Secrets of 401k Millionaires and my new 22% Strategy

[kgtest]

Interesting article from Fidelity that analysed secrets of accountholders whom achieved a million.

I think I am going to adjust my investing strategy a bit to try and invest 22% of my salary annually...according to my current projections and past performance of some of the other numbers they analyzed I would exceed the million mark.

Some quiick facts from this article:

Specifically, current 401(k) millionaires:

• Started saving early and therefore had accumulated $426,000, on average, by 2000. (Their current average balance: $1.2 million.)
• Saved 14% of their annual pay, on average, not including their company match.
• Took full advantage of company contributions that averaged 4.8%, by saving up to their employer’s match and receiving profit-sharing contributions.

The 401(k) millionaires also sidestepped two pitfalls that plague a significant number of investors. They’ve held a relatively high percentage of their assets in equities – with an average equity allocation of 88% at age 45 and of 54% at age 70. Stocks tend to earn higher returns than bonds and cash over time and so make it easier to build wealth.

Fidelity calculates that someone who earns $40,000 a year and starts saving at age 25 will have $1 million by age 67, assuming he or she receives 1.5% annual raises, saves 16% a year, and earns a 7% annual return. If returns average 5.5%, he or she would need to instead save 22% a year—a sum that includes the employer match.

Learn the secrets of the 401(k) millionaires - Encore - MarketWatch

 

[kgtest]

With my new 22% strategy, not much would change.

Max out Roth / Traditional IRA
Continue 401K contributions but increasing % to ensure 22%
Save any additional money into Money Market to feed the gambling addiction.
Continue to try and earn more money by way of good performance reviews and salary increases.

 

[foxfirev5]

Never held 80+% in equities - however I did benefit from high yielding SV funds (6-10%??) during the '80s. The bond bull run also helped. I also averaged over 20% savings per year for over 25 years in the middle of a 35 year span. A solid AA before it was popular has let me reach FI. Maybe not optimal returns but I could easily retire tomorrow. Now 45/35/20 equity/bond/cash AA.

 

[clifp]

Interesting article from Fidelity that analysed secrets of accountholders whom achieved a million.

I think I am going to adjust my investing strategy a bit to try and invest 22% of my salary annually...according to my current projections and past performance of some of the other numbers they analyzed I would exceed the million mark.

http://blogs.marketwatch.com/encore/2013/11/12/secrets-of-the-401k-millionaires/

22% that should definitely do it. I maxed out my 401K (12.5% most years, was at time forced to contribute less) age 25 to 40, added an few IRA contribution in my early 20. I Converted a small amount (59K) to a Roth this century. But between 2000 and today I didn't add another dime. My total is $910K, well on the way to $1 million before 59.5. (No Intel stock in the account either)

 

[photoguy]

What's interesting to me is that the vast majority of the millionaires did it on a salary of 150k or more. That's three times the median US household income.

I'd bet only a tiny percentage actually reached 1M on the 40k salary they use as an example.

 

[Al in Ohio]

I started at 15% of my income into my annual retirement investing in my twenties and was at about 30% in my thirties and over 40% in my forties. Until I hit 50 I was probably at least 85% throughout much of that time in equities. I hit the million mark before I turned 50 even after the " Great Recession " once the market bounced back. I knew then that I needed to change my AA to add more bonds, but had to wait for the recovery before reallocating. I am now about 70/30 and not yet retired. I'll probably reallocate to 60/40 when I retire in a few years. Maybe even 50/50 someday, but I view inflation as the greater risk.

 

[LOL!]

What's interesting to me is that the vast majority of the millionaires did it on a salary of 150k or more. That's three times the median US household income.

I'd bet only a tiny percentage actually reached 1M on the 40k salary they use as an example.

That was $40K starting salary way back when and then assuming regular increases in salary. Plus only a tiny percentage was mentioned in the Fidelty study: 0.4% anyways.

I have contributed the max possible to a 401(k) or 403(b) every year for the past 27 years. I do not have a million dollars in those accounts. I guess I didn't get the big company match touted in the article.

My spouse also contributed the same amount as I did: The legal max. She has had high-fee 401(k)s all along, but with her lower earnings, she contributed a higher percentage of them. Nevertheless, she ain't got close to a million either.

So contributing 22% mentioned by the OP could get one to a million, but by then a million will only be worth $500,000. With today's maximum contrib 4 times higher than 25 years ago, I think lots of folks starting now or in the last 10 years will be able to get to a million.

