At a time when countless surveys point to the lack of retirement security and confidence among American workers, and anti-401(k) pundits claim that the 401(k) plan is a failed experiment, it’s refreshing to hear some good news. After all, there’s $11 trillion in DC and IRA assets — something must be going right.
Profiles of the habits of 401(k) millionaires in Fidelity’s database — that is, those with account balances over $1 million — reveal that:
• 18% earn less than $150,000 annually
• Most started early
• Average deferral was 14%
• They took full advantage of the company match
These millionaires held an average of 88% of equities in their portfolios at age 45, a percentage that dropped to 70% at age 54.
Their lessons for the next generation of younger workers: Don’t get too conservative in their investments even though many have experienced volatile markets; and (obviously) don’t cash out even if account balances are low — something that 44% of workers under 30 do.
Fidelity estimates that someone making $40,000 at age 25 can get to $1 million at age 67 assuming:
• 1.5% annual pay raises
• 16% deferral
• 7% return
If returns are 5% then deferrals have to be 22% — but that’s before taxes, not after, so it’s not as painful as it sounds. Plus, there’s no mention of whether a company match is assumed. It takes discipline, but the system is in place — especially if we tweak plan design with auto-escalation and stretch matches and, for auto-enrollment, do not start deferrals too low.
