Are 401(k)s Unrealistic? Only If You Are

In the past few days, three different readers have sent me a link to this great article from Fidelity entitled Five Habits of 401(k) Millionaires. The article offers up five suggestions for readers that will help you sock away a lot of money for retirement:

1. Start saving early
2. Contribute a minimum of 10% to 15%
3. Meet your employer match
4. Consider mutual funds that invest in stocks
5. Don’t cash out when changing jobs

These are five strong principles that I strongly agree with and Sarah and I are using all of them in our plans for saving for the future.

Great, right? Still, I didn’t really think it was worth writing a post about until I came across another article during my own web browsing. It’s a response to the Fidelity article entitled How easy is it to become a 401(k) millionaire? Here’s the truth, written by Stephen Gandel and popping up over at Fortune a few days ago.

In that second article, Gandel gives a bunch of reasons why the five points that Fidelity offers for saving a lot of money in a 401(k) just isn’t realistic.

To put it lightly, I was frustrated. My take on Gandel’s article is that it excused a lot of financially poor choices and claimed that those choices were a reason why saving a lot of money for retirement isn’t realistic.

Let me walk you through some of his points and why I think they’re misguided.

Why Can’t You Start Saving Early? You Can.

From the Fortune article:

Take Fidelity’s first “habit” of 401(k) millionaires, presumably the first thing you and I will need to do to mint a fortune in our retirement accounts. Step one: Have a job and keep the same one for more than three decades. Fidelity found that, on average, 401(k) millionaires had worked for the same company for 34 years. And that’s the average!

How likely are you to stay with the same job for 34 years or longer? Not very. Late last year, the Bureau of Labor Statistics did a study and found that average worker tenure these days is just under five years. For 55 to 65-year-olds, it is 10 years. But even of that age group, only 29% of workers have stayed at the same job for 20 years or longer.

First of all, shifting jobs does not stop you from saving for retirement. Believe it or not, you can save for retirement right now at your current job, then also save for retirement in a few years at your next job. What matters is the sum of your retirement savings no matter where you do it, not that you sit in one place continuing to retire.

I’m now at my third full time job in my adult life. Guess what? I managed to save for retirement at all three of them. Each job has caused me to save for retirement in a completely different way, as I’ve used a 401(k), a 403(b), and now a Roth IRA.

Guess what? All of those accounts are helping me build toward retirement. They’re all going to contribute to me becoming a “401(k) millionaire” (hopefully… if I don’t retire first).

No matter what your job is, you can save for retirement. If your employer happens to not offer a retirement savings plan, you can launch your own retirement savings plan by opening a Roth IRA account. A year from now, maybe you’ll have a job with an employer who does offer a great 401(k) with matching funds. Great! Take advantage of it!

You have retirement savings options right now. They might change in the next year or two if you change jobs, but a Roth IRA will almost always be available to you – and if that isn’t, a Traditional IRA will be. The fact that you change jobs sometimes is not an excuse not to save for retirement.

Why Can’t You Contribute At Least 10% to 15%? You Can.

The Fortune article goes on:

Step two: Save a lot. Fidelity says that 401(k) millionaires, on average, put 14% of their paychecks into their 401(k). That’s more than what I contribute, and probably more than you too. Most studies put the contribution rate of the average worker at around 6%. And financial planning experts usually say you need to contribute about 10% of your salary to be safe. But that, it turns out, is not even enough.

I had to actually read this one a few times to make sure I understood what he’s saying. Essentially, his argument is that saving 15% of your income is unrealistic because he doesn’t do it and the average worker doesn’t do it.

That has nothing to do with whether it’s realistic to put away 15% of your income for retirement. It’s quite possible and many people do it.

Right now, Sarah and I are sticking about 50% of our income in the bank each month. We’re not high earners – while I don’t like to talk about specific incomes on The Simple Dollar, I can safely say we’re well within the income limits of contributing to a Roth IRA.

We’re able to save so much because having a lot of money invested (in retirement accounts or otherwise) is something we decided was important to us. We want to retire early. Ideally, I’d like to stop working not too long after our youngest child walks out the door. We’re okay with giving up some secondary personal short-term pleasures to achieve this because it’s really important to us.

If you decide to not save much for retirement, you’re showing through your actions that saving for retirement really does not matter all that much to you. That’s a completely fine choice, but you should not then expect to have a bunch of money saved for retirement.