 

[Surewhitey]

We maxed out our 401ks & other pre-tax accounts for 12 years or so and racked up around $500k. If we ever go back to w*rk, we'll return to maxing more. We're happy w*rking to live on 10-15 hrs / week for now.

Don't feel the need to keep building post tax accounts for now.

 

[ziggy29]

That was $40K starting salary way back when and then assuming regular increases in salary.

Might as well assume a generous DB pension, job security and employer-funded retiree health insurance, too, if we are assuming things about yesterday's workplaces instead of today's....

 

[foxfirev5]

Starting salary less than $20k ending salary considerably less than $100k. Very small pension frozen in '94. Heck if I started at $40k and ended at $150k and saved like I did I would either retire much earlier or be approaching an 8 figure portfolio.

 

[tinlizzy]

year balance contributions
2000 22629.... 21022
2001 28202.... 28279
2002 29844.... 36613
2003 48077.... 45377
2004 58715.... 58041
2005 65617.... 71491
2006 90124.... 84533
2007 114455... 98783
2008 130414... 112766
2009 101191... 127207
2010 149979... 142190
2011 197842... 158053
2012 262381... 175052
2013 355000... 192552 estimated

So these are year ending totals to date.

I guess I could see hitting/surpassing a million by 67.
In 2000 I was 33yo and made $45K.
I believe I was contributing 17% for most of the years. I've maxed it for the last couple years.
Our original 401K had only mutual funds (Fidelity Magellan is one I remember). New 401K switched in 2000 or 2001, all index and target date balanced funds.
Regular raises, no company match, 90% or more in stock indexes.

 

[Independent]

What's interesting to me is that the vast majority of the millionaires did it on a salary of 150k or more. That's three times the median US household income.

I'd bet only a tiny percentage actually reached 1M on the 40k salary they use as an example.

+1

 

[Independent]

Fidelity calculates that someone who earns $40,000 a year and starts saving at age 25 will have $1 million by age 67, assuming he or she receives 1.5% annual raises, saves 16% a year, and earns a 7% annual return. If returns average 5.5%, he or she would need to instead save 22% a year—a sum that includes the employer match.

By the time that person hits 67, he/she will be earning $75,000. So 4% of $1 million provides a 55% replacement ratio.

The quoted savings rate assumes that this 25 year old doesn't have student loans, auto loans, or a mortgage. Or, it assumes that he/she will buy stocks and bonds thru Fidelity instead of paying down those loans. I don't think I'd advise a young person to do that.

 

[jollystomper]

"Started saving early and therefore had accumulated $426,000, on average, by 2000. (Their current average balance: $1.2 million.)"

Interesting... by 2000 I had about $225K in my 401K, and now have (at the moment of course) about $910K. Not quite a 401K millionaire but I'm not complaining. During this time I wasn't overly aggressive as my stock percentage was around 70% in 2000 and I gradually reduced it to just over 50% now. Simple Large Company /Small Company/International fund allocations. But I did get more serious about maxing out contributions and that was probably the biggest factor that helped me.

 

[kgtest]

Interesting responses. I think the key for the average joe here is to be aggressive with saving if you want to get anywhere near a million.

I am a strong believer in increasing your earning potential, by gaining experience and/or education. This has worked so far in my saving strategy, and I will continue to increase my earnings while increasing my savings as that is exponentially a quicker path to FI.

I am 33 and I have increased my income 19.37% /yr over the past 6 6yrs which I feel will help me achieve FI sooner.


Thanks for sharing guys and I agree, I wouldn't put too much weight into this actual article, I merely used it as a discussion point.

 

[In-control]

Since I started working I max'd out my 401k benefit. 5 years ago I started to take and max out a spousal IRA and a Roth IRA. I also max out my annuity contribution and a 403B(like 401k for higher ed).

I started when I was 22 and 18 years later I was able to RE with ~ 2Mil. I am now 51 and balanced to 40/60 split. Next year I will probability RE for good. I hear the AT and National/State Parks calling me and the lady!!

The lesson is to leverage the tax differed status vehicles, live below your means, use low cost funds and allow time to work its magic. Simple stuff really.

 

[kgtest]

Since I started working I max'd out my 401k benefit. 5 years ago I started to take and max out a spousal IRA and a Roth IRA. I also max out my annuity contribution and a 403B(like 401k for higher ed).

