5 Tips to Become a 401(k)/403(b) Millionaire

If you’ve ever read this blog before you know I’m a huge fan of the book, The Millionaire Next Door. Written in the mid ‘90s the authors sought out the rich in the U.S. to learn how they became wealthy. To their surprise, they learned that most were ordinary working professionals who lived beneath their means, saved with a purpose and became wealthy the old-fashioned way: steadily, over many years. Since most of us accumulate our wealth through our 401(k)s or 403(b)s, here are 5 tips to maximize the value of those accounts:

1) Contribute enough and pre-tax: The millionaires next door save with a purpose, not by accident. First, contribute to your workplace plan pre-tax. Not only does that save you in taxes, it allows you to save more.

Some math:

• If you’re 35 and currently have $75,000 saved in your retirement plan and want to accumulate $1 Million by age 60, you need to save $9,375 each year – assuming an average rate of return of 7%. (Is $1 Million enough to retire, that depends on your expenses in retirement)
• If you’re 50 and currently have $300,000 saved in your retirement plan and want to accumulate $1 Million by age 60, you need to save $29,664 each year – assuming an average rate of return of 7%.

Obviously, starting early and saving and investing for a long time puts one in a better position to succeed.

2) Choose investments appropriate for your circumstances: We’ve seen new clients in their 30’s invested in a money market (way too conservative) and we’ve seen new clients close to retirement invested 90% in international stocks (way too aggressive). Structuring one’s investment portfolio correctly starts with your financial plan: How much more do you need to save to reach your goals and how much time you have to do it determines how aggressive or safe your investments should be. We structure our clients’ portfolios with a diversified mix of income funds, stock mutual funds, real estate mutual funds and international mutual funds. What percentage of each depends on their individual circumstances.

Note: Avoid Target Date Funds if possible. Not unlike formal living room furniture and nuclear weapons, target date funds are only to be used in case of a dire emergency. I feel so strongly about this subject I wrote an entire blog post about it, read it here: https://www.moneywatchadvisors.com/blog/target-date-funds-offer-false-sense-security. 

3) Rebalance periodically and don’t try to time the market: Once you’ve determined the percentage of each investment that is right for your plan, review your portfolio at least once per year – we rebalance clients’ portfolios once per quarter – to see if the mix is still where you want it. For instance, if you want your stock mutual funds to equal 60% of your portfolio but the market has soared since you last checked and those funds now comprise 80% of your portfolio, take some of those profits and allocate them among your other investments. This will help you stay on your intended path.

Also, don’t try to time the market. Why? It’s not possible. An acquaintance of mine was terrified when Trump won the election two years ago and moved about half of his portfolio out of the stock market and into cash. By the time he realized his mistake and invested again he’d missed out on about $35,000 worth of potential gain. Create a plan, stick to your plan.

4) Glide into retirement: As saving for retirement is more a marathon than a sprint, don’t invest up to that magic date and lean forward into the finish line like an Olympic sprinter. Think of approaching your retirement date like an eagle softly gliding into it’s nest. What I mean is take care to restructure your portfolio mix in the 3-5 years prior to retirement so that a precipitous drop in the market doesn’t leave you short right before you start withdrawing money for income. While 60% to 70% of your portfolio invested in stock mutual funds might make sense in your 30’s and 40’s, being that aggressive in your 60’s might not be wise.

5) Rollover accounts from former employers: It’s not unusual for us to see new clients that have an old 401(k) from a former employer just sitting, unattended, where they left it. What you saved there is an important part of your retirement savings and should be treated as part of your overall portfolio. Rollover that old account to an IRA and include it when structuring your investments mix.

Whether $1 Million is enough or more than you need, following these steps should help you make the most of your workplace retirement plan.

Steve Byars, CFP®