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So here’s something unexpected… I just became a 401(k) millionaire last week.
As an early retiree, I had rolled over my 401(k) into a traditional IRA in March 2019. So on a technicality, I’m really a rollover IRA millionaire, but it’s still my 401(k) account sitting there with nothing new added to it since January 2019.
I had even pulled a little over $60,000 out of the account in December 2019. That was part of the Roth IRA conversion ladder I’m doing so we can access our retirement funds early.
Other than that, this account has just continued to grow alongside the market. And with it, I became a 401(k) millionaire last week.
Let’s talk a little bit more about how this happened and why it’s possible for you to do the same.
As a reminder, I’m not a financial advisor so please don’t make adjustments to your investments based on what I discuss. Talk to a professional to ensure you’re making the best decisions for your specific situation.
The path to $1 million and beyond…
Going from $0 to $1 million in a 401(k) isn’t something that happens overnight regardless of where you work. In my case though, I did something that isn’t as common as it used to be… I stayed at the same employer for almost 20 years. My 401(k) was built up solely from working at the same place.
When I first started working at the company in 1999, I was about $30k in consumer debt (credit cards). That doesn’t count the school loans or car loan I had either.
The good thing is that I was still living at home with my parents at the time. I wasn’t very bright financially back then but I still made the right decision to start contributing to the 401(k) plan I was offered. It wasn’t much at the time but I was at least contributing.
Of course, like most people, I had no idea what I was doing and just picked some random “yeah, these look good” funds in the plan. It wasn’t until later that I learned that they were funds with ridiculous fees (expense ratios) hidden in them.
But at least I was doing something.
And over the years, I slowly started increasing my contributions. Between that steady trickle along with the company match offered, the pot at the end of the rainbow started to grow.
I had to install an old copy of Quicken just to grab some of the old historical data (I’m all in on Personal Capital now!), but here’s what it’s looked like over time…
The chart is scrollable and you can hover or click on a bar to see the actual dollar amount depending on your browser.
Now, I’m not going to say that I didn’t have a little luck on my side. I began investing shortly after the dot-com bubble burst. In other words, I started buying in at the bottom of the market. That isn’t something anyone knew at the time, but it definitely helped me get where I needed to be.
That said, it’s important to note that I also didn’t panic when the 2008 crash happened. I just stayed the course and continued contributing money. I knew one guy who likely had a much larger portfolio than I did. But he panicked and sold everything he had because it freaked him out so much. He sold his entire portfolio at the bottom of the market and has kept everything in cash ever since. So he’s also missed out tremendously on growth over this past decade.
What does a 401(k) millionaire keep in his account?
Great question and the answer is that I keep much better holdings in it now than I did at the start.
When I first started with my 401(k), I was offered several funds to choose from and of course, I had no clue which ones to pick. I randomly chose mutual funds based on what I thought seemed logical. I took it a step further and actually looked at the past performance, but as we all know past performance is not indicative of future results.
If this sounds familiar, that’s because although 401(k) plans in the U.S. are well-intentioned (sort of), the system’s not designed well. Asking people who know nothing about investing to choose their investments is a terrible idea.
Wall Street is out to screw you over and drain you for every penny they can. Between high expense ratios that are generally well-hidden when possible and dropping and creating funds to hide bad past performance, novice investors are almost always positioned to just give away their money to the investment firms.
Just to give you an idea, some of the choices I was invested in funds included:
- MFS International Growth Fund-A
- MFS Corporate Bond A
- MFS Mid Cap Value Fund-A
- MFS New Discovery Fund-A
- MFS Aggressive Growth Alloc-Fd-A
- Dreyfus Basic S&P 500 Index Fd-A
Except for the Dreyfus index fund, I’m not proud of any of these other investments. Hell, I can’t even tell you much about them except I’m sure they enjoyed taking my money while they made random guesses on what would perform well in the market (can you tell I’m slightly bitter?!).