I started when I was 22 and 18 years later I was able to RE with ~ 2Mil. I am now 51 and balanced to 40/60 split. Next year I will probability RE for good. I hear the AT and National/State Parks calling me and the lady!!

The lesson is to leverage the tax differed status vehicles, live below your means, use low cost funds and allow time to work its magic. Simple stuff really.

Yes it is time for you to RE a second time...you earned it!

 

[clifp]

It is also important to point out the huge difference in returns in the various decades.
My accumulation started in the early 1980s and ended in 2000. During that time the S&P had ~16% annual gains and NASDAQ was ~21%. My 401K/IRA AA during that time was ~50-60% S&P, 30-40% small cap 0-10% international and 10% bonds. In the beginning 2000 my AA switched to 65%/35% and I luckily bailed on all the NASADQ stocks (except a chunk of Intel)

In contrast the 20 years returns through 2012 are S&P 8.22% Nasdaq 10.87% Now the returns will jump up after this year but still a big difference. $10000 in invested in the S&P in 1985 and cashed out in 2000 was worth $92,900. Starting just 2 years later in 87 and cashing out in 2012 after 25 years was only worth $101,100 not much more for 10 years more of saving.

 

[free2020]

I had $500K by age 50 accumulated over 17 years. Always maxed out to the IRS limit, always 100% in equities. But have since then rolled over to an IRA and have doubled over the next 7 years.

I've learned a few things which I intend to pass along to my kids
1) Start early, save the max allowed. All equities.
2) As soon as you quit a job, roll over to an IRA and leverage the universe of investment choices versus the few that your 401K presented to you. Please don't let fees come between you and your wealth.
3) Convert / contribute to as much Roth as you can afford to pay taxes on each year. Earlier in life the better.
4) Follow the Buffett rules, buy a few stocks that you really understand and hold-forever.
5) If you don't think 4) above is for you, put 100% in a low cost Vanguard index fund for 30 years or more. You will make the market return rate. Please don't let fees come between you and your wealth.

 

[kgtest]

When you guys say always "maxed" out to the IRS limit, I have no idea how you did this.

My company allows me to contribute 80% and there is no way I could survive off of the other taxed 20%

 

[lrak]

When you guys say always "maxed" out to the IRS limit, I have no idea how you did this.

My company allows me to contribute 80% and there is no way I could survive off of the other taxed 20%

If you can get a job that pays more than $21,875/yr, you are limited by the $17,500/yr IRS maximum rather than the 80% contribution limit. But if you are making $21,875 and saving in a 401k, you should get a savers credit and earned income tax credit so the other 20% won't really be taxed. The federal negative tax rate will likely cancel out your state taxes at that point.

I just assume everyone maxing out both their 401k and IRA are making at least $70k/year. At that point you can max out your 401k ($17,500/yr) and Roth IRA ($5500) with no more than 1/3 of your income. Saving 1/3 seems reasonable for the frugal in that income bracket. If you make more than $70k, you can do it while being less frugal.

 

[LOL!]

....
I just assume everyone maxing out both their 401k and IRA are making at least $70k/year. At that point you can max out your 401k ($17,500/yr) and Roth IRA ($5500) with no more than 1/3 of your income. Saving 1/3 seems reasonable for the frugal in that income bracket. If you make more than $70k, you can do it while being less frugal.

And don't forget that the maximum contributions to 401(k) and IRAs were not always $17,500 plus $5,500 catch-up. So 25 years ago the limits may have been less than $6,000 but I am not going to go look them up.

 

[walkinwood]

...They’ve held a relatively high percentage of their assets in equities – with an average equity allocation of 88% at age 45 and of 54% at age 70. Stocks tend to earn higher returns than bonds and cash over time and so make it easier to build wealth.
...http://blogs.marketwatch.com/encore/2013/11/12/secrets-of-the-401k-millionaires/

That may sound good, but if you have savings outside your tax-deferred account, you may want to hold your equities there first & then use your tax-deferred accounts. Search for Asset Location on this board for more details.

 

[kgtest]

And don't forget that the maximum contributions to 401(k) and IRAs were not always $17,500 plus $5,500 catch-up. So 25 years ago the limits may have been less than $6,000 but I am not going to go look them up.

