1/17/2012 5:00 PM ET|
Secrets of the 401k millionaires
Members of this rare class of savers -- just 0.2% of 401k owners -- don't necessarily have higher salaries or the investing IQs of Warren Buffett, advisers say.
Those hoping to occupy Easy Street in retirement may want to follow the lead of the 0.2% -- that topmost tiny fraction of savers who have managed to sock away more than $1 million in their 401ks.
That figure, based on data from the Employee Benefit Research Institute, may depress those with sums closer to the median 401k balance of roughly $60,000 -- and for good reason. Even among employees 55 and up who have been contributing to the same 401k plan for more than 20 years, just 2% are estimated to have cracked the $1 million mark, says Jack VanDerhei, EBRI's research director.
To some, the remaining 98% of savers 55 and older who haven't cracked $1 million show that the 401k, the principal vehicle for U.S. retirement savings, is at best inadequate and at worst a colossal failure. Even Ted Benna, the man credited with developing the first 401k plans out of an IRS tax loophole in 1981, now concedes that they've grown overly complex, with too many options, too-high fees and too many ways to cash out one's nest egg.
401k providers aren't happy, either
Even some 401k providers don't disagree. With traditional pensions, employers hired teams of experts to make the tough investing decisions now entrusted to individual employees, says Catherine Golladay, vice president of participant services for Charles Schwab. "Left to their own devices, most people do not have the knowledge or the discipline to do this themselves," she says.
Schwab, like other 401k providers, has found that efforts to educate employees haven't proved to be very successful -- and that only 10% of workers take advantage of such offers of help. In response, the company has announced a new index-fund-only 401k, which will keep expenses down and include mandatory advice on investments. "Many employees don't understand what they are losing to expenses -- sometimes 55 to 110 basis points," says Jim McCool, an executive vice president at Schwab. "They don't realize what a drag it is on their retirement savings."
Target-date funds, which allocate investments based on the saver's age, have also proven inadequate, McCool says. "It's a cookie-cutter, one-size-fits-all approach. We're hoping that by adding independent, one-on-one advice, we can help tailor plans to the needs of individuals and stop them from panicking and making bad decisions when the market gets scary."
How some make it work
So if that's what's wrong with the 401k, who are these super-rich among retirement savers who have managed to make the system work? And what are they doing differently? They don't necessarily have higher than average salaries or the investing IQ of Warren Buffett, VanDerhei says. "The one characteristic that differentiates the winners from the nonwinners here is contribution rate -- a high percentage of those million-dollar savers had constant participation and high contribution rates," he says.
Though many savers may be scarred by the past decade of lousy returns, getting to $1 million over the course of a 40-year career should be a manageable goal -- even for some lower-income employees, says Greg Burrows, a vice president of Principal Financial. Someone who earns $35,000, saves 12% to 13% (including a company match) and who gets an annual raise of 3.5% and annual returns of 7% would save a million dollars.
Despite the current volatility, many may still do that, he says. "One thing you have to keep in mind is that the 401k hasn't been around long enough for us to see people take full advantage of it over the course of an entire career."
Of course, those who earn big salaries are more likely to have big balances in their 401k's, says Mike Alfred, the CEO of Brightscope, which monitors and rates retirement plans. Further, the Great Recession not only wiped out many 401k balances, but its fallout also has hampered saving -- particularly among the middle class, he says. "There are a lot of families who have to simply stop saving because of a job loss or major health-care issue," he says.
On top of that, most participants can't -- or don't -- take full advantage of their 401k's, says Alfred. Advisers recommend savers max out their 401k contributions. But while the IRS raised the cap $500 to $17,000 for 2012, just 9% contribute the maximum, according to EBRI.
And to put $1 million in perspective: As nest eggs go, it's not exactly Fabergé. The rule of thumb, advisers say, is to accumulate enough to be able to replace 75% to 80% of one's income in retirement, without -- ideally -- having to draw down more than 5% of the balance per year. So a $1 million nest egg would give off just $50,000 annually, enough to replace 75% of the income of someone who made $66,666. Even if the retiree collects the current maximum Social Security payment of $30,156 annually for a total income of $80,156, that's still just the recommended replacement for an annual income of $106,874.
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US citizens plain and simple spend too much and expect too much out of government. Live simpler and smaller, save your income in any form you can. I am 46 and have been saving since I was 21. Yes, 21, it can be done - even if you make peanuts for income. I alone now have amassed nearly $250K in various forms of retirement savings. My wife about the same amount. I have worked a wide variety of jobs and have never made more than $50K at any job.
My advice for young people: 1.) Start saving right away and put away 15-20% of your income. Make do with what is left over. 2.) If you marry and want children - wait until you can afford them (at least 30 years old). Having children too young is the worst thing you can do. Children are very expensive and will not allow you to get a solid start and to develop the savings habits you will need to reach your retirement goals. 3.) Buy only used vehicles and take care of them and run them into the ground. Do not get into the habit of getting a new vehicle ever few years - it is a losing proposition. 4.) Don't buy too large of a house. Everyone seems to blame the banks for the housing crisis. Sure they had a hand in it, but it was the consumers who bit off more than they could chew. 4.) Eat at home and bring your own lunch to work. Eating out is expensive and bad for you.
I would love to hear comments from some of the writers on this line of responses. Many seem to be delusional and not taking responsibility for their own actions.
How did we do it with 4 Kids and a stay at home wife? Work hard, saving is treated like a bill you have to pay, buy your first color TV after age 40, buy cable after age 50 (World Trade Center antenna collapsed.), do not watch TV, work, save, do things yourself, do not have affairs, do not get divorced, inspect homes on weekend as a paid hobby, start two successful businesses, do not buy crap, and most of all stop whining.
