Articles have been surfacing regarding the number of 401k millionaires has hit an all time high this year. What they don’t tell us is the percentage amount of these million-dollar accounts. Fidelity, one of the largest 401k providers in the US, publishes a retirement data report each quarter. In the latest report, Fidelity holds 16.1 million defined contribution accounts (401k). Out of this number, 168,000 have one million dollars or more. This makes up just about 1% of 401k accounts. This shows how difficult it is to save for retirement in just a 401k. You must use other avenues to create wealth and it all starts with a proactive financial plan that evolves as you do
According to CNN in July 2015, Donald Trump had a 1% chance of winning the GOP nomination, so percentages can be misleading. I am not saying there is barely a chance of becoming a 401k millionaire, but to focus on ways to maximize your retirement. One million dollars in a 401k isn’t the ‘be-all end-all’ to retire. Retirement is more about not having to rely on a steady paycheck and being able to live your own lifestyle. Without saving, you can’t reach any goal, whether that’s a million-dollar, a once in a lifetime vacation, or a college fund.
Why is there such a low percentage of 401k accounts have a million dollars? What does it take to save one million? Will you ever be able to contribute enough to have one million in a 401k? I don’t like using big round numbers as a point of significance, such as one million, but you must draw the line somewhere to put things into perspective and build a plan around. When accumulating funds for retirement, it’s always best to look at the things you can and can’t control. Understanding these two simple concepts, will help you when planning/investing and allow you to paint realistic expectations. Remember, you can’t control the stock market, but you can control your asset allocation, contributions, savings, tax strategies, etc. As pension plans continue to decrease, employees have the responsibly to create their own retirement savings.
So, what are some ways we can enhance our potential to save for retirement?
TIME IS YOUR FRIEND
According to Fidelity, most of the 401k accounts with over a million have been saving for about 30 years. They didn’t necessarily get to a million with max contributions, thought that helps. Rather they invested with a purpose for the long term, which is what retirement is.
FIND OTHER OPTIONS BEFORE TAKING A 401K LOAN
My philosophy on 401k loans has always been the behavioral aspect of once you do it, it’s easy to do again, and suddenly you have derailed your retirement plan without even realizing it. In the latest reading from Fidelity, 20.5% of 401k participants have a loan outstanding. You are not only having to pay yourself back, but you also are losing out on future returns from the borrowed funds. The below graphic from Fidelity shows the impact of a loan on a retirement account.
HAVE REALISTIC EXPECTATIONS
34% of millennial’s believe that becoming a millionaire at some point in their lifetime is possible. While I think that’s a great goal to have, you can’t get there without having a realistic plan. Only about 5% of Americans are millionaires (including estates, business, assets, etc.). On the flip side, if you can ignore statistics like this and create your own financial opportunity, have realistic expectations, save, and be disciplined, anyone can discover financial freedom. Whether that’s becoming a millionaire or just not being dependent on a paycheck.
DESIGN A PLAN AROUND YOUR OWN LIFESTYLE
Retirement is a long-term goal, it takes discipline, careful planning, and monitoring. If it were easy, then 99% of accounts would have a million dollars. Saving for retirement in a 401k goes beyond just stashing as much money into it as you can. You must create a financial plan that also includes your short-term goals. If you don’t address short term goals and challenges, then your 401k can be susceptible to lack of funding or bad financial habits when you need money.
If you are having trouble saving or need advice on how to maximize your retirement, it’s not too late. Talk to us about your financial plan and become financially independent.