Join­ing mil­lion­aire’s club by way of 401(k)

The Buffalo News - - REAL ESTATE NEWS -

You work all your life hop­ing to reach this mile­stone. Then it hap­pens. You fi­nally get into the 401(k) mil­lion­aire’s club – at least on pa­per. Although taxes may tech­ni­cally keep you from net­ting $1 mil­lion, you’ve still achieved what many others only dream about. You’re a mil­lion­aire, but not be­cause you got lucky. Rather, you made con­tri­bu­tions for more than 30 years to your re­tire­ment ac­count, giv­ing you en­tree into an elite club. Or you achieved mil­lion­aire sta­tus by par­tic­i­pat­ing in the Thrift Sav­ings Plan (TSP), the fed­eral gov­ern­ment’s ver­sion of a 401(k).

For the last decade, as the stock mar­ket roared, an in­creas­ing num­ber of em­ploy­ees saved their way into mil­lion­aire sta­tus. But what the stock mar­ket gives, it also takes away. Volatil­ity at the end of 2018 booted a lot of those work­ers out of the mil­lion­aire’s club.

Fidelity In­vest­ments re­ported that for the fourth quar­ter of 2018, there was a 28.6 per­cent drop in the num­ber of 401(k) mil­lion­aires. The num­ber of peo­ple with $1 mil­lion or more in their 401(k) em­ployer plans de­clined to 133,800, down from 187,400 in the third quar­ter, ac­cord­ing to Fidelity, one of the coun­try’s largest ad­min­is­tra­tors of work­place re­tire­ment ac­counts.

As of Dec. 31, there were 21,432 TSP mil­lion­aires, a de­cline from 34,128 re­ported at the end of Septem­ber, ac­cord­ing to the Fed­eral Re­tire­ment Thrift In­vest­ment Board.

“De­cem­ber was bru­tal,” said one Vir­ginia reader whose ac­count dropped down to six fig­ures. “I try to keep this volatil­ity in per­spec­tive and ap­pre­ci­ate that I still have a healthy bal­ance, de­spite the fluc­tu­a­tion. Some­times I don’t look when the mar­ket goes nuts, but I found that check­ing it helped me feel se­cure that it was not go­ing to van­ish com­pletely.”

Other in­vestors ex­pressed the same sen­ti­ment. Tip­ping out of the mil­lion­aire zone hasn’t dis­cour­aged them from stay­ing the course.

“My 401(k) has dropped to $997,000,” said Grant S., a soft­ware de­vel­oper from Mas­sachusetts whose ac­count is ad­min­is­tered by Fidelity. “At the low­est point, it was off close to $100,000. I’ve been through a cou­ple of mar­ket down­turns over the years and learned that all you can re­ally do is grimly hold on.”

The third quar­ter of 2018 marked the 10-year an­niver­sary of the be­gin­ning of the fi­nan­cial down­turn, and things were look­ing pretty good for re­tire­ment in­vestors. Av­er­age ac­count bal­ances hit a record high, as did the num­ber of mil­lion­aires who achieved that sta­tus in their work­place re­tire­ment ac­counts.

But then came the storm. Pres­i­dent Trump started his trade war with China. In­vestors wor­ried about eco­nomic slow­down in the U.S. and abroad and the Fed­eral Re­serve con­tin­ued inch­ing up in­ter­est rates.

The av­er­age ac­count bal­ances for var­i­ous re­tire­ment ac­counts – 401(k)

What the stock mar­ket gives, it also takes away.

s, 403(b)s and IRAs – were down from record highs. The year-over-year av­er­age bal­ance for 401(k) ac­counts de­creased to $95,600, an 8 per­cent drop from $104,300. The av­er­age tax­ex­empt 403(b) ac­count bal­ance fell to $78,700, down from $85,100. And the av­er­age IRA bal­ance de­creased from $106,300 to $98,400.

If you’re in­vest­ing for the long term, the key is to not panic when the mar­ket goes through a down­turn, said Meghan Mur­phy, vice pres­i­dent at Fidelity.

“As the mar­ket went down, the mil­lion­aires didn’t shy away from equities,” Mur­phy said. “About 98 per­cent of peo­ple con­tin­ued to con­trib­ute through the volatil­ity. So as the re­cov­ery comes, you have more shares and it will ben­e­fit you.”

In­vestors re­cently got a boost to their port­fo­lios fol­low­ing news from the Fed­eral Re­serve that it was tak­ing a pause in rais­ing in­ter­est rates. Stocks ended the month on a high with spikes in both the Dow Jones in­dus­trial av­er­age and S&P 500, which reg­is­tered its best Jan­uary per­for­mance since 1987.

Ef­fec­tive this year, work­ers can con­trib­ute up to $19,000 an­nu­ally to a work­place plan such as a 401(k) or TSP. That’s up from $18,500 last year. If you’re over 50, there’s a catch-up pro­vi­sion that al­lows you to con­trib­ute an ex­tra $6,000 for a to­tal con­tri­bu­tion of up to $25,000 to an em­ployer-spon­sored re­tire­ment plan.

Mur­phy said 23.1 per­cent of mil­len­ni­als are sav­ing the rec­om­mended 15 per­cent in their 401(k), which in­cludes both em­ployee con­tri­bu­tions and a com­pany match. Go­ing back five years to the fourth quar­ter of 2013, only 14.9 per­cent of mil­len­ni­als were sav­ing 15 per­cent or more in their 401(k).

The num­ber of 401(k) mil­lion­aires in plans ad­min­is­tered by Fidelity is a small fig­ure – less than 1 per­cent. Nonethe­less, even with the re­cent de­cline, the fact that peo­ple can be­come mil­lion­aires within their work­place re­tire­ment plans should spread hope to others, es­pe­cially young adults. It may take you three decades of dili­gence to reach this sta­tus, but it’s doable.

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