something you need to take into consideration when figuring out whether or not you want to work for a certain company. Your retirement benefits are part of the total compensation package.
4. Consider Mutual Funds that Invest in Stocks
The average 401(k) millionaire had 75% of their assets invested in company stock and mutual funds. They were able to get a 4.8% annualized return.
The counterpoint said the 4.8% return required these millionaires to have outperformed the stock market by a factor of 3, given there were two market crashes during the 2000-2012 period. Brian and Bo disagree, and offer a sample portfolio that could achieve the same results.
5. Don’t Cash Out When Changing Jobs
Fidelity admits the average employee tenure of their millionaires was 34 years, so they didn’t encounter the issue of people cashing out retirement plans when they experienced a job change. If you do change jobs, it’s important to figure out alternative solutions for your funds.
It’s also common advice to not borrow from your 401(k) at all, to which the counterpoint was — it’s not that easy. Some people need the money.
(And this is why it’s critical to develop an emergency fund during good financial times, so you can rely on that first when things get tough.)
As you can tell, becoming a 401(k) millionaire is easy in theory, but many people aren’t willing to commit to the work it takes to build such wealth. What will your path look like? Will you commit to what is necessary to reach millionaire status?