If you choose to contribute only 6% of your income to retirement, you’re not going to become a 401(k) millionaire. That’s fine, but it’s because that’s what you chose to do, not because the system is somehow against you.

The choice of how much to save is in your hands. No one is forcing you to “have” to contribute 0% or 3% or 6% or 15%. You have that choice. It doesn’t matter what anyone else is doing or what the talking heads are rambling on about. However, it is a fact that saving more directly equates to a better and/or earlier retirement.

Why Can’t You Meet Your Employer Match? You Can.

Our pal over at Fortune goes on:

Step three is not even a “habit” you can control. Fidelity said one of the characteristics of 401(k) millionaires is that they worked for employers that matched their contributions. And those matches, as it goes these days, were pretty generous.

According to a 2012 survey, the latest I could find, conducted by American Investment Planners, only 58% of companies that offer a 401(k) matched their employees’ contributions at all, let alone 5%. In 2013, Vanguard found that the average 401(k) had a corporate match of 3%, two percentage points less than you will need to be a 401(k) millionaire. Oh well.

Guess what? This one comes down purely to personal choice, too.

Yes, some employers offer matching funds on their retirement accounts and others do not. That’s just a given. However, you don’t need employer matching to be saving 15% of your income. You can make it to 15% on your own without any matching. Trust me – my wife and I are saving 50% without employer matching. You can save 15% if you so choose.

This is essentially just an extension of my point above. The amount you save for retirement is up to you. You are the one that chooses how you spend your money. You are the one that decides how important retirement savings are to your overall family budget. You are the one that makes the choice when you’re filling out your retirement savings forms.

Yes, some people have an advantage. Their employers match some of their retirement savings. That’s great – and if your employer offers it, I strongly encourage you to gobble up every cent of matching money that you can get, because it’s basically free money for retirement. Who doesn’t want that?

That doesn’t mean that you somehow can’t save plenty for retirement. It has nothing whatsoever to do with you and your retirement savings choices.

Why Can’t You Invest in Stocks? You Can.

The Fortune article continues:

Be Warren Buffett. In fact, you might have to be a little bit better than him. According to the Fidelity study, the average investment return of the people who ended up with $1 million in their 401(k)s from the middle of 2000 to the middle of 2012 was 4.8%. That might sound doable. But remember that between 2000 through 2012 there were two market crashes. Over the same period, the average return of the stock market was 1.3%. So, to become a 401(k) millionaire, you had to do three times better than the stock market over the same time period.

What’s more, given how much stocks have been up in the past few years, a lot of people think 4% is all you can expect in the next decade. And some people think even that is wishful thinking.

First of all, you wouldn’t have to “do three times better than the stock market” to achieve the returns quoted there. What actually happened was diversification. The people that had a 4.8% return over a period where the average stock market return was 1.3% were likely just diversified in a lot of different investments. Perhaps they had their money in a target retirement fund that automatically diversified their investments into things like bonds, precious metals, real estate, foreign currency, and other things in addition to stocks. They also may have invested in different specific stock investments than the “average return of the stock market” that the author suggested here (and I’ll be honest, I can’t figure out what hat he pulled that 1.3% number out of as it doesn’t measure up to any stock market index I can easily find.)

Not only that, the time period chosen was an odd one. It seems specifically chosen to include two big drops in the stock market while including only the gains in between those drops and only a little of the gains on either end of those drops (afterwards). It doesn’t paint a full long-term picture of stock investing.

The truth is that Buffett himself suggests ordinary investors will earn about 6% to 7% over the very long term in the stock market. Those are the numbers I use going forward for long-term stock investments – those much longer than ten years. The shorter the period, the more volatile I expect it to be.

All that needs to be said here is that you should invest with more risk with you’re younger, piling up on stocks, and then gradually become more conservative as you get closer to retirement, buying other things like bonds and real estate. You can do this very easily by just putting all of your money into a single “target retirement fund” offered by your retirement plan.

Why Can’t You Just Leave Your Money Where It Is? You Can.

To close out the list, this little bit is dropped:

Lastly, Fidelity says not to borrow from your 401(k) or cash it out. That may sound easy enough, but it’s not for many people.

