The stock market has been on a strong run in 2023, despite the challenges posed by the pandemic, inflation, and geopolitical tensions. This has benefited many investors, especially those who have been saving for retirement through 401(k) plans. According to new data from Fidelity Investments, the number of 401(k) millionaires increased by 26% in the first half of the year, reaching a record high of 378,000.
What is a 401(k) Millionaire?
A 401(k) millionaire is someone who has a balance of at least $1 million in their 401(k) account, which is a type of employer-sponsored retirement plan that allows workers to save and invest a portion of their income before taxes. Employers may also match some or all of the contributions made by employees, depending on the plan.
Fidelity, which is one of the largest providers of 401(k) plans in the U.S., tracks the number of 401(k) millionaires among its more than 23 million accounts. The company says that the average 401(k) balance for these investors was $1.5 million at the end of the second quarter of 2023.
How Did They Achieve This Milestone?
The main factor behind the growth of 401(k) millionaires was the performance of the stock market, which rebounded from the volatility and losses of 2022. The S&P 500 index, which tracks the performance of 500 large U.S. companies, gained 15.9% in the first six months of 2023, and added another 3.6% by the end of July. It was up 14.7% for the year as of Wednesday.
However, the stock market alone was not enough to make 401(k) millionaires. These investors also followed some key principles of successful retirement saving, such as:
- Starting early and saving consistently. Fidelity says that the average age of 401(k) millionaires was 59, and that they had been saving for an average of 30 years. They also contributed an average of 12.1% of their income to their 401(k) plans, which was higher than the average contribution rate of 9.3% among all Fidelity 401(k) savers.
- Diversifying their portfolios. Fidelity says that 401(k) millionaires had an average of 76% of their assets in stocks, which included both domestic and international equities. They also had an average of 17% in bonds and 7% in cash and other investments. This mix of asset classes helped them balance the risk and reward of their portfolios, and reduce the impact of market fluctuations.
- Taking advantage of employer matching. Fidelity says that 401(k) millionaires received an average of 5.8% of their income in employer matching contributions, which was higher than the average of 4.6% among all Fidelity 401(k) savers. Employer matching is essentially free money that can boost the growth of retirement savings over time.
What Are the Challenges and Opportunities Ahead?
While 401(k) millionaires have achieved a remarkable feat, they still face some challenges and opportunities in their retirement planning. Some of these include:
- Adjusting their asset allocation. As 401(k) millionaires get closer to retirement, they may want to consider shifting some of their assets from stocks to bonds and cash, which are less volatile and can provide more stability and income. Fidelity says that 401(k) millionaires had an average of 24% of their assets in bonds and cash, which was lower than the average of 31% among all Fidelity 401(k) savers. However, they should not abandon stocks entirely, as they can still provide long-term growth and hedge against inflation.
- Planning for taxes and withdrawals. 401(k) millionaires will have to pay taxes on their withdrawals from their 401(k) accounts, which are taxed as ordinary income. They will also have to start taking required minimum distributions (RMDs) from their accounts once they reach age 72, which can affect their tax situation and spending strategy. They may want to consult with a financial planner or a tax advisor to optimize their tax and withdrawal plans.
- Enjoying their retirement. 401(k) millionaires have worked hard and saved diligently to reach their retirement goals. They should also enjoy the fruits of their labor and spend their money on the things that matter to them, such as travel, hobbies, family, and charity. They may also want to leave a legacy for their heirs or causes they care about, and plan for their estate and philanthropic goals.
