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 headfirst into this article.
Written back in 2015 by a charming fellow named Stephen Gandel for Fortune, I was a bit surprised to find the 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 than $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 100% 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, though probably not solely in our 401k.
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.