Thanks to the unrelenting rise in the stock market since 2009, there's now a trend on social media to share your 401(k) balance, especially if it's over a million bucks. Despite the distastefulness of bragging, just the fact that more people are talking about saving for retirement via their 401(k) is a good thing.
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Make no doubt about it, being a 401(k) millionaire is very impressive given the maximum contribution limit has never been higher than 2018's contribution limit of $18,500. When I was first able to contribute to a 401(k) in 1999, the maximum contribution limit was only $10,000.
Check out the chart below for details.
Here's when you'll become a 401(k) millionaire
Given we know the various portfolio returns based on asset allocation in my post, How Much Investment Risk You Should Take In Retirement, one can simply do a little math to figure out roughly when someone will become a 401(k) millionaire if they are starting with $0, max out their 401(k) this year and every year after, and return the average annual return of the portfolio composition since 1926.
- 100 percent equity allocation (10.2 percent historical return): 401(k) millionaire in 18 years
- 80 percent equity / 20 percent fixed income (9.5 percent historical return): 401(k) millionaire in 19.5 years
- 70 percent equity / 30 percent fixed income (9.1 percent historical return): 401(k) millionaire in 19.7 years
- 60 percent equity / 40 percent fixed income (8.7 percent historical return): 401(k) millionaire in 20.5 years
- 50 percent equity / 50 percent fixed income (8.3 percent historical return): 401(k) millionaire in 21 years
- 40 percent equity / 60 percent fixed income (7.8 percent historical return): 401(k) millionaire in 21.5 years
- 30 percent equity / 70 percent fixed income (7.2 percent historical return): 401(k) millionaire in 22.2 years
- 20 percent equity / 80 percent fixed income (6.6 percent historical return): 401(k) millionaire in 23 years
- 100 percent fixed income (5.4 percent historical return): 401(k) millionaire in 25.5 years
- 100 percent cash (1 percent assumed return): 401(k) millionaire in 44 years
Of course, historical returns cannot guarantee future returns, but after a 10-20 year period of investing in your 401(k), your average annual portfolio return will likely begin to mimic the historical averages. Further, if your company provides a generous 401(k) match or profit sharing plan, then it is likely you will become a 401(k) millionaire sooner.
For those readers with more than $0 in your 401(k), simply find an online compound interest calculator and input your data for your specific results. The good thing is, all the numbers above can be considered the maximum longest amount of time it will take to get to 401(k) millionaire status in a normal market.
Let's say I'm 40 years old with $500,000 in my 401(k) and will max it out every year. I've got a 70 percent equity / 30 percent fixed Income portfolio and expect to earn 9.1 percent a year based on historical averages. Using a compound interest calculator, I'll simply input my current principal, annual addition, interest rate, plus a guess number in the Years to Grow field. When the future value equals roughly $1,000,000, you'll know about how long it will take for you to achieve 401(k) millionaire status.
The key to 401(k) millionaire status is longevity
I worked for 13 years for two employers and got my 401(k) balance up to ~$400,000. But once I left my job in 2012, I rolled over my 401(k) to an IRA. If I worked for seven or eight more years, I probably would achieve a $1,000,000 401(k) balance due to strong returns and great company profit sharing. But alas, I'm not a 401(k) or even a rollover IRA millionaire.
The key to 401(k) millionaire status is being able to work at an employer with a great 401(k) plan for as long as possible. The year before I left my employer, I was receiving ~$20,000 a year in company profit sharing.
Therefore, before you decide to leave your cushy job, please first calculate what you are forgoing in company benefits. The same goes for people who are contemplating leaving higher paying, stable jobs to go work for startups which may have no 401(k) plan or most definitely have no 401(k) matching benefit since most startups are loss making.
Let's review my 401(k) savings targets by age and see when various age groups of savers may become 401(k) millionaires if they are able to work at a job with a 401(k) plan for several decades.
Based on my 401(k) by age estimates, older-age savers (50+) should be able to become 401(k) millionaires around age 60 if they've been maxing out their 401(k) and properly investing since the age of 23. If not, then best of luck with Social Security, a paid off house and hopefully after-tax investment accounts.
Middle-age savers (35-50) should be able to become 401(k) millionaires around age 50 if they've been maxing out their 401(k) and properly investing since the age of 23. I'm expecting to be a 401(k) millionaire when I turn 50 in 2027 by contributing to a Solo 401(k) plan.
Younger-age savers (20-34) should be able to become 401(k) millionaires around age 40 if they've been maxing out their 401(k) and properly investing since the age of 23.
Treat your 401(k) as an insurance policy
According to Vanguard, the average 401k plan balance was ~$100,000 in 2017 and the median 401k plan balance was ~$27,000. If you get to 401(k) millionaire status, pat yourself on the back.
The funny thing about your 401(k) is that it doesn't really matter if you have millions in your account. You can't tap the funds without paying a 10 percent penalty before age 59.5 or doing a Roth conversion and paying taxes, so it's more like a retirement insurance policy. Further, a better goal might be to not become a 401(k) millionaire because that probably means you spent 18 years or longer working at a day job. What you should really be doing is building up your after-tax investment account aggressively so that you can retire well before you are 59.5.
The key to 401(k) millionaire status is being able to work at an employer with a great 401(k) plan for as long as possible.
As you've only got one life to live, you might as well figure out a way to escape the grind sooner, rather than later. Not a day goes by where I'm not thankful for aggressively building a portfolio of non-401(k) investments in my 20s and 30s to have the courage to leave my 401(k) behind.
Recommendation: Run your 401(k) through Personal Capital's 401(k) Investment Fee Analyzer to see how much you're wasting in fees. I ran mine through and found out I was paying $1,748.34 a year in fees I had no idea I was paying.
After discovering how much I was wasting on actively managed mutually fund fees that didn't have a perfect track record for beating their respective benchmarks, I switched to low cost index fund ETFs. Their Investment Checkup tool also allows you to analyze your investment risk exposure and make appropriate adjustments.
Sam Dogen is the founder of FinancialSamurai.com, a leading personal finance site established in 2009 that teaches people how to achieve financial freedom sooner, rather than later.
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