Be afraid of the face you see in the mirror in the morning. Work and save
Where in this universe would anyone receive a 3.5% raise annually (besides Washington D.C.)?/ The average annual raise IN GOOD TIMES was 2% or less. Puttin the expectation is someones head that they should EXPECT a 3.5% annual raise is irresponsible reporting.7% annual returns?? You better believe theyr'e going to need someone else to manage their account. This article is rubish!! Look we all have to do what are Grandparents did, work 2 jobs, SAVR money, CUT expenses LOWER EXPECTATIONS and be happy with a roof over our heads and food on our table. A simple sense of welf worth would go a long way for the American worker. The key word is SELF, do it yourSELF, count on YOURSELF, do it YOURSELF. It is not up to your boss, your community or your Government to coddle you or to cover your **** if you fail. Personal responsibility that's the TRUE path to success, financially and personally.
How hard can it be to save $1 million when you're making half that each year? With the average Joe trying to raise a family on 60 grand or less, it's really tough to plan for retirement and keep up with the Jones's.
Most 401K's leave employees few options for investing, and most provide little if any useful advice. How stupid to berate private investors when professional fund managers have been unable to prevent losses of 40% and more - all the while sucking an additional 2 - 3% out of them despite their dreadful perforrmance. In my opinion, 401K's have become as big a scam as Bernie Madoff's. For the most part the only ones making any decent money are the fund managers. They get theirs win or lose.
At least I have passed the magic 59 1/2 mark so if the White House Joker starts messing with mine, I'll pull everything out and set up my own Cayman Islands account.
How on earth can someone earning 35,000 dollars a year begin to afford to put 10% into a 401 (assuming the employer kicks in 3%)? And who gets a 3.5% raise every year? I realize that times have been tough and that the working class has not received raises, but even in good times, I don't remember a 3.5% raise. My return on my 401 investment has been much less than 7% and I have been investing for awhile now. Please check what you are saying and apply it to reality.
Fortunately for me, I do make a little more and can afford to put a little more away, but I see people every day who are struggling on that $35,000 a year income to feed their family. This article makes it sound like these people are doing fine. They are not.
easy though it sounds most people cannot put 12% away into 401ks, and many companies do not match and have not given out raises in 3 or 4 yrs.
Dear Mr. Vision President,
Your comments are heard, but there are exceptions to the rule! I am self employed so i am subjected to the ridiculous 15+% Social Security tax and because I am only 45 years old, unless this government gets its S@@@ together, i will probably never see a dime of the money I have contributed in my 20+ career. I would LOVE to be able to invest 15% of my income in an IRA and I would probably be set in my retirement years. Further to the point, after I pay my 15% to FICA and my Federal and state taxes, there is little left over for a retirement fund. Yes, it is my choice to be self employed, but it is not my choice to pay 15% of my income into a system that is on the verge of collapse.
In this economy, it makes sense more than ever to contribute to a 401k. Here's why? These are pretax dollars invested. Right away, this is money I don't have to pay to Uncle Sam. Also, with the match, it's a win win, even if the market doesn't meet your expectations. The market will go back up. As one person commented, "the maket goes up, the market goes down, but it always trends up." Don't like paying taxes? Max out yoru 401k. Want to retire one day and not be a slave to the workforce? Max out your 401k. If you can't max out, you should be at least contributing 10% of your pay. what most skeptics don't realize is that a 10% contribution doesn't mean a 10% reduction in take home pay. It'll be far less, maybe 6 or 7% because you don't pay payroll taxes on the contributions. Yet, you're getting the whole 10%. I think that's a pretty good deal, and a good incentive to save!
I started contributing to a 403b in 1977. Later I had 401Ks. Over the the last 35 years, I have put in about $70,000 and my employers have contributed about $25,000. Today, all of the plans combined are worth $650,000. At the market top, they were worth maybe $700,000.
I make $40,000 per year. I have never made, even with overtime, more than $70,000 per year. My only secret is to never touch them. I make no withdrawals. There have been about 12 really good years, 15 so-so years and 6 bad years plus two disaster years. Bottom line, 401Ks do work if you give them long enough. Good years will come again. It may not be til 2025, but they will come back. The only way to achieve the results that I have had is to be invested when the good times roll and neither I nor anyone else knows when that will be.
The ONLY way to maximize your savings is to MANAGE THEM! That means invest carefully and wisely after researching your potential investments. 401k is only part of the picture. Youi have to discipline yourself to invest a good percentage of your income, even some after-tax investments. We lived beneath our income for years, did without expensive second homes, cruises, other expensive goodies and heavily invested. I retired at 58 with over $2MM invested, and with our SS we enjoy an annual income over $130K. Now we have that second hoime, travel, and enjoy life.
It takes discipline and unfortunately most people don't have that. Forget that expensive cup of Starbucks and the new car every 2 years. Live like your parents did and you can save money for retirement. Live like you're spending every dollar you make and you'll have nothing to retire on.
A 401K is one of the best tools for an average worker to easily save for a comfortable retirement. Employer matching funds alone are reason enough to participate. I can't believe that so many employees don't take advantage of this great benefit. I've socked away nearly half a million over the years, and I wasn't a highly compensated employee. I've done it by maxing out my contirbution and investing in indexed mutual funds. Since the money is withheld from my paycheck, I never missed it and was never tempted to spend it. It's one of the easiest ways to save. You just have to realize that the stock market will have its up and down cycles but will pay-off in the long-term.
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