Fidelity’s latest analysis of the 24.5 million 401(k) accounts it manages shows near-record numbers of retirement plan millionaires. According to the company’s Q4 2024 analysis, there were 537,000 401(k) plan millionaires in its plans at the end of last year — second only to the 544,000 at the end of 2024’s third quarter.
What’s the secret to their success? Is it a mystery? Have they taken an approach that’s out of reach for most mortal investors? Not at all. They have taken basic steps that are available to all.
While most investors have seen their portfolios buoyed by strong market returns in 2023 and 2024, the keys to a 401(k) millionaire’s success are mainly behavioral — starting to invest early, contributing a healthy portion of one’s salary to a retirement plan, staying consistent, and resisting the temptation to pull money out before retirement. (See Getting the Big Moves Right.)
Start early
Not surprisingly, older investors make up the bulk of Fidelity’s 401(k) millionaires. Most are Gen Xers or Boomers, which makes sense, given the importance of time to the compounding equation.
Consider this. If a 21-year-old making $50,000 invests 10% of her income, gets a 2% raise each year and generates a 7% average annual return, by age 70, she’ll have nearly $2.6 million. But if she waits just five years, starting to invest at age 26 when her salary is $55,200, keeping all other assumptions the same, she’ll end up with about $2 million. That’s a hefty $600,000 penalty for waiting five years.
Invest a lot
Fidelity’s study shows an impressive 14.1% average savings rate — a 9.4% average employee contribution rate and a 4.7% average employer contribution rate. That’s good news, given the relatively low default rate many automatic-enrollment plans use. It shows the benefit of auto-escalation used by an increasing number of plans, where the contribution rate automatically increases over time.
Remember, you don’t have to accept your company’s default contribution rate. You can opt for a higher rate.
Stay with it
In previous studies, Fidelity has said that its 401(k) millionaires have been saving for an average of 26 years. That means they’ve seen their share of bull markets and bear markets. Dollar-cost averaging, where you continue to invest no matter what’s happening in the market, is a time-tested successful approach to investing.
In essence, it acknowledges that no one can predict the market. You just keep adding to your portfolio with the same percentage of your salary every month. When the market is down, your money buys more shares; when it is up, it buys fewer shares.
SMI has compared the results of an investor who added $250 to his portfolio at the same time every month with an impossibly “perfect” investor who added $3,000 to his portfolio once a year at each year’s market low. After 20 years, the perfect investor’s average annual return outperformed the dollar-cost-averaging investor by just one percentage point. And again, the perfect investor’s approach is impossible, whereas the dollar-cost-averaging investor’s approach is available to all.
Leave the money alone
One final behavioral factor that makes a big difference is keeping your retirement money invested. It’s relatively easy to borrow against a 401(k) plan, and many people who change jobs, especially those under age 30, cash out their 401(k) accounts when they change jobs. Doing either one will be detrimental to your retirement preparedness.
You can’t control what the markets will do. Fortunately, as the Fidelity study demonstrates, your success as an investor depends far more on factors that are well within your control.
