3 Secrets of 401(k) Millionaires

While it’s not unheard of for a 401(k) account balance to reach the seven-figure mark, it’s quite rare.

According to mutual fund company Vanguard Group, the average retirement account for clients 65 and older is just $272,588, while the median (or midpoint) balance for these people is much lower, at $88,488. Clearly, a very small number of very large 401(k) accounts are skewing the mathematical average upward!

These numbers raise an important question: What on earth did these people do so differently from almost everyone else to achieve what so few do? The answer to the question is threefold, although none of the three parts are complicated. You could do the same for yourself.

They have “maximized” their contributions every year

Even if you’re lucky and smart, building a million-dollar 401(k) retirement fund is tough because you’re limited in time and in the amount of money you can contribute each year.

For 2024, the maximum amount a person can contribute to a 401(k) account is $23,000, up slightly from $22,500 in 2023. However, this inflation-adjusted limit was only $17,500 in 2014 and just $9,240 in 1994. If someone had started making their maximum annual contributions in 1994, the maximum amount they could have contributed last year would have totaled $449,480. That’s a far cry from $1 million.

So how did some people manage to become 401(k) millionaires in the first place? They contributed as much as they could to these accounts each year. At least some of that money has been invested and growing for 30 years. Since time does the hardest work for all investors, this is no small detail.

Also know that in most cases, these people’s employers have helped out. While not everyone does, most companies will match an employee’s own contributions to a 401(k) account up to 6% of that person’s salary. This can mean anywhere from a few hundred dollars to a few thousand dollars in free money each year.

They invested wisely

Getting investable money into a retirement account is important, of course. But the effort doesn’t stop there. This money needs to be deployed effectively to achieve the most growth with the least risk. And that’s easier said than done.

There was a time, not so long ago, when the mutual fund choices for a pension plan were (proverbially speaking) slim — your options were largely limited to the provider’s own funds. This in itself isn’t a disaster. But since most actively managed mutual funds underperform the broader market, your best hope was an index fund based on the S&P 500 was offered.

Your options are generally better now, with most plans offering at least one or two passively managed index funds. The point is that these are still generally better choices than any of your other fund options.

So what? The big “so what” is that the most successful 401(k) investors probably realized that their best bet was to buy something simple, like an S&P 500 fund, and just leave that holding alone to fester. Most other mutual funds would have detracted from their overall performance, while constantly swapping out those holdings for other, more promising funds would have only done more harm to their long-term net gains.

In other words, 401(k) millionaires understand that less is more and simpler is better.

They have been working on it for a while, long time

Last but not least, even the people who regularly maxed out their 401(k) contributions and invested that money wisely didn’t become 401(k) millionaires overnight. They didn’t do it in ten years, either. Even if you earned the stock market’s average annual return of about 10%, it would still take you at least 20 years to reach the seven-figure mark, and that’s if you were incredibly lucky. It’s a 25-year project for most people, and that’s being conservative!

Most people innately understand that growing a million-dollar retirement account is a marathon rather than a sprint, even if they haven’t done the predictive math outright. The important message here, however, is neither qualitative nor yet quantitative. Instead, the key lesson is to stick to your plan and keep contributing money, even when you’re discouraged or it’s hard to do so. That’s often when things are about to get better. As the old saying goes, it’s always darkest before the dawn.

This might help. According to figures from mutual fund firm Hartford, a $10,000 investment in the S&P 500 in 1994 would be worth about $180,000 today. However, if you missed just the 10 best days during that time, the value of your investment would be significantly lower, around $80,000. And if you missed the 20 best days for stocks during that period, you’d be left with just under $50,000.

Hartford adds that about half of the market’s biggest daily gains actually occur during a bear market, while a quarter of them occur during the first two months of a new bull market, when no one expects them. The problem is that no one has any idea when exactly those big days will occur. They just happen.

The point is that most 401(k) millionaires, if left alone, just happened to have enough invested when these days came along.