You don’t have to be making a million to save a million. If you have a 401(k) or other workplace retirement savings plan, you may be able to save a million—even if you make less than $150,000. How? We looked at more than 1,000 people who have more than $1 million in their Fidelity-managed 401(k)s—and earned less than $150,000—to see what worked for them.
First, meet our 401(k) millionaires: Their average age was 59, and they had worked at their company for more than 30 years. They earned less than $150,000 a year. We analyzed 12 years of their account history, from 2000 to 2012, to see what they did.1
An important note: Not everyone needs a $1 million balance in their 401(k) when they retire, and some people may even need more to help meet their retirement income needs. As always, it is critical to develop a personalized retirement savings and spending plan based on your circumstances and risk tolerance.
Whether saving a million dollars in your 401(k) is the right goal for you, there is still something to learn from those 401(k) investors who crossed the seven-figure threshold. Here are some lessons learned from our millionaires.
1. Start saving early
Beyond the obvious fact that the longer you save, the more you’ll potentially accumulate, contributing steadily over 30 to 40 years is especially beneficial in a tax-advantaged workplace retirement savings plan. This is because your money has an opportunity to grow more through the favorable tax treatment. You pay taxes on distributions from your 401(k)—which includes taxes on any earnings from your contributions—in retirement. In a Roth 401(k), while contributions are taxed when you make them, all distributions are tax free in retirement.2
2. Contribute a minimum of 10% to 15%
Contributing 10% to 15% might sound like a lot, but that amount is meant to include contributions from your employer—such as your company match or profit sharing. For our 401(k) millionaires, the average company contribution was about 5%. On top of that, during the 12-year period we studied them, the millionaire group also deferred about 14% of their pay, on average, or about $13,300 annually. As a result, their total annual savings rate was 19%. The IRS allows you to defer up to $17,500 of your pay into a 401(k) account in 2014, and up to $23,000 if you’re age 50 or older.
3. Meet your employer match
You’ve probably heard it many times, but it bears repeating that failing to contribute up to the full amount of a company match is like turning down “free” money. Today, 96% of 401(k) participants are in a plan that offers some type of employer contribution, but not all of them take full advantage of the opportunity.
Here’s a fact that drives home the importance of taking the money: 28% of contributions in the average 401(k) millionaire’s account came from his or her employer. On an annual basis, employer contributions boosted the average 401(k) millionaire’s savings by almost $4,600.
In addition, many of the millionaires benefited from profit-sharing contributions. If you’re entering the workforce for the first time or switching jobs, keep in mind that a company match and profit sharing are key elements of your total compensation package, and they can have a big impact on your long-term retirement income.
4. Consider mutual funds that invest in stocks
You’ll want to help your savings pull part of the load toward your retirement goal through investment gains. Historical data suggests that a diversified portfolio of stocks can deliver higher returns than bonds or other fixed income investments over time. This lesson was not lost on our 401(k) millionaires, who had an average of 75% of their assets in company stock and stock mutual funds and achieved a median annualized return of 4.8% in their 401(k) over the 12-year period of our study (2000–2012). This return, combined with our millionaires’ contributions and their employer contributions, brought their average account growth rate to 8.75%. Keep in mind that past performance is no guarantee of future results.
A word of warning: Holding 75% of retirement savings in company stock or stock mutual funds isn’t necessarily a sound strategy for everyone. Stocks can be more volatile and carry higher risks than bonds, especially in the short term. How you allocate your savings among asset types will depend on your personal risk tolerance, your investment horizon, and your financial situation.
Virtually all 401(k) plans offer a range of investment options so you can create a diversified mix of investments to help spread out risk. If you prefer a more hands-off approach, you can select a target date fund, which automatically adjusts the percentage of stocks based on an estimated retirement date. Or consider a managed account, which manages and adjusts your asset mix based on your circumstances, preferences, and comfort with risk.
5. Don’t cash out when changing jobs
Taking a distribution from your 401(k) account when you change jobs is hardly ever a good idea. It could trigger significant tax liability and early withdrawal penalties. When you take money out of your 401(k), you lose the opportunity for it to grow. Even if you’re early in your career and your balance is relatively small, it’s usually a better idea to keep your 401(k) savings with your old employer, or transfer your 401(k) to your new employer’s plan or into a rollover IRA.
The average tenure of our 401(k) millionaires with their current employer was 34 years, so most of them likely never had the option to cash out. But even if you don’t end up staying that long with the same employer, you can emulate the behavior of our 401(k) millionaires by keeping your retirement savings intact.
Not everyone needs $1 million in their 401(k) when they retire, but here’s a hypothetical example of what it could take to become a 401(k) millionaire. Meet Tim:
- He starts contributing to his 401(k) plan at age 25, when his salary is $40,000, and retires at age 67.
- He contributes 12% of his salary pretax annually. His employer matches 4%.
- He doesn't take any loans or withdrawals.
- Tim’s salary increases by 1.5% per year.
- His average hypothetical rate of return is 4.7% each year.
- At age 67, his salary is $73,650,* and his 401(k) plan balance has hit more than $1 million.
This is a hypothetical example. His ending salary of $73,650 and the $1 million balance are in today’s dollars—inflation is not included in this example. Your own account may earn more or less than this example. Taxes will be due upon withdrawal.
Saving $1 million for retirement might seem like a tall order, but our 401(k) participants have done it without earning more than $150,000 per year. And even though you may not need to save that much to have a comfortable retirement, the lessons learned can help ensure that you meet your goal.
- If you aren’t already participating in your company’s 401(k) plan, contact your Human Resources department for enrollment information.
- If you’re more than five years from retirement, see if you’re saving enough with Retirement Quick Check.