At work we often have folks pass around different articles and talks that they find interesting or insightful in an effort to help all of us grow and learn.
A few weeks ago, this article entitled How Easy is it to become a 401(k) millionaire? Here’s the truth. came flying across my desk.
I was intrigued. I like 401(k)’s. I’m generally amenable to millionaires. Heck, I’ll even let in some truth every now and then if it brings a friend and pays for drinks.
So I dove head first into this article.
Written back in 2015 by a charming fellow named Stephen Gandel for Fortune, I found an article full of pessimism and lies about how impossible it was for you and I to become 401(k) millionaires. (Quite odd for an article with the word “truth” right there in the title.)
In Gandel’s own words…
So I decided to take a look at Fidelity’s five tips to see if I, too, could become a 401(k) millionaire. Sadly, I cannot, or at least I am not likely to. And neither, I’m sorry to say, are you.
What the what?!?
It turns out Gandel wrote a piece discouraging you and me, and even himself, from ever attempting to build wealth in our work sponsored 401(k) plans. Why did he think such negativity was a good idea?
That’s what we’re going to uncover today.
First, a Report by Fidelity Investments
In 2015, Fidelity Investments released a report stating that the number of people who had more than $1 million in their 401(k) account had doubled in the previous year.
This was a follow up to a report Fidelity released the year prior showing rising rates in the number of customers with an annual income of less an $150,000 who had amassed a 7-figure savings in their 401(k).
This wasn’t Fidelity being sneaky or underhanded in any way. It was a straightforward report showing data for the one thing Fidelity has specific knowledge about, the work sponsored 401(k) plans of their specific clients.
Gandel interpreted this as Fidelity saying that achieving a million-dollar portfolio in your 401(k) was not only possible, but it was easy if we followed what Fidelity found were the 5 key characteristics of these “average” 401(k) millionaires.
In his article, Gandel addresses those 5 key characteristics and comes to the conclusion that he personally, and you and I collectively, have no chance of ever amassing such a fortune.
So I think it’s important to take our own look at those 5 key characteristics Fidelity found, and decide for ourselves if achieving a 7-figure fortune truly is impossible for average folks like you, and me, and even Mr. Gandel.
Is $1 Million in a 401(k) Even a Good Measuring Stick?
Before we dive in, let’s establish that building a million-dollar portfolio solely within our work sponsored 401(k) is likely not a great plan. It’s quite possible to achieve a million-dollar portfolio with only 40 to 60 percent of that coming from our 401(k).
Looking only at 401(k)’s to measure wealth is a fallacy all on its own, but since that is the single product Fidelity had easy access to review, I understand their reasons for using it.
The truth is there are many millionaires that don’t have a million-dollar portfolio within their 401(k). Gandel’s analysis would have been much more helpful to his audience if he had shared that, but we’ll soon see that Gandel’s own analysis leaves many stones unturned while more or less taking Fidelity’s 5 characteristics as gospel, doing a significant disservice to his audience – a disservice we shall remedy today.
So with this knowledge, let’s jump into the five characteristics that Fidelity calls out as the most critical indicators of someone who will achieve a million-dollar 401(k) portfolio, and see if Gandel’s own analysis provides any additional wisdom.
Characteristic 1: Keep the same job for more than 30 years.
Gandel easily throws this idea under the bus for today’s workforce.
He touts statistics from the Bureau of Labor and Statistics from 2014 that show the average worker tenure today is just under 5 years.
What Fidelity is stating is that in their research they’ve seen that a vast number of their 401(k) millionaires have remained employed at the same company for an average of 34 years.
But that is in no way a pre-requisite to building a million-dollar portfolio in general, or even building a 7-figure 401(k) savings. We can change jobs 5 times in 10 years and still be completely on track to millionaire-town.
You’re likely aware that when we change jobs and move companies, we can take our 401(k) with us. We have the option of rolling it over to our new employer’s 401(k) or moving it into a Traditional IRA where it is still our money and still capable of growing and building wealth.
But somehow Gandel completely ignores that fact.
Instead, he takes this idea of working for one company, and one company only, for three decades as gospel for building a large 401(k) portfolio, which is so negligent that it should disqualify him from writing anything more about money in the future.
And yet he continues on to key factor number 2.
Characteristic 2: Save a lot.
People who accumulate large amounts of wealth rarely do it by saving $5 here and $20 there. Somehow this is revolutionary information to Gandel.
The Fidelity study shows that their 401(k) millionaires contribute an average of 14% of their paycheck to their 401(k).
That’s more than what I contribute, and probably more than you too.
Actually, no Mr. Gandel. It’s not. I max out my 401(k) contributions. And by max out, I mean I hit the $18,500 limit we are legally allowed to contribute to our 401(k).
Obviously, I wasn’t doing this starting out in my career at age 22, but even then, I was contributing 16% of my paltry rookie salary, which still qualifies as more than the 14% Fidelity offers as the average for 401(k) millionaires.
But by age 35, a full 13 years later, I was in a position to start maxing out my 401(k) contributions. How was I able to be in this position?
It started when my wife and I chose to drive a 15-year-old and 13-year-old car respectively, both of which we paid for in cash. We tracked our money relentlessly and paid off our house in 7 years, meaning we were completely mortgage free. We spent 3 years wiping out our credit card debt and student loans, so we had no debt at all.
This meant we could live on about 60% of our income, leaving 40% leftover.
