Got $1 million in your 401(k)? Some savers might be surprised how feasible that savings goal is if they put their mind — and their money — to it.
Of course, if you don’t have $1 million saved, you’re definitely not alone.
Just 0.42 percent of all 401(k) participants in the Employee Benefit Research Institute’s database had $1 million or more in their account at the end of 2013. EBRI’s data covers 26.4 million savers.
Similarly, just a tad more than 72,000 retirement savers, or 0.56 percent of the 13 million plan participants in its database, had $1 million or more in their 401(k) account at the end of 2014, according to Fidelity Investments’ analysis of the plans it manages.
Then there is the very worrisome data on the other side of the coin:
- About 31 percent of Americans have no retirement savings and no pension, according to a recent study by Center for American Progress, citing data from the Board of Governors of the Federal Reserve System.
- Most people who’ve saved some money haven’t saved much: Among households aged 55 to 65 who have retirement accounts, the median account balance was $104,000, according to the Center’s report.
But this story is aimed at those who have a comfortable salary — those who may not realize that a little focus on their retirement savings could get them to $1 million without too much trouble.
Having time on your side helps. Say you make $75,000, and enjoy a 3 percent pay raise every year. If you can get a 7 percent annual return on your money, plus your company gives you a 50 percent match on the first 6 percent you contribute to your 401(k) — a not-uncommon company match — then getting to $1 million requires contributing just 7.3 percent of your paycheck every year for 30 years, said Jason Hull of Hull Financial Planning in Fort Worth, Texas.
If your salary is less, or you get a smaller company match, don’t enjoy a 7 percent return or have less time, you’ll have to save a higher percentage of your money. To play with these numbers, visit the 401(k) calculator on Bankrate.com
‘Work Your Way Up’
Saving $1 million may not be easy. But for many Americans, it’s not impossible. It does, however, require a focus on current spending and future goals.
Saving $1 million “is certainly doable, but to do it people really need to have clarity on what their goals are,” said Jeff Gorton, a certified financial planner and founder of the Gorton Financial Group in Oklahoma City.
That means thinking long and hard about where your money is going now, whether that’s the best use of your money or whether it makes more sense to stash that money away
“If you don’t sacrifice some of your lifestyle now, then what you’re really doing is sacrificing your future lifestyle,” Gorton said.
Maybe you can’t contribute the annual maximum of $18,000 ($24,000 if you’re 50 or older) to your 401(k). That’s OK. “Start where you’re at and work your way up,” Gorton said.
Here’s some inspiration for you: Gorton knows a mechanic — an employee in his early 60s – who is currently contributing $24,000 to his 401(k).
That’s half of his salary.
“He is not making a lot of money, but he’s putting in his $24,000,” Gorton said. “He’s been a mechanic for more than 30 years. He’s trying to beef up his retirement as much as he can. Every time he gets a raise, he tries to put at least half of the raise into his 401(k).”
Time Not On Your Side?
If you’re in your 40s or 50s and thus with less time on your side, then you’ll have to figure out ways to squirrel away more.
“If you start at age 50, a couple putting away $48,000 a year, at age 65 if they earn zero interest they’re going to have almost $750,000,” Gorton said. “If you make modest returns, you can easily be over $1 million.”
Of course, $48,000 is a lot of money. Still, some of the people on the forefront of the financial independence movement embrace the idea of living on much less. Don’t buy a new car. Eat out less. You get the picture.
Take Mr. Money Mustache. The popular blogger and his wife and young son live on about $25,000 a year (they live in Colorado and own their house outright).
A $1 million retirement account “can generate an income of roughly $40,000 a year for many decades, and you can add in any Social Security or other pension income on top of that,” Mr. Money Mustache said in an email interview.
“But I’d advise people with above-average incomes to think even bigger: alongside that trickle of $18,000 a year into the 401(k), put additional savings into a Roth IRA if applicable, and even more into plain old Vanguard index funds in an after-tax account,” he said.
“If you can save more than half of your take-home income and learn to live well on the remainder, you’ll have enough to retire in only 17 years. If you can save two-thirds, your mandatory working career can be under 10 years.”
The Money Mustache way is not for everyone. For example, he does his own home maintenance — a task that not everyone can or wants to do.
The key is to take time now to think about your spending and make sure it matches your values.
“I’m a fan of spending lavishly on the things that are important to you and eliminating the things that don’t matter to you,” Hull said.
Here’s another way to power your savings higher: Find ways to increase income, such asking for a raise or finding an additional income source, such as a part-time job. Then funnel that money into your retirement-savings account.
Also, make sure you’re investing in low-cost index mutual funds. “Don’t try to chase returns,” Hull said.
"Active investors, market timers — they underperform the market,” he said. “It’s going to be a long haul. You’re not going to get to $1 million in five years just by investing in your 401(k)."
This article originally appeared on MarketWatch.com and is reprinted by permission from Marketwatch.com, ©2015 Dow Jones & Co. Inc. All rights reserved.