What does it take to become a 401(k) millionaire? Fidelity conducted a study to uncover the common characteristics of individuals who had accumulated over $1 million in their 401(k)s. Today, we’re breaking down the findings and the habits that helped these investors achieve such impressive results.
The Study: Context and Insights
Before diving into the habits, let’s set the stage:
- When was the study conducted? This study was released in 2014 and examined account histories from 2000 to 2012, spanning a difficult investment period.
- Why is this significant? From 2000 to 2012, the U.S. stock market had an annualized return of just 2.26%, far below the often-quoted 10% average return. In contrast, the period from 2010 to 2024 has been exceptional, with annualized returns closer to 14%. This highlights how challenging it was for these investors to grow their wealth during a tough market environment.
- Who were the participants? The average age of the 401(k) millionaires in the study was 59. They had worked at their companies for about 30 years, and none earned more than $150,000 annually.
The 5 Habits of 401(k) Millionaires
- They Started Investing Early
Time is the most powerful tool in investing, and these individuals took full advantage. By starting early, they allowed compound growth to work its magic over decades.
- They Deferred an Average of 14% of Their Income
These savers contributed a significant portion of their income—14% on average—to their 401(k)s. This disciplined approach to saving ensured consistent progress toward their financial goals.
- They Took Full Advantage of Employer Matches
Employer matching is essentially free money, and the 401(k) millionaires in this study maximized their match. It’s one of the simplest ways to boost your retirement savings.
- They Had Diversified Portfolios
Diversification played a key role in their success. While the U.S. stock market returned only 2.26% annually from 2000 to 2012, the participants in this study achieved an average annual return of 4.8%.
How did they outperform the market? Likely through diversification. A total stock market index fund, while popular, can be heavily weighted toward the largest companies. By incorporating small-cap stocks, value stocks, and international equities, these investors achieved better results during a challenging market period.
- They Stayed Invested
Even when changing jobs or retiring, these individuals did not cash out their 401(k)s. Instead, they remained invested, allowing their wealth to continue growing over time.
Key Takeaways
- Building Wealth Takes Time
Achieving significant wealth doesn’t happen overnight. It requires patience, consistency, and disciplined saving over decades.
- Automate Your Savings
One of the most effective strategies is automating your savings. By funneling a portion of your income directly into your 401(k) or other investment accounts, you eliminate the temptation to spend and ensure your savings grow consistently.
- Diversification Matters
The study highlights the importance of diversification. Many people today rely solely on index funds like the S&P 500, often assuming they’ll achieve a steady 10% annual return. However, the market can go through extended periods of poor performance. Proper diversification—through tools like target-date funds or a mix of asset classes—can help mitigate this risk and enhance returns.
Final Thoughts
The Fidelity study provides valuable lessons for anyone looking to build a robust retirement portfolio. By starting early, saving consistently, taking advantage of employer matches, diversifying investments, and staying the course, these 401(k) millionaires proved that financial success is attainable—even in challenging markets. If you need help with your own financial plan, be sure to book a call with us below.
This information is general education only and is not to be construed as specific tax, legal or investment advice.
Sources
Fidelity Study Source: https://www.fidelity.com/viewpoints/tcm%3A526-124671-9451.comp?source=content_type%3Areact%7Cfirst_level_url%3Aarticle%7Csection%3Amain_content%7Cbutton%3Abody_link&utm_source=chatgpt.com
