401(k) Millionaire?

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When you hear the term “millionaire” do you think, “That must be nice!” Well, if you own a home and have a 401(k), you might not be that far off. In fact, a recent study revealed that the number of 401(k) millionaires in the US has soared, jumping 20% in Q4 2023. Some of this may be the result of the stock market’s recent push into record setting territory. However, good fortune is often a result of more than just good luck.

Financially successful people often have good money habits. Common traits of those who have $1 million or more in their 401(k) retirement savings is that these savers are contributing regularly and annually, at a minimum to maximize their employer matching. Employer matching is when the employer contributes a dollar-for-dollar match of the employee’s contributions up to a threshold (typically 3-6% of their salary). A recent study noted that at the end of 2023, 78% of $1m 401(k) holders at a major bank were contributing at a rate high enough to fully take advantage of employer matching offered by their company.[i] Contributing regularly and early in your working career, creates compound growth which can be a powerful tool to earn returns on both your original investment principal, and on the earnings, making your money grow faster the longer it is invested.

Secondly, often these savers increase their contributions annually by a substantial amount. In 2024, the maximum you can contribute to a 401(k), 403(b), and most 457 plans, including the government’s Thrift Savings Plan is $23,000. Additionally, those age 50 and older are allowed to contribute additional money to their employer sponsored plan in a catch-up contribution, which has a limit of $7,000 for 2024.[ii] This brings an employee’s potential savings up to $30,000 for 2024, and that’s before the employer match! A Fidelity study showed that $1m 401(k) holders saved, on average, 17.5% of their pay, and employers contributed an additional 9% to their retirement accounts, totaling a 26.5% savings rate.

Third, often savers kept a long-term investment perspective. In the study noted, 401(k) millionaires saved for an average of 26 years and had an average age of 59. These disciplined investors saved for the long-haul and didn’t get caught up in the highs or lows of the market, because the market is cyclical and both peaks and valleys are temporary and present unique investment opportunities. Investing a consistent amount year over year allows an investor to employ dollar cost averaging. This strategy creates efficiency because when the market is at a high, your fixed dollar contribution buys less of the expensive shares. When the market dips and stocks are priced lower, your fixed dollar contribution takes advantage of this opportunity, buying more shares when stocks are priced at a bargain. This investment strategy creates efficiency, reduces the impact of volatility, and eliminates investor stress.

In investing, time is a powerful tool to have in your favor. The longer you invest, the more flexibility you have to ride out the temporary drops in the market. In the study of 401(k) millionaires, half of the study participants were Baby Boomers, and the other half were Gen X-ers.  Millennials accounted for just 0.8% of the millionaires club.[iii] That being said, Millennials still have time on their side. They have the opportunity to make many more years of contributions now, to impact their future retirement savings.

Finally, successful investors tend to stay the course, taking a long-term view of investing. Often, investing for the long-haul means positioning your investment for the best chances of growth through various uncontrollable and sometimes unforeseen events. In our current year alone, we are on the verge of a political election that could lead to policy, tax, or economic changes. We are also in a high geopolitical tension environment, with Russia still pursuing Ukraine, Israel and Hamas fighting continued, and supply chain disruption in the Red Sea, just to name a few. If an investor were to put all their eggs in one basket, any one of these current events could lead to a dramatic change in the market that could create volatility for an investor who is overly concentrated in a few stocks, or just one asset class. 

A Nobel Prize winning philosophy called Modern Portfolio Theory outlines a method of selecting investments to maximize overall returns within an acceptable level of risk. Economist Harry Markowitz published this idea first in 1952, and it has been employed successfully since for investors of all sizes; not just the millionaires. A key component of Modern Portfolio Theory is diversification. Diversification in investing is the practice of spreading your investments among different inversely correlated asset classes at different exposures to target the right risk and return outcome, custom to each individual investor.

A key component to employing this strategy successfully is understanding the investor’s risk tolerance, so they can stay invested in the strategy for a moderate length of time to see the plan work. A portfolio that is too risky might spook the investor off course.  A portfolio that is too risk adverse may not meet the inventor’s expectations, also causing the saver to also change course. A Certified Financial Planner™ can guide an investor to also pick quality investments that give broad exposure at a reasonable price, and separate out lower profitability companies from the spectrum of investments. If you think your financial planning strategy could use a review, reach out to your financial advisor now.  It’s not too late to get yourself on track to be the next 401(k) millionaire.  


[i] https://finance.yahoo.com/news/soaring-number-of-americans-are-now-401k-millionaires-100001736.html
[ii] https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000
[iii] https://www.cnbc.com/2024/02/27/401k-millionaires-and-average-balances-rose-in-2023-fidelity-says.html

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