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2017 was an epic year when it came to people achieving financial success. Everyone around me seemed to either be reaching FIRE or about to reach FIRE in the next year or two. This isn’t that surprising when you consider that the stock market rose over 20% in 2017. In fact, now 1 of out 20 Americans are millionaires.
I recently had a conversation with a friend. He shared that he would retire with over $1 million in his 401(k).
I was shocked to hear this. While it’s fairly common to hear of people becoming millionaires in the DC area, I was not expecting him to tell me that his 401(k) would have over $1 million in it.
Of course, I realize that a million dollars isn’t what it use to be. However, when you consider that 44% of the U.S. population does not have $400 saved up for an emergency, reaching $1 million is still quite the feat.
TSP Millionaires
In fact, it’s pretty rare in the federal government. As of August 2017, there were only 16,475 Thrift Savings Plan (TSP) millionaires (out of 5.1 million TSP participants). Yes, that is a very tiny percentage— 0.3% to be exact. And this was a big jump from 2015, when there were only 2,675 TSP millionaires. Clearly, the number of TSP millionaires is a small subset of the 5.1 million TSP participants.
After that conversation, I was curious to see when the typical 401(k) millionaire reaches that milestone. According to a Fidelity Investment report, which reviewed over 15 million Americans who have accounts with them, they reported 133,000 401(k) millionaires.
On average, women achieve the status of 401(k) millionaire at the age of 58.5. Meanwhile, the average man achieves this status at 59.3. Interestingly enough, over the last 12 years, the number of women that have amassed $1 million or more in their 401(k) account has more than doubled. Nearly 20% of 401(k) millionaires are women, up from just 10% in 2005.
What does it take to become a 401(k) millionaire?
Fidelity found that those who opened 401(k) accounts in their 20s typically took 30 years of working and saving in order to hit the $1 million milestone.
The typical 401(k) millionaire saved over 20% of their income and invested nearly 80% of that in stocks, with women holding 76% and men holding 77% in the stock market.
Whoever said that women are too conservative when it comes to investments should take a look at some of the figures above.
On top of that, the average income for a 401(k) millionaire was $287,700 for women and $354,600 for men.
Making Less than $150,000
What if you don’t make anything close to those figures? You may assume that you’ll never become a 401(k) millionaire. In the words of Lee Corso, “Not so fast my friend.”
Fidelity found that even if you earn less than $150,000, consistent saving and investing in the stock market were the keys to reaching 401(k) millionaire status.
For earners making less than $150,000, women earned $117,000 on average and men made $118,800 on average. Women, on average, saved a little over 18% of their income, with an employer match of nearly 7%. In contrast, men who earned less than $150,000 had an annual savings rate of nearly 23%, when combined with the employer match. For both men and women, it took nearly 30 years to become 401(k) millionaires.
How can you become a 401(k) millionaire?
If you’re young, take advantage of time on your side. Compound interest is very, very helpful. According to Fidelity, Millennial investors (20s – mid 30s), on average, are saving 10.2% in their 401(k), including their employer match. Meanwhile, Gen Xers (late 30s – early 50s) save, on average, 11.7%.
While these are healthy contributions, they pale in comparison to the amounts that the average 401(k) millionaire saves.
Do you need a large salary to become a 401(k) millionaire?
Take a look at this response from the Washington Post:
“Linda has close to $1.5 million and makes less than $60,000 a year. She’s been at her job for 42 years…”I began with 5 percent, and as I was there longer, every year I got a raise, and I would take 1 percent of the raise and put it in retirement. Since the rest of the increase went into my pocket, I never missed it.”
As you can see, compound interest is a powerful tool. Since 1966, the S&P 500 has averaged an annual return of 11%. However, even if the S&P 500 doesn’t return that same amount over the next 50 years, you can rest assured knowing that you should have a healthy return if you invest diligently.
While becoming a 401(k) millionaire is a great goal, the bigger goal should be determining your Retirement Number. It doesn’t matter if you have saved up $1 million for retirement if you plan to spend more than that.
If you haven’t gone through my Reaching FIRE course, I’d encourage you to take a look and start this New Year off right.
Slow and steady wins the race. Many people fail to realize that investing consistently over time – even if it doesn’t feel like a lot of money each month – can grow into a huge retirement account balance over 20, 30, 40 years. People often forget too that the growth doesn’t stop at retirement… it’s not uncommon for retirement to last at least 20 years, so in reality they might be looking at a 50 year + investing timeline.
Brad – MaximizeYourMoney.com recently posted…How To Pay Off Your Student Loans Faster
I’m right there with you Brad!!! Little by little things add up over time. I’m amazed to see how much my portfolio has grown over the years. Especially when I consider how little it appears at times.
Not really surprised at the age due to the limited annual contributions to 401ks and limited average savings rates. I’d have to run the numbers. Let’s say fresh out of college someone max’s their contribution to the government limit every year and earns a 7% annual return. Doing that would get you a million in “X” years. That then is the gold standard benchmark for speed to a million. Everyone else could be bench marked off of that. Tom
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Great point Tom!!! I didn’t think about that but you are absolutely right!!!
Being a millionaire is one thing, being a 401(k) millionaire is another. I am a bit surprised that the number of millionaires out there (1 in 5). On the other hand, 44% can’t even take out a $400 in emergency means more than 2 in 5 are in pretty bad financial shape.
Personally, I want to have lots of savings, but I don’t want to have a million bucks in my retirement savings. I think it’s a little too inflexible to have that much money locked up. I would prefer to have the flexibility to diversify my investments in different assets and accounts.
