Barbara O’Neill, Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension
How to Become a 401(k) Millionaire
Would you like to have a million dollars by the time that you retire? There are several ways to become wealthy. One wealth-building strategy is to marry a wealthy person (e.g., Bill Gates’ wife Melinda). Another is to inherit a lot of money or receive a large settlement of some kind. A third way is to invent or produce a product or service that is in high demand. In reality, though, most millionaires become wealthy the old fashioned way: they grow rich slowly over time through a combination of hard work, systematic investing, and compound interest.
At the end of 2017, Fidelity investments announced a significant achievement: the share of women who amassed sums of $1 million in their retirement savings plans doubled since 2005. About 20% of the 133,000 401(k) millionaires from among15 million accounts that it oversees were women. This achievement was attributed to “more women actively participating in 401(k) plans and contributing more.” Increased interest in retirement planning can also be explained by an increase in the number of women who are primary breadwinners for their families and women’s increased understanding of retirement planning challenges such as their lower average earnings and longer life expectancies than men.
What can women (and men) learn from the Fidelity research study and millionaires’ milestone accomplishment? Below are eight key take-aways about strategies to build wealth over time:
What People Think About, They Bring About- When retirement planning gets on people’s mental “radar screen,” they talk about it with family members and coworkers, share ideas about investing and retirement planning, sign up for employer retirement savings plans, and monitor their investments’ performance.
Stocks Build Wealth – History tells us that stocks outperform other types of assets over time. The Fidelity study found that, contrary to stereotypes that women are more risk-averse than men, both genders invested in a similar fashion. On average, women who achieved millionaire status held about 77% of their savings in stocks vs. 76% held by men.
It Takes Time- Fidelity found that it takes three or four decades to build wealth. Most people become millionaires after age 50. The average age was 58.5 for women and 59.3 for men. The age difference was attributed to the fact that women are saving more. The Fidelity study found that women who achieved millionaire status saved 18.1 % of their salaries.
Free Money Helps- Fidelity noted that, in addition to saving 18.1 % of their salaries, women millionaires received an average 6.8% employer match, for a total of 24.9% of their income saved (vs. a total of 22.8% for men). An employer match is basically “free money” and should definitely be accessed to maximize retirement savings.
Career Longevity Promotes Savings- Millionaires in the Fidelity data base had long careers, thereby enabling them to invest for decades. Continuity in retirement savings behavior matters. Fidelity recommends that workers aim to save 10 times their final salary by the time that they retire (e.g, those earning $50,000 are estimated to need about $500,000).
Frugality Helps- Living frugally has helped many millionaires accumulate wealth. Authors of The Millionaire Next Door, Stanley and Danko, found that most millionaires were not interested in a lifestyle of consumption and high-status items. Instead, they tended to plan their spending carefully and follow a “pay yourself first” strategy of regular saving. Spending less than they earn is a common characteristic of millionaires.
Leverage the Power of Compound Interest- Most people simply don’t earn enough to become wealthy from their incomes alone. They need help from compound interest. Three key principles are: save part of what you earn starting early in life, achieve a reasonable rate of return, say 6-7% on a diversified portfolio, and be patient and allow money to grow.
Take Prudent Investment Risks-Most millionaires invest regularly and include a healthy percentage of stock in their portfolio. Everyone can invest successfully without special knowledge or skill. One easy, low-maintenance, way is to purchase index funds that track a benchmark market index such as the Standard & Poor’s (S&P) 500. Another is to buy a target date mutual fund with an asset allocation aligned with investors’ planned retirement age.
It is possible for people of ordinary means to become millionaires through hard work, steady investing, and the magic of compound interest. Generally, it takes three or four decades but it can be done. Will you be a millionaire someday? This easy three-step online calculator can help you develop an action plan: http://money.cnn.com/calculator/pf/millionaire/
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