401K Millionaire

We Financial Planners are instructed that we should get our clients to set specific and measurable financial goals.  One goal that you should think about for yourself is to become a 401k Millionaire.  You read that phrase and you know exactly what it means:  You set a goal to have $1 Million in your 401k.  While it is not easy and it requires discipline over a number of years, such a goal is certainly attainable for those who can contribute to a 401k and who stay in their job (or at least stay in a job where they can contribute to a 401k) for many years.  If you are a public-sector employee, a 403b account has the same contribution limit so you can reach the same goal that way as well.

I enjoyed Slumdog Millionaire a few years back so here is a shot from that Academy Award-winning film from Danny Boyle:

Time Value of Money

Calculating how long it will take to become a 401k Millionaire is a simple Time Value of Money calculation on a financial calculator.  Say you start with nothing – you are young and have started a new job with a large employer.  You know you can contribute a maximum of $18,500 per year into your 401k, and you know you want to become a millionaire.  You figure, conservatively, that you can earn 5% per year on your account.  I have been using an HP 12c financial calculator for over 30 years, and I bought a new one last year.  They are much faster and less expensive than they were when I started, so I encourage you to get one or get a new one if yours is old.

To calculate how long it will take, use the following steps:

  • -$18,500 PMT (Your contribution/payment is an outflow from your standpoint, hence the negative sign)
  • $1,000,000 FV (Your Future Value goal is $1 Million)
  • 5 i (You think you can make 5%)
  • Solve for n

It turns out that n = 27, which means that you can become a 401k Millionaire if you contribute the current maximum to your account every year for 27 years.  If you are young, perhaps that 27-year-old who is just starting their first job, saving for 27 years may sound like forever.  However, if you think again about it, it really isn’t.  If you are 27 now, in another 27 years you will be 54, and you can have a 401k worth $1,000,000 if you just follow the rules.  Not easy, requires a lot of discipline, but very doable.

What if you think you can make 7% per year on average?  A little more difficult, but that’s in line with the return on the S&P 500 Index during the past 30 years.  At 7%, the time it takes to reach $1 million is reduced to 24 years.  You can have that $1 million by around Age 50 if you start early enough in your career.

A number of employers have an incentive program whereby they will match employee contributions up to a certain amount.  Employers do this to entice lower-compensated employees to save and contribute to a 401k.  Let’s assume the employer contributes $2,000 per year, which means the total of employee plus employer contribution is $20,500.  If that’s the case, and you earn the same 5% on your account, it takes only 26 years to reach $1 Million, thereby shaving 1 year off the time.  Better than a kick in the pants!

What if – there are a lot of what-ifs.  If you are intrigued by this notion of setting a tangible, measurable goal for your 401k and you are curious about how to factor in various changes to the base case of contributions, please contact me.  If you are older, or if you already have a 401k and want to know how you too can reach that goal, contact me and I can help set you in the right direction.