Achieving a million dollar balance in your 401K

[bjl584]

Secrets of the 401k millionaires - 1 - retirement planning - MSN Money

Some highlights from the article:

0.2% of 401K holders have a million dollar balance or more

The median 401K balance is $60,000

Only 9% of 401K holders contribute the max ($17,000 a year.)

[disneysteve]

Originally Posted by bjl584

Only 9% of 401K holders contribute the max ($17,000 a year.)

I'm not really sure that this stat means a whole lot. If the median income in the US is 50K, saving 15% for retirement would be $7,500/year. Maxing out the 401k would require saving 34% of gross income, not a realistic number for most people.

[fe2o3ez]

Originally Posted by disneysteve

I'm not really sure that this stat means a whole lot. If the median income in the US is 50K, saving 15% for retirement would be $7,500/year. Maxing out the 401k would require saving 34% of gross income, not a realistic number for most people.

Now THAT would be an interesting stat to know. What percentage of individuals contribute more than 10% to their retirement fund? >5%?

And, for that matter, how is your contribution impacted by the % that your employer contributes? Would you contribute more than your employer is matching? When I first got out of college - seems like forever ago - I recall thinking that contributing more than they were willing to match (6%) was a waste. Oh, to know then what we know now...

[MonkeyMama]

The interesting thing is I deal with a lot of payroll. The majority of people that *I* see either max out or put in basically nothing. There isn't a lot of in between. (Of course, doesn't mean they aren't funding ROTHs or other retirement plans). A second wage earner who puts 100% or max into 401k is also not terribly uncommon. I see more people doing that than simply putting in 5%-15%-ish. (Er, these are all no-match plans, so no extra incentive to contribute).

Basically, you care about your retirement or you don't.

Maxing out is not terribly realistic for the average person, I am sure. I will agree with Steve on that one. I also probably never see anyone under $100k income maxing out, for the most part. Someone with less income/single, maxing out, is pretty darn rare. I certainly wouldn't max out a 401k though I have a nice wage (well under six figures). I also pay hardly any income taxes so prefer a ROTH, unless I could get a match. I'd rather invest anywhere I pleased (IRAs) without a match or without high income limitations on IRA contributions.

[disneysteve]

Originally Posted by fe2o3ez

When I first got out of college - seems like forever ago - I recall thinking that contributing more than they were willing to match (6%) was a waste.

Actually, it probably is a waste. The standard advice around here is to only contribute to the full match and then shift to funding a Roth IRA instead and only returning to the 401k once the Roth is maxed out.

So even if someone earns 100K and saves 15% or 15K for retirement, if the company matches 50% up to the first 6% contributed, you'd put 6K in your 401k and get a 3K match. Then you'd put 5K in your Roth. Then you'd go back and put another 4K in the 401k to get to your total savings of 15K. That would be a total of 10K in the 401k, still nowhere near the 17K maximum allowed.

[kork13]

As MM and DS have said, it's just not practical for alot of people to max a 401k. I could max mine out, but doing so would consume a huge portion of my total monthly savings... I have more savings goals than simply stashing away for retirement. WIll I eventually max it out? Perhaps, if/when my income goes up. But right now, I'm contributing $9k-$10k/year, and even at that, I feel like it may be a little too much (as far as the balance between retirement/non-retirement savings).


I just had a thought based on my last comment (balance in savings)... What portion of your monthly savings go to retirement vs. non-retirement savings? I wonder what others feel about where that balance should lie. For me, retirement savings make up about 40%-50% of my total monthly savings. The rest of my savings go to home DP savings or general savings for car, travel, or other spending. Is that similar to what you all do? It seems to me that to have too much going into retirement would be a mistake (particularly for a young person in their 20's or even 30's).

[snshijuptr]

kork, I think it depends on your age and situation. At my age and with the goals we have, we put away enough to retire at 70 years old. In my mind this is my "in case I'm too sick to work" retirement. After we save for a down payment (which I figure paying off a home will reduce retirement expenses) and pay down our high interest student loans (which cost more than we can reliably earn), we will begin to invest for an earlier retirement. Of course we also have DH's pension which will be vested in about a year and a half.

