Five habits of 401(k) millionaires

They start early, maximize the company match, and have a sound investment strategy.

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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.

An example

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:

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.

Bottom line

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.

Next steps

Fidelity can help you review your options and assist you in making the most of what you've saved. To speak a Fidelity retirement representative, call 800-343-3548.

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Before investing, consider the funds’ investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.
1. About the study: Fidelity Investments analysis of more than 1,100 participants who had annual gross compensation as of 2012 of less than $150,000, with 401(k) assets in excess of $1 million as of 6/30/2012. This population had a median age of 59 and median tenure of just under 34 years. The participants analyzed had balances and were actively employed by their plan sponsor throughout the 6/30/2000 through 6/30/2012 12-year period. All data represents the median value unless otherwise noted.
2. A distribution from a Roth 401(k) is tax free and penalty free, provided the five-year aging requirement has been satisfied and one of the following conditions is met: age 59½, disability, or death.
Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.
Target date funds are designed for investors expecting to retire around the year indicated in each fund. The funds are managed to gradually become more conservative over time as they approach the target date. The investment risk of each fund changes over time as the fund’s asset allocation changes. The funds are subject to the volatility of the financial markets, including that of equity and fixed income investments in the U.S. and abroad, and may be subject to risks associated with investing in high-yield, small-cap, and foreign securities. Principal invested is not guaranteed at any time, including at or after the funds’ target dates.
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