We’re now in a day and age where things have gotten a little better. Mutual fund companies are supposed to disclose their expense ratios more readily and there are more index fund offerings out there. However, we’re far from where we need to be.
Regardless, for the most part, I just left my investments be. It wasn’t until later that I realized that these companies were out to suck your hard-earned money out in the way of hidden fees.
I’ll talk more about that later in this post, but know that once I figured this out, I made a big change to my investments. In 2016, I moved everything in my account ($443,788.55) to be invested in the Vanguard Target Retirement 2055 Fund (VFFVX).
This was one of the only low-cost offerings to us in our plan (0.18% expense ratio at the time and now down to 0.15%). It was also the only target retirement fund we could choose from regardless of the date we planned to retire. Still, it was better than the other options.
A couple of months before I retired at the end of 2018, the company I worked for switched providers to Empower (who coincidentally now owns Personal Capital). Our investment choices changed and I moved everything I had in my account ($632,998.75) to American Funds 2055 Target Date Retirement Fund (AAMTX).
Finally, I retired at the end of 2018 and wasn’t a 401(k) millionaire yet… I wasn’t even close. But I was ecstatic to be able to move my money over to a traditional IRA where I could freely choose what to invest in. So that’s exactly what I did.
I rolled over $691,298.37 from Empower to Vanguard in February 2019. And here are my holdings as you see them today:
Remember that this is now just a part of our entire financial picture. As such, that’s why you see a year’s worth of our living expenses in BulletShares. The other BulletShares investments we have in our “Bucket 1” are in other investment accounts. I discussed more of this in detail in my post “The Drawdown on Investments – Our Game Plan” a couple of years ago. And the $25k in cash is part of what I’ll be using to buy VGSLX as I talked about in my last post, “Investment Portfolio Changes I’m Making!”
So there you have it. Because the stock market has been on an insane roll for so long, it’s helped the account take off without a doubt. The balance has grown over $375,000 since I retired without me adding another dime into it. That’s almost a 60% increase and doesn’t even account for the $60k I pulled from the account in 2019 as part of the Roth IRA conversion ladder that we’re doing.
How to become a 401(k) millionaire
I can’t guarantee you’ll become a 401(k) millionaire, but I do hope that this has inspired you to at least make that a goal. I’m excited to tell you that it’s possible even if you’re not bringing home doctor or lawyer paychecks.
So what do you need to do?
Save more… and the sooner the better!
Look, this should be the biggest gimme. If you want to become a 401(k) millionaire, you’ll need to sock away more money to make it happen. Putting 1% of each paycheck into the plan isn’t going to cut it.
I’m not saying that you need to max it out to the federal limit right off the rip ($19,500 for 2021), but you’re going to need to start pushing your contributions up.
My suggestion is to start with contributing the most you can afford (until you feel a pinch). But then look for opportunities to push that up even more.
If you get a 3% raise at work, raise your contribution by 2%, and then enjoy that extra 1% raise to spend on yourself… you get the best of both worlds! If you have a nice-sized bonus coming, talk to human resources and see if you can do a one-time contribution of half of it to your 401(k).
Two cool things to keep in mind:
- The earlier you contribute each dollar, the more time it has for compound interest to do its magic. Sure it’s great to think that you’ll contribute more down the line, but consider finding some ways to cut back on some things today so you can contribute a little extra sooner than later. You likely won’t miss it and you’ll appreciate it down the road!
- Be aware that contributions to traditional 401(k) plans are using pre-tax dollars (this doesn’t apply to Roth 401(k) plans). And this is something cool that took me a while to realize. Because taxes are taken out of your check based on the total after your 401(k) contribution, the more you contribute, the less you pay in taxes on that check. Because of that, it’s possible to contribute more and have your take-home pay be close to what it was before you upped your contributions. Try it out using a 401(k) calculator like this one or this one.
A future 401(k) millionaire loves the free $$$$!!!
If your employer offers you some type of match, I forbid you to not take advantage of it. Is that too strong? It shouldn’t be because it’s something you’ll regret later in life if you don’t.
