Who wants to be a 401k millionaire?

George is a 401k millionaire.  He is a client of ours, he’s 59 years old, and George isn’t his real name.  George has worked for the same company for 34 years (yes Millennials, it can be done). His employer was one of the first corporations to adopt the 401k plan around the time that George came onboard in 1981. George saw the benefits right away and decided that he would make the effort to max out his 401k contributions.

Over the years, George has deferred on average 14% of his pay. He started out much lower but decided that with each raise he would increase his deferral percentage, eventually landing at his current 16%. The company that George has worked for offers an employer match, which amounts to 5% of George’s base salary. This meant that over the course of his career, George has effectively been setting aside 19% of his income in his 401k account (and currently 21%). In recent years, George’s salary has approached $150,000 but for the majority of his career, he didn’t earn in the six figures.

Ever since a high school economics class, George had been intrigued by the stock market. As a result of his affinity for stocks, George decided that he would allocate 75% of his 401k account to equities, with the other 25% going to bonds. So, what is George’s current 401k balance? Just over $1 million.

Now it’s time to come clean. George isn’t a real person; rather he’s an amalgam. Fidelity recently studied 401k plan investors with over $1 million in their accounts. The qualities that George exhibits above are largely the median values from this study.

The five key takeaways from this are as follows:

-Saving aggressively, especially while younger, allows the power of compounding to do its best work.

-Persistence, focus, and patience are what leads to success, not only in investing but in life.

-You need a healthy exposure to stocks. Invest more aggressively when you’re younger, but don’t get too conservative later on.

-Don’t underestimate the importance of employer matching contributions, which accounted for a third of total plan contributions for 401k millionaires.

-Finally, if you do change jobs, don’t cash out your retirement account. Either roll it over to an IRA or into your next employer’s plan. Keeping this money pre-tax (which is what the majority of 401k participants have) allows even more money to work for you over time.

Source: “How to become a 401(k) plan millionaire” – CBS Marketwatch

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Since 1995, Pittenger & Anderson has guided individuals and families going through money-in-motion events. We are a fee-only Registered Investment Advisor and a full-time fiduciary providing investment management, financial planning, and complimentary services to 700+ clients in over 30 U.S. states.

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