Taking money out of your 401(k) early is an extremely poor financial choice. Extremely poor. It’s one of the first things you’ll read in any investment guide. If there’s anything on earth you can do to avoid taking money out of a 401(k) early, you should probably do that instead.

Most of the time – note that I’m not saying always here, but most of the time – when people choose to take money out of their 401(k), there are two reasons. One, they made terrible financial choices in the other parts of their life, usually involving overspending in areas where they shouldn’t have been. Two, they haven’t looked at all of the options for solving their financial problems in the moment and tapping their 401(k) seems like a very easy fix.

Neither one of those things are a reason why a person can’t save a ton of money in their 401(k). Instead, they’re indications that people sometimes make disastrous choices in life and sometimes people use their 401(k) as an emergency button when they shouldn’t.

It’s simple. If you want to have a lot of money in your 401(k) when you retire, leave it alone. Don’t take money out of it during a financial crisis. Instead, work to take care of your financial state by staying out of debt and building emergency savings so that when a crisis does occur, you can easily handle it.

The Small Fraction

Near the end, this little bombshell was dropped:

It’s easy. So easy that of the roughly 13 million 401(k) accounts that Fidelity administers, a total of 72,379, or just 0.6% of them, have a balance of more than $1 million. This is, as Fidelity reported, up from 0.3% two years ago. Congrats! Among people who made less than $150,000 a year, the number of 401(k) millionaires was much, much lower, around 1,100. The rest made a lot more, over $350,000 a year, making the fact that they were able to save $1 million over 34 years sound a lot less impressive, and probably not even enough for someone making $350,000 to retire on.

Here’s the problem with these numbers – the years don’t really add up.

Let’s say that it takes 30 years of 401(k) saving to build $1 million. I think that’s completely reasonable for most savers.

Well, the actual law that created 401(k) accounts in the first place didn’t appear until 1978 and it wasn’t even really noticed by anyone in the financial industry until 1980. In fact, by 1985, only 10 million people participated in 401(k) plans.

Compare that to today, when there are 52 million active 401(k) particpants.

So, out of those 52 million folks, only 10 million of them could have had a plan open long enough – thirty years – to accrue $1 million.

Another problem – how many of those people who had a 401(k) account in 1985 are still actively in the work force and kept saving for all thirty years without retiring before then? That’s thirty years ago. How many of those initial 401(k) account holders – the ten million that had those accounts in 1985 – actually worked for thirty more years after opening the account? I couldn’t find statistics on this, but some back of the envelope math suggests to me that about 10% of those workers made the mark. Why such a low number? Most of the people in that initial 401(k) group weren’t people fresh to the workforce – they were often already experienced employees who would not have worked for another thirty years.

That means you have only 1 million 401(k) account holders from 1985 that would still be saving today. That’s a little under 2%.

(In fact, 401(k) plans didn’t really start booming until well into the 1990s, meaning that average holders of those accounts didn’t start saving until twenty years ago or less. Unless you’re saving at an extremely high rate, there’s no way you could have $1 million in a 401(k) if you’ve only been saving for twenty years.)

The fact that 0.6% of 401(k) accounts actually have a balance of over $1 million is actually extremely impressive. It means that somewhere around 30% of people who started saving in their accounts 30 years ago managed to make it to the $1 million mark. (Remember, I’m using some back of the envelope math here, but even if you play with the numbers a little bit, it’s still a pretty healthy percentage.)

That 0.6% number is bound to go up as people who started saving at the start of their career in the late 1980s and early 1990s start coming of age and reaching the thirty and thirty five year mark of consistent savings.

Final Thoughts

Here’s what I felt the entire time I was reading the Fortune article: there sure are a lot of excuses people use for not saving for retirement. They’re pretty questionable excuses, too – other people aren’t saving is a pretty weak excuse, as is the idea that you can’t save after switching jobs or that you can’t diversify your investing in a sensible way.

You make the decision as to how to save for your retirement or for your other goals. You. The choices and actions and opportunities of others have nothing to do with it. You have the choice, every day, to save or not to save.

If you choose not to save, you may enjoy perks today, but you shouldn’t expect any money to be in your account when you’re ready to retire.

On the other hand, if you choose to cut back a little and save a healthy amount, your later years will be much easier than they otherwise would be as you’ll have plenty of resources for whatever you choose to do.

The choice is yours. What do you choose?

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