Some secrets are or have been very closely held, such as President Franklin Roosevelt's need for a wheelchair later in life or the recipe for your grandmother's spaghetti sauce. Other secrets can be easily discovered with just a little digging.
For example, if you're wondering how people who have amassed a million dollars or more in their 401(k) accounts did so, you can find out. One good resource is Fidelity, which is a major administrator of 401(k) accounts for lots of companies. It thus has a lot of information on 401(k) accounts. Better still, it has offered a list of habits of 401(k) millionaires.
Image source: Getty Images.
Fidelity's findings
In late February, Fidelity reported that its number of administered 401(k) accounts worth $1 million or more surged by a whopping 41% year over year in the fourth quarter of 2023. The new total number of such accounts was 422,000. That suggests it's not that rare or impossible an achievement.
Fidelity's vice president for workplace thought leadership, Mike Shamrell, offered a clue as to how those millionaires became millionaires -- and it didn't involve penny stocks, using margin, day-trading, dabbling in commodities, or other ultra-risky behaviors: "[Those millionaires are] a great example of people who have really stuck with it and taken a long-term approach to their retirement savings."
Timeless, sage advice from 2014
Back in 2014, the folks at Fidelity released a list of five "lessons learned from our millionaires," which they also referred to as "five habits of 401(k) millionaires" -- essentially revealing five secrets of how to become a 401(k) millionaire. Here are the five:
- Start saving early.
- Contribute at least 10% to 15% to your 401(k).
- Max out any employer matching funds.
- Focus primarily on stocks.
- Don't cash out your account when you change jobs.
Let's take a closer look at three of them.
Start saving early
This is a critical imperative for any of us who wants to amass a hefty war chest for retirement. If your 20s, 30s, or even 40s are behind you, it might seem too late to start saving early. Still, if you start saving aggressively at almost any age and invest effectively, you should be able to improve your financial condition.
Check out the table below, showing what can be amassed over time if you regularly invest significant sums and earn an average annual return of 8%:
|
Growing at 8% for |
$7,500 invested annually |
$15,000 invested annually |
|---|---|---|
|
5 years |
$47,519 |
$95,039 |
|
10 years |
$117,341 |
$234,682 |
|
15 years |
$219,932 |
$439,864 |
|
20 years |
$370,672 |
$741,344 |
|
25 years |
$592,158 |
$1,184,316 |
|
30 years |
$917,594 |
$1,835,188 |
|
35 years |
$1,395,766 |
$2,791,532 |
|
40 years |
$2,098,358 |
$4,196,716 |
The table shows how those who start early and have, say, 35 or 40 years in which their money can grow, can become multimillionaires -- even when they regularly contribute much less than those who start later. And those with just a decade to retire might still amass several hundred thousand dollars.
401(k) accounts can help you amass a lot in part because they sport very generous contribution limits. In 2024, that limit is $23,000, plus an additional $7,500 "catch-up" contribution for those 50 or older, for a potential limit of $30,500. (The IRA contribution limit, meanwhile, is just $7,000 for 2024, plus a $1,000 catch-up contribution.)
Max out any employer-matching funds
Another great feature of 401(k) accounts is that many employers will contribute matching funds into your account. Per Fidelity, more than 85% of the plans it administers offer matching funds, with the most common formula being "a dollar-for-dollar match on the first 3% and then 50 cents on the dollar on the next 2%." So if you earn, say, $100,000, and contribute 10% of your income, or $10,000, to your 401(k), your employer would match the first $3,000 and then chip in 50% of the next $2,000 you contributed, for a total employer contribution of $4,000. It's not a fortune, but over many years, these matching funds can add up significantly.
If your company offers matching funds, aim to contribute at least enough to grab all available matching dollars -- because that's free money.
Focus primarily on stocks
Of course, it's not enough to just plow lots of money into your 401(k) account. You also need to invest that money effectively. It's hard to beat the stock market for long-term wealth building -- as is made clear by the research of Wharton Business School professor Jeremy Siegel. Check out the table, featuring returns of various asset classes between 1802 and 2021 -- some 291 years!
|
Asset Class |
Annualized Nominal Return |
|---|---|
|
Stocks |
8.4% |
|
Bonds |
5% |
|
Bills |
4% |
|
Gold |
2.1% |
|
U.S. Dollar |
1.4% |
Source: Stocks for the Long Run, Jeremy Siegel.
The table makes the point clear -- stocks outperform bonds over most long periods -- and it's true over somewhat shorter periods, too: For instance, Siegel found that over the 75 years between 1946 and 2021, stocks grew at an average annual rate of 11.3% vs. 5.8% for long-term government bonds. (Note that these numbers are not inflation-adjusted. Know that inflation will shrink your purchasing power over long stretches -- so you might want to look into inflation-resistant investments, or just to amass more than you think you'll need for retirement.)
A good way to invest in stocks via a 401(k) account is through a broad-market index fund, such as one that tracks the S&P 500. Such an index fund can be all you need to amass a fat nest egg -- the table up top shows how.
So go ahead and aim for a million dollars or more in your 401(k). And note, too, that other kinds of retirement savings accounts can serve you very well -- and in some respects, a 401(k) account isn't even the best one. It can get you to a million dollars, though, so read up on 401(k)s and IRAs and investing in general, and don't put off saving and investing for your future.
