A cool million for retirement
Recent news reporting stated that there are now a record 769,000 people with at least $1M in a Fidelity 401(k) account. But the really interesting number is that this represents only 3% of their 25.8 million 401(k) accounts. Of course, it also matters what the ages of those who own those accounts are, because there’s a big difference between what $1M means at 70 vs. 55. Regardless, $1M in a 401(k) is a significant achievement reflecting decades of savings and appropriate investing choices. And certainly, if you’re way short of that, it seems like an impossibility to get there.
It got me thinking that this question is easy to evaluate with a spreadsheet. While you can use my Retirement Checkpoint tool, available here, to evaluate in detail where you are and what you’ll potentially have at retirement, a simpler compound growth calculation can quickly answer the question: how can I get a cool million in retirement savings?
Assume you’re 27 with zero in retirement savings. How much would you need to save to have $1M at age 67 (currently the Full Retirement Age (FRA) for Social Security)? In the free Compound Calculator on this website, if you start saving $3,500 a year, earn 7%, and increase the amount saved each year by the inflation rate, you’ll have just over $1M at age 67. Now, a 27-year-old might find it challenging to save $3,500 a year. But what if the employer offers a 401(k) that matches 3% of your contribution? Assume a salary of $58,500; then 6% is about $3,500, but the employee only has to contribute $1,800 (3%). By starting to save only $1,800 a year, they can accumulate $1M in retirement savings. [And it’s actually less because the $1,800 is not taxed now because a 401(k) is a “tax-deferred” account, meaning you won’t pay income tax now on the $1,800 in income, effectively lowering what it costs you to save today.]
The example used a 7% return, which is moderately conservative, and assumed starting at 0. If instead they started with $1,000 and an 8% return, they could reach $1M with only $2,600 saved per year. This is possible because they start early, save consistently, and increase savings as their income rises. A more realistic scenario might involve someone age 40 with only $5,000 saved for retirement. What would they need to do to reach $1M? Plugging numbers into the calculator, I find they would need to save $10,000 per year. If the employer matches some, they might need to put aside only $6,000. Increasing the return assumption to 8% shows they would need to start saving $8,500 per year. While an 8% return assumption is more aggressive and less likely than 6%, if returns turn out lower, it will just take longer to achieve the $1M goal.
To be clear, I’ll bet many of those 401(k) millionaires didn’t plan or expect to reach that level. They simply followed advice to save, set the percentages, chose appropriate investments, and, most likely, let it grow automatically. I’d also bet it wasn’t a financial burden to do so. Once in place through payroll deduction, they lived on what was left. All the others who don’t reach the million-dollar level aren’t paid less; they just saved less. So the secret, if there is one, is to start saving early in life and let the magic of compound growth take over.
It now makes sense that only 3% of accounts reached $1M. They’re not done saving and growing, likely because most of the 25.8 million accounts are held by people under 65. In fact, that’s why I used the analogy of climbing the hill to retirement in my books. The journey takes time and isn’t easy. The reward comes on the way down for those who make it to the top. But many can’t reach the $1M level because they started too late, can’t save enough, or don’t know how to invest properly (or didn’t have access to a 401(k) and employer contributions to nudge them along). Unfortunately, the only way to recover from lost time is to save much more, since the time for compounding growth has been lost.
Of course, $1M for a retirement 30+ years in the future is likely not enough. The number might be $2M or $3M to fund a decent retirement. But the exercise shows that you can build sufficient wealth easily if you start young enough and increase savings over time. That’s why you’ll read advice to save 15% for retirement, although I think most can start lower and increase over time. Also, setting an appropriate asset allocation and choosing low-expense funds helps. Those current Fidelity account holders with $1M in a 401(k) only got there because they paid attention and took action. Yes, you need to save more if you start late or are too conservative with your investments. But as I showed, under reasonable assumptions, it is possible. You can try variations of this compounding using the free Compound Calculator available here. Just click the FREE DOWNLOAD & PURCHASE link above and look for the Compound Calculator.
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