By Susan Tompor
Detroit Free Press
WWR Article Summary (tl;dr) Here is something to think about…A 30-year-old saver who makes $40,000 a year and sets aside 11 percent of pay a year could hit $1 million in 35 years, assuming the 401(k) plan includes an employer match, the investor gets a 7 percent annual return on investments and a 2 percent annual salary increase.
Detroit Free Press
Steve Horaney has two kids in college, a home in South Lyon, Mich., and every other excuse people can roll out for not saving for retirement.
Except he’s still one of the country’s 401(k) millionaires.
Horaney, 50, says he’s learned to sock away money with every paycheck going back to his early 20s when he started a good job at Guardian Industries in 1990. It’s worked.
“I max out my 401(k),” he said. “I always took the philosophy of paying me first and spending the rest.”
Horaney has no plans to splurge or retire immediately from his job as a vice president of membership at the Original Equipment Suppliers Association in Southfield. He’s still writing rent checks for two children who are living in apartments near the schools they attend and wants to help his children to pay down student loans.
“I don’t think I’m anywhere I need to be to retire” yet, he said.
Hitting that million retirement savings mark often takes the better part of any career.
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There are limits to how much you can save each year in a 401(k), and there is the potential downside of brutal bear markets, like the meltdown in 2008-09.
More time can mean more money.
A 30-year-old saver who makes $40,000 a year and sets aside 11 percent of pay a year could hit $1 million in 35 years, assuming the 401(k) plan includes an employer match, the investor gets a 7 percent annual return on investments and a 2 percent annual salary increase, according to a retirement calculator at Bankrate.com.
Investors received quite a boost, of course, as the Dow Jones industrial average posted one record after another in 2017. Wall Street has been on a bull market run for nine years.
Still, a million dollars? Really? Face it, the closest many will get to a million dollars is buying a lottery ticket, watching a TV game show or listening to a clever, quirky song by the Canadian group, the Barenaked Ladies.
“And if I had a million dollars (if I had a million dollars) I’d buy you furniture for your house (maybe a nice chesterfield or an ottoman) And if I had a million dollars (if I had a million dollars)
I’d buy you a K-car (a nice Reliant automobile).”
We’re not exactly hearing folks singing: “If I had a 401(k), one day I’d have a million dollars.”
Reaching seven figures in savings is not a slam dunk for most households.
About 150,000 people had $1 million or more in their 401(k) balances at Fidelity Investments as of the fourth quarter of 2017. It’s a record number and up from 93,000 for the fourth quarter of 2016.
It’s less than 1 percent of 16 million 401(k) accounts.
The average 401(k) balance at Fidelity reached $104,300 with the average IRA balance reaching $106,000, both record highs.
But many people have far less than that in retirement savings. The median value for retirement accounts, including a mix of IRAs and 401(k)s from current and past jobs, was $60,000 in 2016, according to the Federal Reserve Board’s Survey of Consumers.
Savers who reach the millionaire milestone tend to set aside money consistently, not run scared in a down market and avoid taking out loans from their 401(k) plans.
It helps to have steady, fairly good-paying work, work at a large company with a generous matching contribution into that 401(k) and time to build up to millionaire status.
Perhaps not surprisingly, the typical 401(k) millionaire is around 58 years old on average, according to Fidelity’s data as of the third quarter 2017.
On average, savers are setting aside 14.8 percent of pay, while their employers are matching 9 percent, according to Fidelity.
“They tend to save a lot in their 401(k)s,” said Jeanne Thompson, senior vice president of Fidelity Investments, the country’s largest administrator of 401(k) plans.
“The key is to start saving as early as you can,” Thompson said.
The split was roughly 79 percent men and 21 percent women at the end of last year.
Saving earlier in the game means you’re not stuck trying to save thousands of dollars a month to try to reach $1 million in your last 10 years before retirement.
The longer one contributes to a 401(k), the bigger the potential retirement nest egg.
For workers who have been contributing to their 401(k) for 10 consecutive years, the average 401(k) account balance increased to $286,700, up 22.5 percent from a year earlier, according to Fidelity.
For individuals who have been in their 401(k) plan for 15 straight years, the average balance rose to $387,100, up 21.5 percent from the fourth quarter 2016.
Some of that increase can be attributed to gradually increasing one’s contributions _ including using higher “catch up” limits for workers age 50 and older.
In 2018, savers who work for an employer can contribute up to $18,500 into a 401(k) as an employee _ or up to $24,500 if the saver is age 50 or older.
Robert Bilkie, president of Sigma Investment Counselors in Southfield, said investors who create a solid retirement nest egg and hit $1 million, like Horaney who is a client, tend to practice “detachment and discipline.”
It takes discipline to keep saving. And one can’t get too excited when investments swing up, or fall down, dramatically in value.
“Investors in 401(k)s need to be emotionally detached from these funds,” Bilkie said.
“They have to view them as assets that are virtually locked away from the outset and recognize that the value of their investments will fluctuate, sometimes painfully so.”
If you don’t dwell on the ups and downs, you can avoid making moves that could be harmful in the long-run _ such as shifting all your money out of stocks into cash in a panic.
“Like a scary movie, sometimes you have to just ‘look away’ from your monthly 401(k) statements,” Bilkie said.
It is, of course, tough not to panic when you live through days like Feb. 5 when the Dow Jones industrial average lost more than 1,100 points in a day.
The Dow has lost about 6.9 percent or 1,830.08 points from Jan. 26 when it closed at a record high of 26,616.71 points through April 17. The Dow closed at 24,786.63 points April 17.
The market has been increasingly jittery in 2018, as investors have feared that President Donald Trump was launching a trade war with China. We also saw wild swings from computer-driven trading, as well as continued concerns about how high interest rates could be headed.
Yet Horaney said he’s staying the course and not worrying if he’s trending above or below that $1 million mark on any given day. And he’s contributing more money now that he’s hit 50, too.
Horaney doesn’t invest in individual stocks any more, partly because he had picked a few losers in the past. He has some index funds and other mutual funds.
His wife, Kari, is a third-grade teacher at St. Patrick Catholic School in Brighton. Both do not have traditional pensions at their jobs.
The family has never dipped into his 401(k) savings for loans.
And they tend not to panic and make rash moves by shifting investments in their 401(k) plan based on Wall Street’s headlines.
“With a planned retirement of 10 to 12 years away, I try not to get too worried about each swing,” Horaney said.
“To be honest, I have not moved any of my savings,” he said, referring to the most recent dips for the Dow.
“It appears that the daily swings are driven by the ‘tweets’ and they recover within a day or two. I don’t have the time or expertise to try and time the swings so I am staying the course,” Horaney said.
Horney admits that he’s been fortunate to be married to his wife for 27 years and able to keep saving for nearly 30 years.
“I have always worked hard and had a fortunate career,” Horney said. “I can’t say we have made a ton of sacrifices. Just tried to live within our means.”
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ABOUT THE WRITER
Susan Tompor is the personal finance columnist for the Detroit Free Press.