I am working on getting down to living on 1/3 of my income. Ideally I would love to get down to 1/4 of my income but I am almost certain I would have to all but eliminate my love for V8 Pickups. Quite frankly they are expensive to own and operate, add to that the occasional bad habit and the fact my housing is over $27k/year right now my income doesn't go quite as far in that department. Is that an excuse, no but it's a reality. I am still working on looking at ways to reduce my annual expenses believe me. For the next year, and until either of our income situations changes that is the only other thing I can do. The more I can shave out of expenses, the sooner I can retire.

After the 10% comes out for 401k, and now that I am gearing up to contribute an extra $12,000 next year somehow, someway to cover both me and my wife's annual IRA contributions I have no clue how I will live on 1/3 of my income out here in Maui but I will do my best.

My first attempt is driving the crappy little honda as much as humanly possible lol. I swear the thing gets like 40+ mpg and it only costs me $40 as opposed to $100 to fill the Tractor (pickup).

My second attempt is bringing my lunch which has gone well and my third attempt is to get the DH to quit smoking as they are like $10/pack out here in Maui... hell every extra grand here and there helps I've realized.

Less than a year ago I owned a boat, motorcycle, 2 trucks, and 2 cars so I downsized a bit and that has kind of opened my eyes as to what kind of compound savings can occur when you're not constantly dropping a grand on the hobby-of-the-month. Anywho, a lot of rambling but you can check my other thread on how I am doing financially...having a clear vision helps and I love the input you all are providing back to me. If anything it is giving me some level of confidence. I guess that's what they mean by "knowledge is power."

 

[kgtest]

If you can get a job that pays more than $21,875/yr, you are limited by the $17,500/yr IRS maximum rather than the 80% contribution limit. But if you are making $21,875 and saving in a 401k, you should get a savers credit and earned income tax credit so the other 20% won't really be taxed. The federal negative tax rate will likely cancel out your state taxes at that point.

I just assume everyone maxing out both their 401k and IRA are making at least $70k/year. At that point you can max out your 401k ($17,500/yr) and Roth IRA ($5500) with no more than 1/3 of your income. Saving 1/3 seems reasonable for the frugal in that income bracket. If you make more than $70k, you can do it while being less frugal.

Please do expand on the Savers credit. I understand the EIC.

See this is the other piece of the puzzle that I am missing. I know this isn't exactly a tax forum, but any help in this department would be of great benefit to me as well.

Tax situation is this, I am not too sure what I will file for AGI but I earned a bit this year, got married, sold real estate, and will earn over 70k this year with our household income. Guys, keep in mind when I say my retirement, I also mean my DH as well, so I have to take things out of my coffer to cover her retirement...or so that is how I have been approaching the strategy but I feel something is wrong...

Sooo if I contribute the max to DH 403(b) not 401k since we all know low-earners do not get 401k lol...well they get screwed out of a ton of benefits but that discussion is not for this forum neither. Long story short my wife will be looking if she grosses 10k this year. So she invests 80% or $8000 of that into her 403(b) and the other $1260 (remaining from her paychecks for next year after taxes) into her Roth IRA (Roth since we won't be in as high a tax bracket as we were this year).

Then we have my income, well with my income...if I invest the 23k for my 401k+roth, and then after taxes make up the difference of $4240 for the DH, that puts me with annual pre-tax income of 57k. Subtract the taxes and insurance from this and we are looking at a cash-flow of about $32,260. This is great, but again my housing costs are 27,600. so this leaves me with 5grand to live off of for 12months or $355/month which just doesn't work for me.

By contributing this heavily I do realize a $315 tax savings dropping .35 in state taxes and another roughly $3000 dropping us from the 25% federal bracket down to 15%.

It was interesting figuring out all of these numbers, but I just don't see how In this 70-90k annual household income bracket with my high cost of housing how I can actually take advantage of the lower tax bracket advantages.

Feel free to poke holes, fun or shine a light on my tax logic.

PS...this thread may turn into a tax thread...or perhaps I may have a more appropriate place to begin this conversation within this forum I am not too sure lol.

PPS...To tie this back to the article, with this "maxed out" version of our 401K+ IRA savings plan we could be saving a total of 17,760 combined as a household or a rate of roughly 19.73% compared to our income which still isn't quite 22%. If you count the tax savings that I COULD realize by not having such a high COL, or roughly $3300 and I could stick that in some taxable account, that would be our 22% right there. So this is the modern-day perspective in relation to that article. I am in like 90+ equities and I plan on riding that wave the next 20+ years or until I am 52, bull or bear with persistence and fortitude but I need to lower my COL, decrease my income taxes or increase my cash flow that is apparent.