Becoming a 401(k) Millionaire Is Not As Hard As You Think

By David J. Kupstas, FSA, EA, MSPA

David J. Kupstas, FSA, EA, MSPA

David J. Kupstas, FSA, EA, MSPA Chief Actuary

Fidelity Investments reported that about 72,000 workers had amassed $1 million or more in their 401(k) retirement plans with Fidelity at the end of 2014.  While higher-paid workers should have little problem accumulating a million dollars over a 30- or 40-year career, those who don’t earn as much may hear that big number and decide there’s no way they’ll ever reach one million dollars.  Can they do it?  Is there hope for the average worker?

As Fidelity points out, saving regularly and early is the key.  Consistent savings of 10 to 15 percent of pay seems to be a common theme among its 401(k) millionaires.

We determined that someone starting out at age 25 with a $25,000 salary receiving 3.00% annual pay increases, earning a consistent 8.50% return on investments, and socking away 10% of pay each month will have – get ready – $1,086,858 at age 65.  This is very attainable, particularly since the employee rarely has to come up with the whole 10% of pay himself.  Usually, the employer will provide a match or some other type of contribution.

Of course, there is no guarantee 8.50% investment returns will be available over a 40-year period or that everyone will be able to attain 3.00% annual pay increases.  Some will do worse, some will do better.  We are also aware that the purchasing power of $1 million will not be near what it is today.  Already, it is billionaires who are thought of as wealthy rather than millionaires.  Regardless, a million dollars will still be nothing to sneeze at.  We know many retirees who would be thrilled today to have half a million or even a quarter of a million dollars at their disposal.

There are many ways to become a millionaire.  For most workers, the best way will be to join the company 401(k) plan, save early, save regularly, and let the magic of compound interest take care of the rest.

— Topics: 401(k), Retirement