The other day something on Twitter caught my attention. (Yes, I’m that easily distracted.) It was Live Your Wage with this Tweet:

Guy writing for reputable financial magazine:

“It turns out I have little chance of ever building a 7-figure net worth, and likely, neither do you.”

So…I’m guessing he’s a “glass is half empty” kind of guy. #personalfinance #money #millionaire #financialfreedom

— Live Your Wage (@liveyourwage) July 19, 2018

Update: Live Your Wage breaks down the article here:

It turns out that the article in question was this Fortune Magazine article by Stephen Gandel: How easy is it to become a 401(k) millionaire? Here’s the truth.

(I reached to Live Your Wage about the big difference between a million in net worth and 401k and he admitted his memory in quoting on Twitter wasn’t accurate. However, this article is well worth discussing on its own (lack of) merits.)

The only thing I didn’t realize when reading the Tweet was that the article was written in 2015. That doesn’t matter given that the idea of becoming a 401(k) millionaire is, by its nature, a long journey. When you limited to putting less than $20,000 a year to work, getting to $1 million isn’t going to happen in 3 years. So let’s not label it as being outdated.

This article is going to be a two-fer. I’m going to dispute the Fortune article and then give you some advice that may encourage you.

Where Fortune got it Wrong

We have to start with a couple of base assumptions before we can dig in:

The base assumption is something I mentioned above… getting to $1 million when you are limited to less than $20,000 a year is not supposed to be “easy.” Simple math (without compounding) tells you it will take more than 50 years. How would you react to an article titled, “How easy is it to climb Mt. Everest? Here’s the truth”?

So let’s start with that common sense.

Next, we need to understand this getting to be like Inception. I’m critiquing (this article) a critique (Fortune article) that was critiquing some Fidelity research that was triggered by a Twitter critique.

What’s Wrong with the Fortune Article?

1. Fortune starts with the wrong implication.

The Fortune article starts off with by saying Fidelity’s studies leads to “The implication was that there is an easy prescription to becoming a 401(k) millionaire.” The article that they cite doesn’t appear to do that. It simply states what you need to get there. It was only two steps: start early and save a lot.

I guess you could say that’s a simple prescription, but it’s not easily followed.

2. Author points to his own article about how 401ks failed.

I have no problem with pointing to your previous work, but in 2015 he points to his Oct 2009 article Why It’s Time to Retire the 401(k). The problem with that is the article is based on the stock market crash that relatively quickly rebounded… and by 2015 looks a little silly. In fairness, I could only read the preview as I don’t have a subscription. In any case, pointing to a 2009 market crash as reasoning why 401ks are a failure in 2015 is pretty silly.

I’m not even trying to make a point that 401ks are great. It’s just a terrible justification for why they are bad. It looks even worse in 2018, but I can only judge from 2015.

3. Author looks at Fidelity’s 5 tips.

He didn’t seem to link to Fidelity’s 5 tips. Instead he linked to the NBC News that gave the two tips mentioned in #1. I had to go out and do the work myself. Here’s are Fidelity’s original tips.

4. Tip #1: “Fidelity found that, on average, 401(k) millionaires had worked for the same company for 34 years. And that’s the average!”

The author points out that is very unlikely in today’s world and I agree. However, it’s a backwards-looking stat that may reflect that people used to work at the same job. More importantly, I can tell you that I have a ZERO DOLLAR 401k. Why? Because went I moved jobs, I moved it to a Rollover IRA where I could invest with lower fees. I’m sure some tax experts may disagree due to nuances, but for all practical purposes my Rollover IRA is a 401k.

Technically though, I was eliminated from the 401k millionaire quest because I did the smart thing. I imagine many other people who are saving up large amounts in their 401k do the same thing and are eliminated as well. Thus we are stuck with people who tend to stay at their job and don’t have the option of doing the smart Rollover IRA.

The worst part about the author’s point on this tip is that when you review the real Fidelity article, the tip was really, “Start saving early” and included nothing about needing to stay at the company for 34 years. A previous note in the introduction provided that statistical fact, but no weight was given to it being relevant.

5. Tip #2: “Save a lot. Fidelity says that 401(k) millionaires, on average, put 14% of their paychecks into their 401(k).”
The author: “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 read that walking up 5-6 flights of stairs is average. I’ve seen a study say that walking up 8-10 flights of stairs a day is recommeneded. It turns out, that if I want to climb Mt. Everest, even those 10 flights a day are not enough. The madness!

I follow bloggers who routinely save 40-50% of their money. You want a million dollar 401k and you are going to balk at a few percent of pre-tax money?

