401(k) millionaire

America’s 401(k) Millionaires Rebound

After falling in 2022, the number of 401(k) millionaires in America is rising again, showing persistence pays off in the long term, notwithstanding the market’s ups and downs.

This exclusive group of savers owns retirement accounts with balances over $1 million. The types of accounts include 401(k)s, 403(b)s, and IRAs. As per the latest data from Fidelity Investments, the mutual fund and brokerage giant, the number of millionaires climbed almost 26% after the first half of 2023.

The comeback of American 401(k) millionaires is encouraging for all workers. It shows that successful saving for retirement requires patience. To quote John Bogle, the father of index funds and founder of Vanguard, “The winning formula for success in investing is owning the entire stock market through an index fund, and then doing nothing. Just stay the course.”


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Last Year Was Rough for Retirement Savers

Stock markets performed poorly in 2022. The market entered 2022 on a high note. But the highest inflation in 40 years, and the U.S. Federal Reserve’s response of quickly raising interest rates triggered a simultaneous decline in equities, bonds, and cryptocurrencies.

In fact, it was the worst year since the Great Recession for Wall Street. The S&P 500 Index, a commonly used benchmark for index funds, was down almost 20%, the worst year since 2008. The Dow Jones Industrial Averages (DJIA) also declined a more modest 9%. However, the Nasdaq Composite was in a bear market after plummeting approximately 33%.

As a result, the number of 401(k) millionaires fell by almost 33% because of a 20% decline in retirement account balances. Anxious investors were likely apprehensive about 2023 because the Fed remained hawkish in combating inflation.

But double-digit gains for the Nasdaq Composite and the S&P 500 Index year-to-date have allowed retirement account balances to expand for three quarters in a row.

A Noteworthy Achievement

The rise in number of 401(k) millionaires is a significant achievement for America’s savers. By mid-year, a total of 378,000 had balances of million dollars or more in Fidelity’s 401(k) plans. This value climbed from 299,000 at the end of 2022. The average 401(k) balance was about $1.5 million, and the typical person was 59 years old, with an average of 26 years in their plan.

Another 349,104 people were investment retirement account (IRA), millionaires, up from 280,320 on the last day of December 2022.

Although impressive, the total was short of the record at the end of 2021, when the stock market completed a strong bull run. The all-time highs were approximately 442,000 401(k) and 376,100 IRA millionaires.

However, a retirement account millionaire is in an exclusive club. At Fidelity, only about 1.6% of 401(k) and 2.5% of IRA accounts contain at least $1 million.

The Average Worker is Doing Better

How much you should have in your 401(k) plan depends on your age and circumstances. But generally, the average worker is doing better. In the first half of the year, the average 401(k) account balance was $112,400; for an IRA was $113,800; and for a 403(b) was $102,400.

Moreover, the average balances increased across all age groups from the prior year. Younger workers saw larger increases in their average 401(k) balance. In fact, Generation Z saw a 66% increase, Millennials or Generation Y saw a 24.5% rise, and Generation X experienced a 14.5% growth. The oldest age group tracked, the Baby Boomers, saw a 6.3% increase, presumably because they own more conservative mutual funds with less exposure to equities.

Much of the success is due to decent stock market performance combined with consistent savings, regardless of volatility. For instance, some of the largest mutual funds, like the Vanguard Total Stock Market Index Fund (VTSAX) and the Fidelity 500 Index Fund (FXAIX), are up about 14.6% and 15.4%, respectively. In addition, options in some plans like auto-enrollment and contribution escalators are causing workers to save more earlier.

Investing to Become a 401(k) Millionaire

The 401(k) millionaires are different than most workers. They save at higher rates and for longer durations. This exclusive club saves 17.2% of their salary. Their employers contribute another 9.3%, summing to a total saving rate of 26.5%, a value only a tiny number can match unless your mortgage and student loans are paid off.

However, following the retirement millionaire habits makes sense because of their success. 

Save at a High Rate

Successful retirement plan investors save at a higher rate than most other people. Most younger workers probably cannot save 17.2% of their salary in a 401(k). But at a minimum, contributing enough to receive the company match is prudent. Afterward, raise the percentage to boost your savings as your salary rises.

Start Early and Be Consistent

Starting early and staying the course is essential to take advantage of the power of compounding. A 401(k) or IRA account is not a get-rich scheme. Doug Greenberg, President of Pacific Northwest Advisory, told Dividend Power, “…consistently invest in your 401(k), but to truly harness its potential, one must maximize contributions and fine-tune investment choices…”

Use Target Date Funds or Index Funds

Most workers do not have the time to manage their own funds because of their busy schedules. They are often better off investing in a target date fund or a few index funds. They have several advantages like low cost and simplicity. In addition, target date funds usually hold a blend of stocks, bonds, and cash. The ratio changes from a growth tilt when you are young to a more conservative portfolio near retirement.

Bottom Line

Becoming a 401(k) millionaire is challenging but possible. You need a long-term approach, consistently saving at a sufficiently high rate and avoiding short-term reactions to the market’s ups and downs. Terrie Amundson, CFP of The Heights Financial, stated, “…patience and a well-structured investment approach form the foundations of achieving 401(k) millionaire status.”

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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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