Now those are choices we chose to make. I don’t know Gandel’s personal situation, but claiming he simply can’t contribute more to his 401(k) is just hard for me to believe.
It’s all a choice, and I’m guessing Gandel, and many others, simply choose to spend money in other areas, which is absolutely their right. But unless you work for minimum wage and live in a van down by the river, you don’t get to play the I Just Can’t card.
It’s a choice.
Which brings us to key characteristic number 3.
Characteristic 3: Work for an employer that matches your 401(k) contributions.
Step three is not even a “habit” you can control.
Out of our control? Really?
At some point, I think the entire article is Gandel just trolling his readers.
I was under the impression that we had some say in the companies that we work for. But according to Gandel, employment is some predetermined plan that we simply can’t change.
He is right that not all companies match 401(k) contributions, and those that do, have varying matching levels generally from 2% to 5%.
But you and I have choices about the companies that we work for. If we work for a company that doesn’t match 401(k) contributions, we can choose to look for a different employer if matching is really important to us.
We can also decide that we are a perfect fit and love our job at the company that doesn’t match 401(k) contributions. It’s a tradeoff, but a tradeoff we get to choose.
But here’s where Gandel’s analysis runs completely off the rails.
According to a 2012 survey, the latest I could find, conducted by American Investment Planners, only 58% of companies that offer a 401(k) matched their employees’ contributions at all, let alone 5%. In 2013, Vanguard found that the average 401(k) had a corporate match of 3%, two percentage points less than you will need to be a 401(k) millionaire. Oh well.
Two percentage points less than you will need to be a 401(k) millionaire?
Going back to point number two, one of the biggest factors in our ability to build wealth is our contribution level.
If we max out our 401(k) contributions at a company that has no match at all, we will eventually become a millionaire.
If we max out our contribution at a company that matches our contribution to any degree, we’ll become a millionaire a bit faster.
But in neither scenario is it impossible to achieve millionaire status. Yet for some reason Gandel wants us to believe that if we work for a company that doesn’t match at least 5% of our contribution, it is completely impossible for us to achieve a 7-figure portfolio.
Again, I say, complete nonsense!
I’m beginning to wonder if Gandel is really just bummed about his own situation, and he’s determined to drag as many other people down with him.
These are the types of people we need to ignore at all costs.
And we’re only three points into the five-point article. Let’s hurry through these last two.
Characteristic 4: Be Warren Buffet
This is Gandel going full raincloud.
The actual fourth point stated by Fidelity is that their 401(k) millionaires achieved an average of 4.8% return on their investment portfolio.
Gandel’s ray-of-sunshine take?
But remember that between 2000 through 2012 there were two market crashes. Over the same period, the average return of the stock market was 1.3%. So, to become a 401(k) millionaire, you had to do three times better than the stock market over the same time period.
Yes, let’s pull out the worst possible stock market returns over the past decade so we’ll absolutely understand that we’re screwed. We have no future. It’s not even worth trying. Give up now!
Instead, Gandel could have shown that the average annual S&P 500 return for the 5-year period from 2010 to March 2015 (the date his article was published) was 13.12%. That’s…um….a bit more than 3 times higher than the 1.3% return he chose to reference.
But I get it. Why shed some positivity in an article clearly meant to depress as many people as possible?
Characteristic 5: Don’t borrow from your 401k.
This is great advice. Borrowing from our 401(k) is a bad idea for many reasons.
First, we’re pulling money out of our money-making machine. Through the power of compound interest, every dollar invested represents dozens of future dollars. Every dollar removed from our 401(k) represents the loss of dozens of future dollars.
Removing money from our money making machine is a bad way to build wealth.
Secondly, if we have an outstanding 401(k) loan when we leave our company – and we will leave our company when we find a better job, move to a different part of the country, or get downsized – we’ll be required to pay back the entire loan in full usually within 60 days. Otherwise we’ll end up paying taxes on that money plus a 10% penalty.
And trust me, when we are moving across the country (or getting laid off) it’s a bad time to have another financial crisis trying to pay back borrowed money.
The best way to avoid borrowing against our 401(k) is to have an emergency fund of at least 3 to 6 months of living expenses saved up. This way when the car breaks, or the kid visits the emergency room, or the A/C gives up the ghost at home, we’ve got $10,000 to $20,000 just sitting there waiting to take care of it.
Never borrow against your 401(k).
But let’s check in on Gandel’s brilliant and uplifting advice.
Lastly, Fidelity says not to borrow from your 401(k) or cash it out. That may sound easy enough, but it’s not for many people.
Seriously. That’s all he offers.
To be fair, he does link to a 2014 U.S. News and World Report article outlining pretty much the exact same warnings about 401(k) loans I mention above. So that’s…uh…good.
The bottom line is that there are many ways to achieve a 7-figure net worth. It isn’t completely dependent on our 401(k), although the tax benefits, plus any company matching make this a great vehicle to start building wealth. But our 401(k) is just the beginning.
The truth is, achieving a 7-figure portfolio is fully within the grasp of most middle-class Americans. And depending on the choices we make, we don’t even have to wait until age 65 to achieve that dream. I know many regular people who have reached millionaire status in their 50’s, 40’s and even in their 30’s.
The real truth is that it’s simply a choice.
(Shhh. Don’t tell Stephen Gandel.)
(Oh, and let this be a lesson to all of us that not everything we read in “reputable” publications is actually true.)