Leo T. Ly @ isaved5k.com recently posted…Comparing The Greater Toronto Area Real Estate Prices With Other North American Metropolises
I definitely agree with this too. Being a millionaire and a 401(k) millionaire is not the same thing (but don’t get me wrong, both are great accomplishments!) due to the restrictive nature of the 401(1k).
Lately, I have been contributing less and less to my 401(k) because I prefer flexibility with my money.
I can’t really touch the money in my 401(k) until I’m old. And I already have enough allocation of my net worth in stocks, so I need to diversify to other areas (thinking physical real estate).
Best,
Andrew
Thanks for sharing Andrew!!! The main reason I like to max out my 401k is the tax write off ability 🙂 Otherwise I’d contribute to the match and then use my brokerage for the rest 🙂
Thanks for sharing Leo!!! I’m right there with you. I think it’s great to be a 401k millionaire but it does seem like it’s tied up so you can’t do as much as you’d like at times…
Hubby and I just started maxing out our 401(k) late last year. If we keep that up, I will be a 401k millionaire at 55, and hubby at 60. That’s pretty close to the age you mentioned in the post! 😀
Thanks for sharing Ms. FAF!!! That’s amazing that both of you are contributing to the max!!! Congrats and both of you being 401k millionaires would be amazing 🙂
Above a certain amount, your income doesn’t really affect a 401k…at least the pre-tax contribution since those are capped. That means the CEO & the mid-level management employee could be contributing the same amount on a dollar basis.
The most viable & enviable retirement perk I see company officers getting is deferred compensation. They can designate a portion of their income to be deferred until retirement. How great would that be for the rank & file FIRE adherents? I wish companies offered deferred compensation to all employees. Most employees would not take up the offer but for a person considering early retirement, s/he could essentially build up a synthetic annuity using deferred compensation. At the same time, s/he could reduce their taxes by the selecting deferral amounts to get within a tax bracket.
Thanks for sharing Dan!!! That’s a great point and I’d love to set up my own deferred compensation. I definitely agree most people wouldn’t take advantage but it’d be nice for everyone to receive the same benefit options 🙂
I think your salary IS an important component of becoming a millionaire. However, your spending is also an important factor. Salary and spending/savings in tandem determines your probability of success. Earning a high salary means nothing if you are spending all of it on junk. The larger the gap between your earnings and your spending, the better.
You are absolutely right Miss Sara Bee!!! Research has shown that the percentage you save is often times more important than the amount that you make 🙂
A large income isn’t required to reach that level, but boy does it help. I have been sloppy with budgeting, investing, and spending. Nothing has been optimal. But because my income was so high, I could make tons of mistakes and still reach a “two-comma” portfolio.
Thanks for sharing WealthyDoc!!! That’s great to hear that you were able to reach a two comma portfolio even with the mistakes. There are too many that can’t even do that 🙂
I don’t have a 401(k). Reaching a million dollars is cool. However, I don’t think it is going to be sufficient. I did some calculations with my own expenses. 2.4 million seems to be my sweet spot. Irrespective of how much I save I will find it difficult to reach this number. I really need to increase my income.
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That’s awesome to hear that you know what you need. Too many people stick their head in the ground and refuse to figure out what they need and HOPE it all works out 🙂
Love the pre-tax advantage of 401(k)s. It would be much harder for me to invest 18K after tax, but saving taxes + preparing for the future is hard to turn down!
Chris @ Duke of Dollars recently posted…My Insurance Almost Cost Me $3,500 – A teeth grinding story…
I”m right there with you Chris!!! Having to use post tax dollars for the $18k would be incredibly hard but it’s much easier with the pre-tax option 🙂
I’m always a little bummed we only have 220k in our retirement despite hubby being 30. It’s because he didn’t contribute to it in his 20s. He only started after he met me and I told him he was a complete idiot. He was definitely making more than $150k. He just didn’t put the savings into a 401k for some odd, dumb reason. If he did, we should have at least $400k in there. He still apologizes to me sometimes but I haven’t forgiven him :p
Hahhaa…that’s crazy that he didn’t do any savings and you all are already up to $220k. Sounds like you all will have no problem reaching the two comma mark in no time at all.
The best time to max out and get ahead of your 401k is, ironically, in your 20s. I wish I fully understood the value of compound interest and time those days. But better late than never. 🙂
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I was fortunate that I always contributed to my 401k. Although looking back I wish I had contributed more 🙂
Great article. I recently discovered the concept of FIRE and understand the HUGE relationship between savings rate and early retirement. I try maxing out my retirement plan at work but I’m no where near a million dollars. I wish I started earlier but better late than never. I like this article because it’s a reminder that you don’t have to be making a large salary to be able to achieve financial independence.
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Thanks for stopping by Dividend Portfolio!!! Like you FIRE was a new concept just a couple of years ago but now I am on board. It has been a huge difference maker 🙂
Im 34, been contributing in tsp since 23. I started with 50 dollars a paycheck. As my pay get increases, I up my contribution by one percent. Now im at 16 peecent, and have a balance of 117k i. My tsp. One thing i regret is that for the last 11 years i left my money in the G fund. As of Jan 2018, i allocated all my money to the L2040 funds. Hope to reach 1million by the age of 57…
Congarats Zane!!! $117k is amazing and I’m sure you will reach $1m by the age of 57 if you continue investing at that rate and more importantly out of the G fund 🙂