As a percentage, we put 25% of our savings budget toward retirement which is 9% of our monthly budget.

I know DisneySteve, you usually push for 20% savings with 15% of that into retirement, right? So that would be 75% of savings going toward retirement and 15% of monthly budget. I think that is appropriate once your savings goals are less important, but for many young people, savings goals take a higher priority and retirement has time to grow.

[GREENBACK]

Originally Posted by kork13

I just had a thought based on my last comment (balance in savings)... What portion of your monthly savings go to retirement vs. non-retirement savings? I wonder what others feel about where that balance should lie. For me, retirement savings make up about 40%-50% of my total monthly savings. The rest of my savings go to home DP savings or general savings for car, travel, or other spending. Is that similar to what you all do? It seems to me that to have too much going into retirement would be a mistake (particularly for a young person in their 20's or even 30's).

The vast majority of my savings is towards retirement but I'm getting close to retiring(6 yrs.). I think it has a lot to do with where you're at in life. If you're paying various debts off or saving for a house or other big expense retirement savings may not be a priority. I know when retirement is close you really concentrate on making it a priority.

[MonkeyMama]

Yes, agreed with the above. IT just depends on your situation. We have always put 10% income to retirement, no matter what. But when we were saving for a home, maybe 80% - 90% of our savings was going to a down payment. But this was in a case where housing and rents were both very expensive and we just wanted to get into a mortgage ASAP. These days I don't have any particular/immediate non-retirement savings goals. So only save about $5k/year, but we put $10k or so to retirement every year. (The $5k per year is for home repairs, car purchases, and stuff like that, and is just how much I find we *need* to save outside of retirement - we already have an ample emergency fund).

It just depends - the best use of our money in our 20s was getting through college debt free and working towards a reasonable mortgage. If housing was not so expensive here, bulking up retirement might have been a better option. Then again, we probably couldn't have put much more to retirement (401ks/IRAs) than we were (maximum contributions were MUCH lower a decade ago), so there is always the limits of tax law and figuring what is most tax efficient for you.

[disneysteve]

I was curious about the $1 million figure. If you were to max a 401k at the current limit of $17,000/year and earn an annual return of 7% it would take you 23 years to amass $1 million. Considering that the limit was just raised to 17K for 2012, doing it in the past would have taken even longer (unless you managed better returns). No surprise that only a tiny fraction of participants have achieved that milestone. Very few people even stay in the same job that long.

[kork13]

Originally Posted by disneysteve

I was curious about the $1 million figure. If you were to max a 401k at the current limit of $17,000/year and earn an annual return of 7% it would take you 23 years to amass $1 million. Considering that the limit was just raised to 17K for 2012, doing it in the past would have taken even longer (unless you managed better returns). No surprise that only a tiny fraction of participants have achieved that milestone. Very few people even stay in the same job that long.

Good point. 401k's only even became available in 1978 (33 years ago). The first generation of 401k-users are only just starting to reach retirement age. Assuming it takes 25-ish years of max'd contributions to amass $1M in a 401k, it's hardly a surprise that very few have gotten there. Add in low participation rates and not staying in the same company for an entire career (leading to IRA rollovers), the statistic becomes no surprise at all.

I've always found the $1,000,000 figure an interesting one... obviously, it means less than it did 20 or 50 years ago, and in the future, it will mean even less (speaking of inflation). Being a "millionnaire" is touted as an line denoting wealth and prosperity. Although it's certainly nothing to spit at, even today the coveted $1M figure provides only a marginal income in retirement ($40k-ish per year), approximately the median income in America.

[nck4857]

Originally Posted by disneysteve

I was curious about the $1 million figure. If you were to max a 401k at the current limit of $17,000/year and earn an annual return of 7% it would take you 23 years to amass $1 million. Considering that the limit was just raised to 17K for 2012, doing it in the past would have taken even longer (unless you managed better returns). No surprise that only a tiny fraction of participants have achieved that milestone. Very few people even stay in the same job that long.

