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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Holy Cow! This board is overrun with people who have rationalized their lot in life. They don't want to count on themselves because if they fail, they have no one to blame. It is always someone or something else's fault. The decision is simple but not easy. Live below your means and save and don't count on anyone else to improve your lot in life.
The downside is if you do that, you won't have anyone to blame but yourself.
I think Craig has it right "you can retire with a million dollars, but you had better save a million". Something tells me he doesn't belive that..
Reduce our taxes by separating our taxes from the Gov't Non-Productive Retirees first . Productive workforce should not be made non-productive to support retirees.
All contracts can be modified.
Don't save and pretend that you can live on Social Security. There is nothing wrong with working until you die just don't blame someone else for your stupidity.
contribution from the next generation into retirement plans is essential for retirement plans to continue.
Coverup of modern day events as 911 is impossible. But Succeeded as our bellies were kept full and will not be able to satisfy these future contributors.
Save the retirement systems now as it does not have to go into a complete collapse. Re-Open & re-investigate 911 . The Truth is best for the Golden Years .
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
I still own the other stocks. Disciplined long term saving with dividends reinvested have made me a GS-9 (not a 1%er) millionaire before reaching my minimum retirement age. No annual fees and the magic of compounding.
And your comment is not at all helpful to young people like myself today.
There are annual fees in almost every single 401k, and they have grown in the last decade and will impair our long term compounding prospects.
Aside from the fact that, living for us from 2000 thru today has been filled with increasing costs on all sides, healthcare, education (which education dwarfs everything else, it's increased 300% in the last 20 years), oil, food.
As opposed to the period in which you made your money. 1980-2000.
For you young folks, times were much harder back then. And "time" is on your side.
This comment is beyond bogus and I can't believe people voted it up.
You're kidding yourself a) if you think 1975 job market and prospects and just living was harder than today and b) considering the period after that. 1980-2000, in which you were doing your saving and compounding.
It's really just insulting to say that. Shows a lack of empathy to the current problem for young people. And offers no viable solutions (like, why not promote financial education in our gradeschools? We have math, english, etc. But ultimately, financial education is very important to success).
Comparing the two jobs markets is apples to freaking moonpies. There has never been a harder job market since the depression. Never.
You have obviously never looked at this chart. So just let me show you....
This is why what you say is almost insulting. Pre-1990. The average recovery to full employment was 12-24 months in 8 separate recessions. 1990 was 34 months. 2001 was 46 months. And looky at 2007. It's targeting 8+ years back to full employment.
So don't sit there and say things were easier without even bothering to actually look at data.
And remember If my retirement plan doesn't pan out, I'll be that happy old guy flippin' burgers in your neighborhood.
To Brian_2273, You sound like a bright young man, who took advantage of the downturn. It is a shame there are not more like you.
You have already posted that you will make the $1M mark with just your existing contributions (which are valued at nearly three years gross salary, in just a ten year period). Just think about your potential if you continue to contribute!
Financial advise from someone I don't know in an industry I don't trust? I don't think so. I'll bet most of the people who "do not take advantage of the available advice" feel the same way I do. The people giving the advice are part of the industry that: 1) allowed savings and loans to get crushed underfoot, 2) allowed the junk bond crash to take place, 3) pushed along the "Tech Bubble" in the stock market, 4) created financial instruments traded in a back room that was not investigated or regulated and brought annuity firms like AIG to its knees, 5) packaged mortgages in such a way that they could hide no-doc junk mortgages and drop them off on the unsuspecting until the market collapsed. These people are going to give ME advice?
continues to grow and is setup to be the last failure even after all the infrastructue collapeses Gov't Retiree Pay is the first Contractual Obligation to be paid above all problems and needs.
Dog eat Dog plans are the main causes of false flag events (911)
All Contracts , even Government Retiree contracts should be re- negotiated !
Reduce my taxes, so I don't have to carry these non-productive gov't employees. and maybe my 401K can live !
And more UPPER Middle Class Citizens than 401K participants.
I'm sure other states Public Employee Retirement Systems are as productive. As these systems are projected to produce more millionaires than the lottery.
retiring from Federal Gov't is not too shabby either, Army, NAVY. CIA. Too bad they're underfunded by more than FOUR TRILLION DOLLARS !
I taught myself how to invest and I have done well with my investments. About the same time I started investing in stocks the company I worked for started a 401K plan. Our pension plan went the way of the dinosaur and the 401K plan was used to take its place. My company matched part of the money we contributed. Even though my salary was not high I did my best to max out my contributions in the plan. I was laid off after working for the company for over ten years.
I had to start over and was able to find a new job. My current employer had a 401K plan and as soon as I was able to I joined the plan. Once again I try to max out my contributions and my company also matches part of my contribution. In both plans I did my best to diversify my investments. Except for the company stock the plans only offered mutual funds to invest in.
I still have over ten years before I will consider retiring and I have a nice balance in my 401K plans and I am well on my way to have a comfortable retirement. I wish I was able to buy stocks or other securities in my 401K plans but I am still satisfied with the progress I have made. My only regret is that I should I had started sooner to invest my money in the stock market.
My advice to anyone reading this article is to start investing in your 401K plans as soon as possible and put as much money away as you can. If your company has a matching plan you should at least invest the amount of money your company will match. You should also make sure you diversify your investments and try to pick low cost mutual funds if that is what your plan offers.
If you get a raise each year you should bump up your 401K contribution. The earlier you start investing and the more disciplined you are the better off you will be when it is time to retire. You will be amazed how quickly your money will grow by compounding alone. The more it hurts you today the less it will hurt when you are older.
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