When I was young, I thought it was nice that my employer offered a match on our 401(k) contributions… but I didn’t get just how valuable it truly is.
If we go back a step to the saving more idea, think about how valuable this match can be. Your employer is offering you free leverage to help you boost your 401(k) balance. Remember how compound interest needs time to do its thing? Now think about how much faster you can get there with someone else helping contribute.
My employer offered a unique match. Some of this was lumped under profit-sharing, but the overall gist was that we received 35 cents on every dollar contributed to our 401(k) plan. There was no limit on that match except for the federal max.
Take a step back and think about this. I was getting $35 of free money on every $100 I invested in my 401(k). That’s a 35% return before any stock market growth!
I’d be a fool to pass that up… and I was for several years. In my post, “How I Got Over $181,000 of Free Money for Retirement”, I talked about how it looks like I started maxing out my 401(k) somewhere between 2006 and 2008. I kept that up until I retired at the end of 2019.
But that’s still 7-9 years of not maxing the plan out. And because my employer was matching up to the federal max, I had too many years where I was missing out on free money.
As a former manager at the company, I can tell you that most of the employees were passing up some or all of that free money being offered… not good.
Becoming a 401(k) millionaire doesn’t mean you need to do it yourself. If your employer is offering you a match, you should be contributing at least everything you can to get every penny available to you. Find out what the max is that you can get a match on and set your sights on that target. Do what you need to do to make that happen.
The fees can eat you alive if you don’t pay attention
For years, I gave up way too much money to these companies due to my naivety of things. The fees they charge come out almost invisibly to you, so as long as your account continues to grow, you don’t think much about it.
However, I started using Personal Capital as some free software several years ago to get a better handle on my investments. It lets you securely link all your accounts (banking, credit cards, investment accounts, etc.) and it’s nice to be able to see everything in one place. This is something I also had with Quicken, but Personal Capital has a few other tricks up its sleeve.
One of those tricks is that it can see what fees you’re paying in your 401(k) account much easier than you can. I learned that the fees I was paying would amount to over $65,000 over just 10 years!
That got me going and I did a lot of digging around and I then easily changed my investments to ones with lower fees. After re-running the analyzer, I was now projected to pay just over $12,000 in fees over 10 years.
That’s more than a $50,000 savings just because some free software showed me what was really going on! If you’re not using Personal Capital to track your investments, it could be costing you big money!
Don’t ever cash out your 401(k) if/when you leave a job
I became a 401(k) millionaire through almost 20 years of employment through the same employer. However, this wasn’t my first 401(k) plan.
I was introduced to 401(k) plans when I worked at Walmart back in the mid-’90s. I’ll be honest – I didn’t contribute much back then (poor college student!). And then I made the biggest mistake you can do with a 401(k)… I cashed it out when I left.
That’s right – I was so desperate for cash that I withdrew everything I had in it. It sounded like a good idea at the time, but after having to pay taxes and a 10% penalty on it, was it really worth it? Probably not.
Looking back, I’m sure I could have cut back on expenses or borrowed a little money to make things work. But I didn’t realize what a big deal this was – not only did I get crushed from cashing it out, but I also missed out on a valuable opportunity for the magic of compound interest to grow this account at such a young age.
Such is life and obviously, things turned out fine for us financially, but that likely cost us time getting to where we are today. Don’t make the mistake I did – if you leave a job, let those 401(k) accounts continue to grow. Roll them over into an IRA and invest wisely – years from now you’ll be glad you did.
As if that mistake is embarrassing enough, what I’m about to do might even be worse! I’m sharing a regional commercial I did for Walmart back in the day…
Will I stay a 401(k) millionaire over the long run? Who knows? The market’s been crazy hot lately… too hot? Time will tell. Maybe this fun point in time will already be over by the time you read this.
In the meantime, I was just excited to reach such a cool milestone… and I’ve got the screenshots to prove it! 🙂
Plan well, take action, and live your best life!
Thanks for reading!!