There are a lot of misconceptions about so-called corporate qualified plans, the best known of which are 401(k)s. Much of the misunderstanding stems from several articles about a Fidelity Investments report on how many of its clients had $1 million or more in their tax-deferred savings accounts, a group sometimes referred to as the 401(k) millionaires.
In the raucous online debate that ensued, some commentators suggested that saving $1 million was almost impossible. As someone who runs an asset-management firm with millions of dollars in qualified corporate 401(k) plans, I want to address this assertion. We will a) set the record straight on various dollar amounts that can be contributed to retirement plans; and b) outline a simple path for getting to $1 million.
First, the data: The typical 401(k) account holder can easily reach $1 million, mathematically; the hard part, like so much in investing, is having the discipline to set a plan and stick to it. To be sure, it is much easier said than done, but the rules make the $1 million goal very attainable.
How do you get to $1 million? Well if you were just starting out today, it is really easy: assume a zero-starting balance, make the maximum annual pretax contribution of $18,500, generate investment returns of a mere 6 percent annually from a low-risk portfolio of 60 percent stocks and 40 percent bonds. Even without a matching contribution from your employer, in 30 years that will be worth $1,509,687 .
Of course, all of this assumes you earn a decent salary, have the basics (food, rent, health care, etc.) covered, and max out your 401(k) every year. It also doesn't take account of expenses charged by the 401(k) plan administrator.
The $18,500 contribution limit is for any employee under 50; for those over 50, an employee can contribute an additional $6,000 a year (or $500 per month). Over the course of a decade, I estimate that adds almost $100,000 to the total.
The contribution limits are inflation-indexed, and they go up over time — $18,500 is the 2018 limit, and it will likely increase (it was $7,000 in 1986; $15,000 in $2006, and $18,000 in 2016-17).
If you are fortunate enough to work for an employer that contributes a match of employees' salaries to their 401(k), you begin to see even bigger gains. Using the same assumptions as above, the money piles up. The Internal Revenue Service rules allow employers to match an employee's salary with as much as $55,000 in contributions, plus a $6,000 annual catch-up for employees over 50. The best-case results of our conservative scenario is three decades from now, an employee maxing out their 401(k) has a portfolio worth $4,489,838. Note this uses a low-risk and simple strategy to achieve that goal.
Barry Ritholtz is a Bloomberg Opinion columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of "Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy."
