How to Become a 401(k) Millionaire – A Rebuttal

I read an article the other day entitled “How to Become a 401(k) Millionaire“. The premise of the article (if you don’t want to take the time to read it) is that if you are diligent and simply save the maximum deferral amount ($18,500 for 2018), you will become a “401(k) millionaire”. Not only that, you will have over $1.5 million saved in your 401(k).

Let’s be honest. Not everyone can afford to save $18,500 each year. According to the census bureau, the median household income in the United States is $57,617 (for 2016 – the last released number). So, according to the article, those that are at the median (or below) simply have to save over 32% of their income to become 401(k) millionaires! How many of us can afford to save over 32% of their income?!?!?

In my opinion, these articles can do more harm than good.

First, the math that they use isn’t to become a millionaire, but to save $1.5 million. That’s a 50% difference in account value. If their interest rate assumption is utilized (6%), one would need to save $12,648.91 each year to reach the $1 million mark after 30 years. This dollar amount can be further reduced if there is a company match for your plan.

As I noted above, they used an assumptive rate of 6% for the annualized return (60/40 stocks/bonds mix). While there is nothing wrong with using this assumptive rate, it doesn’t hold historical significance. According to Vanguard, this portfolio mix averaged 8.8% per year from 1926-2017. (REQUIRED LEGAL DISCLAIMER: Past performance is no guarantee of future results.) Keep in mind, there was a bull market in bonds for a number of the aforementioned years. If we account for the historical return noted, the annual contribution drops to $7614.80. According to the same site, an 80/20 (stocks/bonds) growth portfolio averaged 9.6% for the same time period. (See above past performance disclaimer.) If you are able to average 9.6% a year, the annual contribution plummets to $6,556.09 per year – nearly a third of the original amount noted in the article.

Second, and perhaps more important, not everyone needs to save $1 million for retirement. Each individual and family we meet with is unique. There is no rule of thumb that properly details how much you should save for retirement. Depending on the lifestyle they want in retirement, some people will need to save more than $1 million. Some can live the life they want by saving less.

What is important is having a plan and saving towards that plan. I’m not advocating saving 32% of your income towards retirement…you still need to live pre-retirement. I’m advocating having a plan in place that helps you understand how much you need to save for your situation and then sticking to that plan.

Have your plan and live your life.