401k Millionaire By Age 45: How Was It Possible?

millWith the ongoing bull stock market, more people are reaching $1,000,000 balances in their 401k every day. However, a more extreme claim is that someone reached this mark at age 45 with total employee contributions of only $300,000. Is that really possible? Let’s take a look at what would need to fall into place for that to happen…

Consistently high contributions from salary. If you divide $300,000 by a theoretical 25 years of savings, that works out to $12,000 per year. That is within 401k historical contribution limits, but even with 25 working years, that means nearly maxing out your 401k contributions every single year. (Employer company matches don’t count and can push you above that limit.) According to Redditor Subject_Beef, s/he indeed saved regularly in 1995 with contributions close to the max most years. Consider that only about 10% of participants max out their 401ks each year, and most of those people were over the age of 45.

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High investment gains. Next, you must have the growth of $300,000 to $1,000,000, which would require a high stock allocation, avoidance of a prolonged bear market, and not panicking during market losses. Even with a lump-sum invested 25 years ago, going from $300k to $1000k would require a compound annual growth rate of 6.2%. However, with a 401(k), you have to do this through regular contributions and dollar-cost-averaging over time. Therefore, the actual growth rate would have to be significantly higher than that. By my rough calculations, the average would have to have been around 9% annually. The current asset allocation was shown to be roughly 37% S&P 500 Index fund, 33% US Small Cap Stock Index fund, and 30% International Stock Index fund. The annualized return of the S&P 500 has been about 10% over the last 23 years, so the numbers are quite possible.

No IRA rollovers. Finally, you’d need a steady career as most people who change companies either cash out or roll their 401(k) funds into an IRA with more flexibility. It is possible to do repeated 401k-to-401k rollovers, which is apparently the case here. I can’t think of too many compelling reasons to do so besides enabling the Backdoor Roth IRA. This is also why I don’t think tracking aggregate 401k balances is a good way to measure savings or wealth. People move funds out of 401ks into IRAs all the time.

Altogether, I believe this story and the numbers do check out. However, this is not a common occurrence given the factors above that have to align. The poster does mention a significant employer match that would have help increase the effective contributions above $300,000 and make it a bit more realistic for an average worker. In any case, becoming a 401(k) millionaire by age 45 is an impressive accomplishment.

Comments

  1. I’d suspect people got healthy employer matches on top of their own healthy contributions. If you put $12k in yourself and get a 100% match then thats $24k annual combined contributions.

    If you invested $2k a month into the S&P500 from 1997 to 2017 you’d have ~$1.1M total.

  2. Kaptain Insano says:

    Their company could have also allowed after-tax contributions.

    • That’s true, although in this case, the person did list all their contributions broken down by year in the Reddit post and it doesn’t look like they exceeded the pre-tax deductible limits.

  3. Laurel Heights says:

    I’m curious to see a Roth IRA over the same amount of time and the pre-tax/post tax benefits.

    • Roth IRA contribution limits were much less over time. In 1998 they started at $2000. Then $3000 in 2002. $4000 in 2005, $5000 in 2008, $5500 in 2013. So the amount you can accumulate in a Roth IRA will be much less than what you could have piled up in a 401k in the same time.

      The pre/post tax benefit depends entirely on your individual tax situation when you contribute vs when you withdraw. And.. if you pick right for your circumstances. Theres no guarantee that a Roth or a 401k is better. e.g. I could be in the 15% bracket and decide that a Roth is the way to go since my taxes are so low. Then I might end up disabled and unemployed then prematurely retired living off social security and end up with a 0% tax rate in retirement. In hindsight choosing the Roth hurt me.

  4. I think the key takeaways for this particular example were:

    – Start early and max out
    – Allocate 100% to stocks
    – Buy and hold… this investor must have had a high risk tolerance and didn’t get scared out of the market during the 2000 dot-com crash or the 2008 great recession. Others may not be so fortunate.

  5. I suspect a fair amount is from company match. It’s not that uncommon to get 50% matching. My company does that and you bet I take 100% advantage of it.

    BTW, Jonathan, my first post here, but been reading your blog right after graduating from college 10 years ago. It has help me tremendously. Anyway, just wanna say thank you!

    • Company match probably helped, but I at least have never worked anywhere that matched more than a few % of salary total. I mean, they might match 50% of contributions up to a certain percentage, but usually nowhere near 50% of a maxed out amount.

      As Jonathan’s analysis shows, it’s not that unreasonable for $300k of contributions over that period to have appreciated to $1 million. So it’s quite likely the matching contributions had a somewhat negligible impact. I bet he’d have gotten to $1 million in not much longer even without them.

  6. This is quite plausible. With the strong market I am almost there… and I am only 40. In my early 20s I did not max but have been since then. I also get a 7% company match (high earnings help that match in being a larger #). Was 100% stocks through early 30s, now I hold ~20% in bonds.

    • Same case here. Mine is also almost there too. I’m ~40, max out the contribution every year, but didn’t get much match from employer. You can’t go too high risk as there aren’t much fund available to invest in 401k plan. Invest 100% in stock most of the time.

  7. What used to be a tough climb to be a 401k millionaire became possible to a lot of people in the past eight years or so. Mine was a rollover to an IRA from my previous 401k and was extremely happy so far. The real question now is how do we protect our retirement savings from a crash. Last Friday’s 600 points dropped was unexpected. Lot of anxieties over the weekend but how do we really prepare for the worst?

    • Like I posted earlier, the person who initially wrote the post probably kept fully invested through the dot com and Great Recession crashes. Trying to time the market usually doesn’t work, but you’ll have to judge on your own at what point to back off your investments for greater protection.

  8. I turned 45 last month and I’m not even halfway to a million. I hope to be there by age 50.

    • We’re not quite 40 but neither my wife nor I have gotten to $1M in 401k assets individually. Unless you started contributing early and have close to 100% stocks, I still don’t think $1M is common.

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