Don't forget about company match, where I work, the Company can contribute up to I think around $50k/year or whatever that limit is (too lazy to look it up).

[moneybags]

Originally Posted by disneysteve

I was curious about the $1 million figure. If you were to max a 401k at the current limit of $17,000/year and earn an annual return of 7% it would take you 23 years to amass $1 million. Considering that the limit was just raised to 17K for 2012, doing it in the past would have taken even longer (unless you managed better returns). No surprise that only a tiny fraction of participants have achieved that milestone. Very few people even stay in the same job that long.

You don't have to stay at the same job to keep your funds in the same account. My DH rolled his old 401K to his new one. Also, for the 50 and over crowd, you can save $22,500/year in your 401K.

It makes sense that the people maxing out their 401Ks are in an income bracket that makes them ineligible to fund any IRAs, so their retirement savings goes into the 401K.

[disneysteve]

Originally Posted by nck4857

Don't forget about company match, where I work, the Company can contribute up to I think around $50k/year or whatever that limit is (too lazy to look it up).

That's true. I wasn't counting the match. That would shorten the time considerably though I'd still suspect that most people either haven't been at their jobs long enough to come anywhere close to $1 million even if they were contributing the max, which very few people do.

[jadet]

Originally Posted by bjl584

Secrets of the 401k millionaires - 1 - retirement planning - MSN Money

Some highlights from the article:

0.2% of 401K holders have a million dollar balance or more

The median 401K balance is $60,000

Only 9% of 401K holders contribute the max ($17,000 a year.)

They didn't have 401ks until the 90s...that would explain the .2% million dollar balance.

[bjl584]

Originally Posted by jadet

They didn't have 401ks until the 90s...that would explain the .2% million dollar balance.

The article states that 401K's were started in the early 80's.

[disneysteve]

Originally Posted by bjl584

The article states that 401K's were started in the early 80's.

When they were first created and when they became commonplace are two different things. Even today, only about half of all workers have access to a 401k plan. I don't. Never have. Probably never will. My wife has only had one for about 5 years.

[jpg7n16]

Factors working against million dollar 401ks:

-not introduced that long ago (80's)
-initially proposed as part of a 3 part retirement system (pension + 401k + SSI), so lower emphasis on contributing
-initial max contributions were less than half what they are today: Google Answers: 401K Historical Chart
-since 2000 (when contribution limits have been higher, and more encouraged) the stock market has been close to flat, limiting the amount of growth of the larger contributions
-most Americans do not have the income to support maxing the 401k each year; if the median is around $45k, the average American would have to contribute 38% to max it out
-the workers who have been around long enough, making enough to max out the 401k each year, were likely more senior employees, who are now retiring and reducing their balances by taking distributions

I'm not too surprised the figures are that low - but I guarantee that they're on the rise. Like KTP said, it won't mean as much. I'd even venture to say, that a time will come (pretty soon in fact) where if you DON'T have $1 million, people will say you've done something wrong in your planning. Though that prob won't all be in the 401k...

[kv968]

Actually that elusive $1 million mark is even scary if you discount it to today's dollars. Figuring a 2% inflation rate, in 20 years that $1 mil would be worth ~$673,000 today and with a 4% withdrawl rate that would equate to $27k/yr. If you figure the same inflation rate but 40 years from now for the younger crowd, that million would be worth about 453,000 of today's dollars or ~$18k/yr with a 4% withdrawl rate. Happy investing

[LivingAlmostLarge]

We maxed out my DH's 401k the minute he got a real job and was first available. When also maxed out our roth iras then too. Before that I only had a Roth IRA at $2k/year because he wasn't an american citizen nor did he have any retirement savings vehicles until 2005.

So part of the low balances can also be dependent on situations people are in due to jobs, visa status, etc. Also like MM I think it's hard in your 20s to really save for all your goals. Getting married, having kids, buying cars, homes, etc.

Even now the bulk of our savings is retirement, but we save a portion for short and long terms savings. We don't prepay our mortgage because we just have too much else to save for.