Several months ago — perhaps mid-January, and corresponding with the crest of the S&P500 — a friend of mine around my age posted on social media about becoming a “401(k) millionaire”. As a saver and cautious index-fund investor, I found this claim incredible in two ways:
1. it’s amazing to think that a person in their early thirties has saved and invested so prodigiously; and,
2. it’s literally not credible.
In 2018, the IRS allows 401(k) contributions of up to $18,500 per year. This does not include catch-up contributions or employer matching. Since my friend is in her early thirties, catch-up contributions are irrelevant. Employer matching is relevant, with the IRS allowing combined employee/employer contributions of up to $55,000 — although that is far from typical, with most employers matching contributions up to something in the neighborhood of 3.5% of the employee’s salary. If you’re making an even $100,000/yr, a 3.5% employer match would only net you an additional $3,500/yr.
Which brings us to our hypothetical. For a first-order SWAG, I make the following assumptions:
- Annual Contribution: $22,000
- $18,500 employee contribution
- $3,500 employer match
- contribution limits remain constant
- Annual ROI: 6%
With these assumptions, it would take around 22 years of contributions to reach 401(k) millionaire status. It is, of course, highly unlikely that someone in their early thirties has this many years of contributions under their belt, if for no other reason than our country’s child labor laws.
So, is it at all reasonable for someone in their early-thirties to have a million dollars in a 401(k)? Perhaps so. Maybe said person has an exceedingly generous employer, willing to afford her a full match up to her salary up to the maximum contribution limit. Or maybe the person’s 401(k) allows after-tax traditional contributions (a la the horribly-named Mega Back-door Roth) and she milks that cow for all its worth. What would that look like?
- Annual Contribution: $22,000 $55,000
- $18,500 employee contribution
- $3,500 $36,500 employer match (+ after-tax contributions, if any)
- contribution limits remain constant
- Annual ROI: 6%
With these new (and likely-impossibly-generous) assumptions, it would still take around 12 years of contributions to reach 401(k) millionaire status. For such a person to reach this status at age 33, that person would need to be able to contribute $18,500/yr to her 401(k) and have an employer willing to pay a match of $36,500 — all by age 21. And this is still a generous over-estimate as it ignores the fact that 401(k) contribution limits have been steadily increasing over time. This means that prior to 2018, a contribution of this amount would not be possible.
What, though, about the ROI? Perhaps this person is a gambler. He or she could embody a rare combination: prodigious saver and aggressive (and lucky!) investor. Our 6% assumption may be reasonable for the market in aggregate, but what about someone who throws caution (and whatever else) into the wind and bets it all on mid-cap blockchain stocks with in-house baristas? What if that person could achieve, say, a consistant 15% ROI?
- Annual Contribution: $22,000 $55,000
- $18,500 employee contribution
- $3,500 $36,500 employer match
- contribution limits remain constant
- Annual ROI: 6% 15%
Setting aside the fact that $55,000/yr is, for most, a ridiculous annual contribution, and that 15% ROI is a ridiculous consistent return, these fantastical assumptions show that it would still take a person over 8 years to become a 401(k) millionaire. These are highly generous assumptions which, to my mind, make it pretty clear that by far the likeliest explanation for how a 32-year-old becomes a 401(k) millionaire is that they’re lying.
The real takeaway, of course, is that the status is attainable in less than the span of a reasonable career. If you can afford to max out your 401(k), you can reasonably expect to have a seven-figure balance in a little over two decades. Even if you can’t afford to max it out, slow-and-steady is a winning strategy. Consider this much more modest contribution scheme:
- Annual Contribution: $8,300
- $4,800 employee contribution (about $400/mo)
- $3,500 employer match
- contribution limits remain constant
- Annual ROI: 6%
Contributing $400/mo, or about $200 per bimonthly pay period, with a $3,500 employer match will produce a balance of ~$1M in around three-and-a-half decades. The value of starting early is self-evident since balance growth is clearly dominated by interest, not new contributions, by the 25-year mark.
Thanks for reading.
