Who wants to be a millionaire? Pretty much everyone who doesn't already have seven figures socked away. And that includes 401(k) savers who hope to join the elite $1 million club before they retire.
Sure, a million bucks isn't what it used to be. Blame pesky inflation, which erodes purchasing power, and sky-high home prices.
Still, $1 million is still a sizable sum of money that's aspirational. It's also a pathway to a secure retirement for many people.
The good news: The number of 401(k) millionaires rose 10% to 378,000 from March to June, according to Fidelity Investment's second-quarter retirement analysis. The study looks at account balances of workers with Fidelity 401(k) plans.
The bad news? The number of current Fidelity 401(k) millionaires account for just 1.6% of the 23.1 million 401(k) accounts it services.
What's more, two recent studies show most people think they'll need to save more than $1 million to retire comfortably. 401(k) plan participants at Charles Schwab think they'll need $1.8 million. And respondents to a Northwestern Mutual poll believe the magic number is $1.27 million.
So, what are the winning investment traits that enabled this small slice of retirement savers to amass $1 million?
Michael Shamrell, vice president of thought leadership for Fidelity Workplace Investing, ticks off the Big Three: "They have been saving for a long time, they save pretty aggressively, and they're not afraid of equities."
The profile of a $1 million 401(k) investor, according to Fidelity, looks something like this: Their average age is 59.4 years old. They've been invested in their 401(k) for about 26.6 years. And their average stock allocation is 76.6%.
So, just as a historian can discern the behavior and habits of successful people, so too can 401(k) profilers assemble a profile of a winning retirement investor.
Here are five keys to amassing a $1 million nest egg:
1. Play The Long Game To Be A Millionaire
Warren Buffett didn't make his first billion overnight. He didn't hit that 10-figure net-worth milestone until his mid-50s, despite buying his first stock at age 11.
Similarly, no 401(k) account holders are going to amass $1 million in a single bull market or at their first job.
It shouldn't be a surprise, therefore, that baby boomers, now 59 to 77 years old, account for most of Fidelity's 401(k) millionaires.
"We point to our 401(k) millionaires as examples of the positive outcomes that come from staying the course and taking a long-term approach to retirement planning," Shamrell said.
Speculating with your 401(k) isn't the road to success, either.
"A lot of people think it's hot stocks that added to 401(k) millionaires' account balances, or that all of a sudden overnight they were a millionaire," Shamrell said. "And that's not the case."
2. Invest Regularly
Just like coffee drinkers make a habit of having a cup of Joe daily, retirement savers need to make investing a regular part of their life, too. That means having a certain percentage of your paycheck go directly into your 401(k) every payday no matter if the S&P 500 is up 20% on the year or down 20%.
Fidelity recommends workers save 15% of their pay (including the company's matching contribution) for retirement. The average savings rate of its 401(k) millionaires was 13.9%, according to Fidelity.
Dollar-cost averaging is a good investing strategy for long-term money. It forces you to buy fewer shares when stock prices are high and more when prices are lower. Fidelity says a good way to put a systematic savings program into action is to put your savings on autopilot via automatic investments.
Fidelity's 401(k) millionaires have stayed the course despite many stock market storms over the past 30 years. Instead of jumping out of the market when turbulence picks up, they stick to their savings plan.
"This group has seen it all," said Shamrell. "Everything from the dot-com crash in the late '90s to the aftermath of 9/11 to the steep downturns in the 2008-09 financial crisis and the Covid-19 sell-off in 2020. A key part of building wealth is making 401(k) contributions throughout your career regardless of what the economic landscape may look like."
3. Be A Millionaire: Monetize The Match
Saving more not only means a bigger chunk of retirement change has the potential to benefit from the wonders of compounding, but it also boosts your chances of taking advantage of your company's full matching contributions.
More than 85% of 401(k) plans serviced by Fidelity offer some type of employee contribution. A common practice is for employers to put in 50 cents for every dollar the employee contributes up to 6%. So, a worker earning $100,000 who contributes 6%, or $6,000, to his or her 401(k) plan, would get an additional $3,000 from the company.
"You've got to take advantage of your employer's offer to contribute to your retirement savings," said Shamrell. "You don't want to leave money on the table."
4. Hold A Hefty Basket Of Stocks
If Gordon Gekko from the 1987 movie "Wall Street" was giving a speech today about saving for retirement, he'd probably include the catchphrase "Growth is good."
But to grow your money you need to hold a hefty helping of stocks, which historically have generated much higher returns than bonds and cash. That's especially true now, with people living longer. Some retirements can last 10, 15, 20 or 30 years or more.
Hoarding cash or investing too conservatively isn't going to get you where you want to go — to be a millionaire.
"To make sure that you don't outlive your money, you'll still need to have some level of growth in your portfolio — even when you enter retirement," Shamrell said.
5. Avoid Mistakes That Derail Your Plan
Many people, even diligent savers, are often to blame for personally upending their retirement savings plans.
One of the biggest mistakes is getting scared when economic conditions turn shaky and pulling out of the market, says Shamrell. Market timing is extremely difficult.
"Research shows that when markets rebound, they tend to rebound very quickly," said Shamrell. "So, if you pulled out of the market, you could be missing out on potential gains."
So-called "401(k) leakage" also results in lower account balances, says Shamrell. These mistakes include things like taking a loan from your 401(k) when you have other money-raising options. Another blunder is cashing out of your 401(k) instead of rolling it over when you change jobs.
Another no-no is playing it too safe and being too fearful of short-term market volatility.
"A lot of people are fairly risk averse, but they need to be conscious of the fact that this (trait) could potentially result in them not having as much money when they retire," said Shamrell.
The bottom-line: Building a $1 million nest egg isn't impossible. Your best chance of achieving that goal is to save as much as you can.