6. Tip #3: “Fidelity said one of the characteristics of 401(k) millionaires is that they worked for employers that matched their contributions.”

The author is right on this one. You can’t control it. However, Fidelity points out that 96% of 401k plans (at the time) offer some match and simply suggested that people be aware of making sure that they get the free money. It’s good advice!

This may be a good time to point out that these 401k millionaires today were limited to $15,000 contributions per year for many years. Today, you can contribute $18,500, which gets you to a million dollars much faster.

7. Tip #4: “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%… 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.”

The Fidelity article didn’t seem to say mid-2000 to mid-2012. From January, 2000 to December, 2012 the market returned 1.84% (using this calculator. However, we aren’t comparing money dumped in on January 2000. We are presuming a lot of dollar cost averaging with more money being invested in low points like the crash and ending on a high period.

It’s very much the reverse of the sequence of returns risk that retirees face.

The irony is that Buffett says you should use index funds, which is almost always the very best option in the limited choices available in a 401k. The people in the study didn’t stock pick their way a million dollars and Fidelity makes the point that this step was about asset allocation… something that the author ignores.

Finally, all we need to manage is 4.8% over the long term?!?! Let’s rejoice, because the S&P 500 has returned 9% (dividends reinvested) from 1/1871 to 6/2018 (same calculator as above). Looks like these were very “unlucky” 401K millionaires and it can be reasonably argued that it’s possible to do twice as well as what the author believes is Buffett-like.

8. Tip #5: “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.”

This step is literally to not do something negative that takes a lot of work to figure out in the first place. It’s almost like saying, “Don’t go rob a bank.” That’s the easiest thing to accomplish and nearly everyone accomplishes it without even thinking about it. You have to go pretty far out of your way to rob a bank and I think we can agree it isn’t something that happens by accident.

Fortune’s Conclusion

Let’s get to Stephen Gandel’s conclusion:

“So that’s it. If you want to end up with $1 million dollars in your 401(k), all you have to do is work for the same employer for more than three decades, save about 40% more than most financial planners dare to recommend, land a job at of the rare companies generous enough to match 5% of your contributions, and totally crush the market, while you go about your normal day job, avoiding all the sudden financial traumas that lead people to borrow against their retirement funds.”

A more realistic conclusion would be:

“So that’s it. If you want to be one of the few who can amass an amazing $1 million dollars in your 401(k), and not other retirement accounts, all you have to do start early, save 4% more in pre-tax dollars than most financial planners consider safe, take advantage of the 401k match, and invest in stock index funds, while being a little lucky to avoid the big financial traumas by possibly having an adequate emergency fund due to living below your means.”

Finally, at the very end of the article Gandel tells us what we already know, but with a bunch of sarcasm:

“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.”

Once again, Fidelity never said or implied it would be easy. You can search the whole article, it’s just a strawman fallacy that the author invented so he could take a bunch of stuff out of context and spread sour grapes and discouragement.

The sad part is that it seems like people paid money to actually read it.

So You Really Want an Million Dollar 401k?

The first step is throw away the idea that it has to be in 401k. There’s nothing magical about the characters, “401k.” What you probably really want is a million dollars in retirement accounts.

This allows us to include Roth IRAs that, in many ways, are even better than 401ks. It can be withdrawn tax-free (as the taxes have already been paid on it) which is the most obvious advantage. If someone were to offer you a million dollar 401k or Roth IRA, you’d jump at the Roth IRA.

We include Rollover IRAs which I mentioned above is practically the same thing, but with fewer fees. This also allows us to include people who are self-employed. Yes, there’s the solo 401k for that, but it isn’t a 401k in the way that most people think of them.

The next step is to actually follow Fidelity’s study. Start early and contribute a lot. As someone once said, “There’s no trick to it, it’s just a simple trick:”

A couple of years ago, I did the math and found that if you were able to invest $23,000 each year for 20 years you’d have a million dollars. That’s magically turns out to be maximizing your 401k and Roth IRA… assuming you are eligible for both. It also assumes that 7% investment growth.

When I ran the numbers, the interesting thing is that the growth from investment gains was more than the money invested. As you get close to the 20 years your money works much harder for you than you do for your money.

Of course saving $23,000 a year isn’t easy. If anyone ever said having a million dollar retirement is easy or that anyone could do it, they were lying to you.

One thing to keep in mind is that this assumes only 20 years of saving and investing. It’s geared to people who either start late or want to retire early. If you can’t save $23,000, you can still get to a million dollars, it will just take longer.

The math is the math. It doesn’t require you to stay at the same job, get a company match, or invest better than Warren Buffett.