401(k) millionaires: Their secret to saving a fortune

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What does it take to amass $1 million in your 401(k) retirement plan?

I recently got a chance to chat with Jeanne Thompson, vice president of market insights at Fidelity Investments, who is an absolute authority on the topic.

She has analyzed the savings habits of roughly 1,100 investors who earned less than $150,000 per year but had accumulated over $1 million in their 401(k) plans.

These individuals were an average age of 59 and had been with the same company for 30 years, so a stable work life was a big part of their success.

But after studying their behavior over a dozen years from June 2000 to June 2012, Thompson says what "really stood out to me is that it wasn't just one thing that they did. They did sort of everything that you're supposed to do."

Here are the four critical things that made those savers so successful.

They started early.

One of the best things you can do is to start saving for retirement when you're young.

Thompson didn't have the data to determine at what age these individuals first opened their 401(k) plans — she would have liked to — but she says that many of them likely started in their 20s, as soon as they were eligible for their plan.


Jeanne Thompson

Starting young allowed them to accumulate significant assets early in their career.

And that's a crucial point, because the first $100,000 is the toughest and takes the longest.

Thompson couldn't say when these individuals made their first $100,000, but they had already accumulated about $426,000 in the year 2000, or when they were somewhere in their mid- to late 40s.

By the end of the 12 years that were analyzed, they had increased their holdings by over three-quarters of a million dollars, for an average of $1.2 million.

So let's say you have $50,000 in your 401(k) account, and your investments have a good year and are up 10%. That means you've increased your holdings by $5,000.

But if you have $100,000, you've just increased your holdings by $10,000. And if you're sporting $400,000 in that account, you've just gained $40,000 and are well on your way to the next $100,000.

That's how the rich get richer, and it's a tool that we should all use to our advantage.

Once you save that first $100,000, the market really starts working for you.

They put their faith in stocks.

When you're young — and we're talking broadly here, from your 20s through your 40s — you have anywhere from 20 to 40 years until you retire.

Sure, stocks are volatile. But they also have the greatest potential for growth.

Even if the markets take an epic fall (think 2008), you have all the time in the world to wait for prices to go back up and profit from the rebound (think this fall's record highs).

The key, says Thompson, is to take advantage of that.

That means putting most of your money in stocks when you're young and having the courage to ride out all of Wall Street's ups and downs.

Her subjects held, on average, 70% of their portfolio in stocks and earned an average annual return of 4.8% despite the financial crisis and crash (and not counting the big gains of the past 18 months).

"What we found with these 401(k) millionaires is that they were disciplined about their savings and that they were committed to it for the long haul, just like you would if you were to try and do an Ironman," she says.

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They saved a significant portion of their pay.

In order to build up that 401(k) account, you have to save.

Thompson's subjects saved a median 14% of their pay annually, or an average of $13,300 per year.

That doesn't include company matches or contributions, something 401(k) millionaires used fully to their advantage.

Employers contributed an additional 4.8% on average, or $4,500, which means that these investors were saving about 19% of their pay, or around $17,800 per year.

They never touched the money in their retirement accounts.

Thompson says her 401(k) millionaires never made hardship withdrawals or borrowed from their 401(k) plan, allowing their money to grow without interruption.

Of course, not everyone can follow all of these steps.

Yet increasing your savings by even 1% per year can really make a difference.

I asked Thompson if her study caused her to change any of her saving behavior.

Not really, she replied.

"I definitely save absolutely as much as I can in my 401(k)," Thompson says, "and I take advantage of any company contributions."

But more than anything, she says, this is a great reminder to do an annual checkup to see if you're following these steps for retirement success.

"The closer you can get," Thompson says, "the better outcome you'll have during retirement."

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