Can You Still Become A 401(k) Millionaire?

Wealth is hard to measure. It’s easy to just count the numbers, but it’s more than that. It’s the people around you. It’s the places you’ve been. It’s the experiences you’ve had.

All those things that wealth is? They aren’t numbers you can count. They are, however, a lot easier to access when the one number you can count reaches certain threshold levels.

For many, the target number contains seven digits. That’s a million dollars. It may sound ambitious, especially if you’re young, but look around you. Chances are, there are more millionaires around you than you think.

For the last forty years we’ve been blessed with one of the most effective, most efficient, most effortless money-making machines ever invented. It’s the 401(k) plan. And it has produced a plethora of millionaires.

These millionaires aren’t the lucky few. They are the diligent hard-workers, often in very ordinary positions.

They are the human embodiment of the American Dream. And, despite what you might have been led to believe, these people are as everyday as you can get.

“We have all read the stories about the millionaire next door who built their wealth from essentially nothing by investing in the retirement plan at their job,” says Josh Simpson, Financial Advisor at Lake Advisory Group in Lady Lake, Florida. “Like most people, I was always skeptical of these stories because I had never met any of these people. However, after I became a financial advisor, I started to meet several of these people who had worked and saved and were able to join the ranks of the millionaires. One of the couples spent their lives working and saving through their 401(k) while he worked in automotive sales and she worked in accounts receivable for a payroll company in the Midwest. Another man was able to save enough money to become a millionaire while working for a church. I also met with a couple who saved their money while he worked as a police officer and she worked as a registered nurse in the Northeast. I have also met several others who worked as teachers, farmers and even truck drivers who saved enough in their 401(k) or 403(b) to become millionaires.”

That’s right. This simple savings vehicle, sponsored by your employer, has yielded a nation of millionaires. These aren’t Kardashian-type spendthrifts, either. They got there by saving, not spending. Their homes are modest, their cars are non-descript, and their suits are off-the rack. More important than any of those things, they are living the good life.

Wes Shannon, Registered Investment Adviser at SJK Financial Planning, LLC in Fort Worth, Texas, knows several people who became 401(k) millionaires prior to retirement. “It actually is much more common than people expect,” he says. “All of these individuals started with saving 10% of their income into their 401(k)’s up to the annual maximum contribution. It is much easier to start at 10% and live on 90% of pay from the beginning. Most of these received a company match of 100% on 3% to 5% of pay and the amount over that was just invested without a match. Think about it, if you put in 10% and your company matches another 3% you are making a guaranteed 30% return on your investment. The 401(k) is a vehicle to allow a person to ‘pay themselves first.’ It comes out of the paycheck and it is not missed. That and the matching and the tax-deferred growth is a perfect method to get a million dollars by retirement.”

The one critical trait among all these 401(k) millionaires has been the discipline to stay the course no matter how turbulent the seas of life.

“All my examples were able to reach the million-dollar mark by being committed to saving no matter what else was going on in their lives at the time,” says Simpson. “All of them raised families in different parts of the country and went through good times and bad, but they made sure that they stayed committed to saving their money. The use of their retirement accounts made it easier for two main reasons. They were able to have the money deducted straight from their paycheck and never saw it and the match that your employers contributed helped them to save more than they would have otherwise.”

While it’s clear what the past has produced, today’s younger workers may worry whether they, too, can reap the solid rewards seen by their elders.

“Yes, this same strategy can be repeated by employees today,” says Simpson. “It takes commitment and dedication to reach a goal that you set for yourself. There is nothing that says, over the next 30 years, you will not see the same type of annualized returns in the stock markets that older generations saw while they were all working. It may mean investing in different companies than your parents or grandparents did because of the changes to the world’s economy. But you have the ability to save money if you put their mind to it, develop a plan, and stick to the plan.”

Shannon believes there is a heuristic you can use to guide you. He says, “You can attain this if you start with putting 10% of pay into your plan from the very beginning. It truly is an easy process. Sign up and be done. I know of one salesman for a building construction supply company who is 35 years old and his current balance, current returns, and contributions should put him closer to $2 million by retirement age.”

You should also consider this: maybe you don’t need to hit that one-million-dollar threshold. Maybe you can live comfortably at a much lower target. Once you discover this, you won’t be concerned with measuring yourself against what others say you should be doing.

Don’t fall prey to those who lament the terrible condition of our collective retirement readiness. Retirement is not a “one size fits all” option. You can ensure your comfort by customizing your own personal retirement readiness.

 “The current environment and disparity with wages seem to always be the reasons some people use to explain why different groups of people are not able to save money for retirement,” says Simpson. “There are a few things that can still be done to create the retirement you want. First, define what you want your retirement to look like. Do you want to completely retire and never work or do you think that you would like to work part time? Second, realistically look at your financial situation and taking your age into account, decide what amount of money you would reasonably be able to save for retirement, if you received a modest annual gain of 5%. The average annualized return of the S&P 500 since its inception is more than 9%. Maybe you cannot get to one million but maybe you can get to $300,000 with no debt and minimal monthly bills, so you will not need much to supplement your retirement income.”

There’s one other trick that can make your retirement target much less than a million dollars. Remember, most of the 401(k) millionaires of today used the traditional tax-deferred method of retirement saving. As a result, a large portion of that million dollars is earmarked for Uncle Sam.

It doesn’t have to be that way.

“I cannot think of a better strategy than a ROTH 401(k) contribution with a company match,” says Shannon. “It can’t be beat.”

The ROTH option allows you to save and withdraw tax-free. That means you’ll be able to save a lot less and live a similar retirement lifestyle compared to a tax-deferred retirement saver.

So, can you still become a 401(k) millionaire? You certainly can, but you may not need to.

There’s nothing wrong with today’s 401(k) plans. Because you can contribute significantly more in them compared to an IRA, and because your company will often kick in some matching amount, they remain the preferred retirement saving vehicle.

There is, in fact, only one thing wrong with them. Far too many workers don’t have access to them.

That may all change beginning next January when you will begin seeing pooled 401(k) plans made available to many more workers than ever before.