A 401K Millionaire Rebuttal
A few days ago I came across an article about 401 (k) and how easy it is to be a millionaire, laced with some heavy sarcasm and disbelief. I read the article like many of the big box articles that I come across with anger in my thoughts and disbelief in my heart. So I decided to craft a rebuttal and look at the article and research from a personal finance blogger who’s goal is to reach financial independence and retire early. Before you launch into my rebuttal please take a read of the Fidelity article titled Five habits of 401(k) millionaires and the Fortune response titled How easy is it to become a 401 (k) millionaire? Here’s the truth. The good news is I got time, go ahead read both articles, if not that’s OK with me as well, i’ll be diving in to them with a smile on my face.
Let me get it out there right in the open, I am not a 401 (k) millionaire, I am currently contributing 4% of my salary to receive the company match, this percentage will go up shortly after I pay off my student loan debt. My salary is less than $150,000, during the time I have been working I have stayed with the same company, with a one year gap in between, during this one year gap I found the women I decided to marry, best year off ever right?! For a salary I’m going to use $52,000 for any calculations. The reason is when you Google average annual income 2014, you get the below picture giving the 2013 income, because this was close enough to $52,000 I decided we would roll with it.
1. Start Saving Early-Fidelity
1. Have a job and keep the same one for more than three decades-Fortune
As you can see that’s quite a difference in statements. The bottom line for both statements is if you want to have a million dollars by the time you re
tire, you are going to need a good number of years to save up money and have the power of compounding work for you. 30 years is a good number for compounding since it captures most people’s working lives. The footnote Fortune uses to get you nodding your head yes is “This population had a median age of 59 and median tenure of just under 34 years”. First let’s clear up the definition for Fidelity and Fortune of the term median, please see below. I don’t want to split hairs, the individuals in this study stayed with their company for 30 years, i’m good with that.
Let’s think about that for a minute, this study was completed in 2012, so 30 years before that was 1982. Want to know what was new to the S & P 500 in 1982, Wal-Mart and Apple and the S & P 500 was trading in the low 100’s, versus today’s low 2000 mark. What am I getting at here? That times were different, people did not jump from company to company in hopes of a higher salary. I mean my grandfather worked at a rivet company for 30 years and then retired on a pension, both of those things are pretty rare today unless you are a government worker in some capacity. I believe a better takeaway is that individuals worked for 30 years to get to a million dollars, it didn’t happen overnight, it took time and a whole lot of compounding interest. Today has changed, more people are switching jobs, but the ultimate affect is they are still working. Let’s do some math below to see how this affects today’s modern day employee.
30 years at Wal-Mart=30 years
5 years at Wal-Mart + 10 years at Target + 15 years at Apple=30 years
12 years at Wal-Mart + 18 years at Apple=30 years
Sometimes the math can be tricky so I wanted to make sure they all added up to 30 years. So as times change and individuals switch jobs more frequently than in the past 30 years, do one thing, keep working and start saving early.
2. Contribute a minimum of 10% to 15%-Fidelity
2. Save a lot-Fortune
Based on what I currently contribute, that is more than doubling or tripling my current savings rate is a lot using 4% as a base of what’s normal. Here’s the thing though, I have plenty of room to spare in my budget, I have instead decided to tackle my student loan debt before I begin making larger contributions. Remember our salary of $52,000, well 10% of that is $5200 and 15% of that is $7800, which amounts to:
- $100-$150 per week
- $200-$300 per bi-weekly paycheck
- $217-$325 per bi-monthly paycheck
When you look at those numbers (remember all pre-tax) they don’t seem like a lot of money, I mean we could be millionaires right! 15% why not save 30% or 50%, remember this is the average, let’s go big, I mean why save a million why not save a few million. I agree with both statements we all should be saving more, because if we don’t’ save a lot, how the hell can we get to a million dollars, certainly not with magic pixie dust.
3. Meet your Employer Match-Fidelity
3. Work for an employer who matches your contributions-Fortune
This is one that instead of taking what’s in the Fidelity research, Fortune decided to search for a survey that not only didn’t correlate with the actual habit, but instead focused on the actual percentage of the match. Let’s look at the detail that really matters, “Today, 96% of 401(k) participants are in a plan that offers some type of employer contribution, but not all of them take full advantage of the opportunity.” What?!?! 96% offer some sort of match that’s incredible. So let’s not forget whatever your match may be 3%, 4%, 10%, let’s make sure your contribution meets this and reap the rewards for your 401 (k) future. Remember if you look at the glass half empty, the glass will always be half empty.
4. Consider Mutual Funds that Invest in Stocks-Fidelity
4. Be Warren Buffett-Fortune
At some point you have to begin to wonder if the individual writing the article is even reading the study by Fidelity? Well are you? Fidelity research states that investors had an average of 75% of their investments in stocks and mutual funds, this allowed for investment gains to reach the 1 million dollar number. The study mentions that from 2000-2012 the investors returned an average of 4.8%, while Fortune uses a 1.3% return, without any historical reference. When you make statements like this is when a big red flag should come up. Habit number one is to start saving early and the reason for that is because the compounding effect needs to take place, if these individuals have been working for 30 years, why would anyone care what the return is for a 12 year period, why don’t we look at the historical returns over a large period of time, instead let’s see what the S and P(SPX) returned from 1982 until 2012 or 30 years. Well it’s 926.20%, let me write that again 926.20% or another calculator input gave me the compound annual growth rate of 9.42% adjusted for inflation. So you don’t need to be Warren Buffet and as these 401 (k) millionaires have shown, you can just be an average Joe or Jane.
5. Don’t Cash Out When Changing Jobs-Fidelity
5. Don’t Borrow from your 401 (k)or cash it out-Fortune
Well let me start with the lowest hanging fruit first. The article makes no mention of borrowing from a 401 (k), sorda like me saying you need to make money from your job, but don’t rob a bank. I mean what in the world does that have to do with cashing out your 401 (k)? I read the entire linked article and not even a mention of cashing out your 401 (k) when you change jobs, only mention of borrowing from your 401 (k). I mean the author had to talk about changing jobs and cashing out your investments right? Nope. That’s what he leaves us with.
The point of the habit is that if you want to be a millionaire, you cannot take money out that you have built up, you need to keep your retirement savings intact. What most personal finance and/or financial advisers recommend moving these funds to a Rollover IRA because this provides more options to invest in.
We all want to be a millionaire in some form or fashion, the reasons behind it may be different, but everyone* wants to accumulate wealth in some form or fashion. Today one of the main retirement vehicles is the 401 (k) and we have two choices:
- Invest money into our 401 (k) and realize the more we save, the more our savings will be
- Do not invest money into our 401 (k) and instead explain how poor of a choice this is
I could provide numbers, historical data, savings rates, and big fancy graphs. I will not, do not want to complicate things, I want to keep things simple. Instead I will tell you over and over to invest in your 401 (k). Invest something, don’t let someone tell you that investing 1% doesn’t matter, because not everyone jumps in the water, some feel better dipping their toe in the water. Eventually it is in your best interest to be in the water and yes the sooner the better, because we all want to be millionaires and a 401 (k) is one of the options to get there. Go ahead, the water feels great, in fact I’m getting ready to jump in soon.
* I’m sure their are exceptions, but if you are reading about 401 (k) information you are probably not one of the exceptions.