Business & Tech
Fidelity Reveals the Secret to Becoming a Retirement Millionaire
Find out the savings habits of people who retire with a comfortable nest egg.
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Written by Matt Brownell, AOL Daily Finance
Fidelity Investments recently decided to examine the saving habits of people who had managed to amass more than $1 million in their 401(k)s. The goal: To determine the secret to becoming a retirement millionaire.
As it turns out, there is no big secret. You just have to start saving earlier, throw a whole bunch of money at your retirement accounts, and stay in equities for a long time.
Fidelity VP Jeanne Thompson looked at the behavior of more than 5,500 Americans over the course of 12 years. She limited the study to those with an annual salary under $150,000, as she wanted to focus on people who had been able to buff up their retirement accounts without being filthy rich to begin with.
The biggest factor was how much they contributed to savings: The 401(k) millionaires were deferring an average of 14 percent of their total paycheck. That was complimented by an average employer contribution of 4.8 percent, for a total of close to 20 percent savings rate.
They started early, too. On average, the millionaire savers already had upwards of $400,000 in their accounts by their late 40s, which ballooned to $1.2 million by their late-50s.
"We recommend individuals start at age 25," says Thompson. "Really, as soon as you're eligible to start saving, that's when we recommend."
But saving to the degree that Fidelity recommends will likely be difficult for your typical 25-year-old. Most 20-something won't be able to spare 14 percent of their paychecks, nor are they likely to see such a generous employer match. Still, young savers are advised to save at least as much as is necessary to take full advantage of their company's matching policy.
Finally, about that $1 million figure: It's a nice, round number, but is it an arbitrary amount to set as your retirement goal?
Thompson says that a good goal is to retire with eight to 10 times your final salary; given that the average worker in this survey retired making close to $120,000, a million is indeed a good goal to maintain their usual standard of living. Yours might be lower, of course; if after years of work you end with a salary of $80,000, then you might be fine if your retirement savings total somewhere in the vicinity of $750,000.
That's why the important figure is not the $1 million, but the rate at which you save. Putting 14 percent of your savings in your 401(k) might seem extremely ambitious, but come retirement you'll be a millionaire -- or at least, you'll feel like one.
Matt Brownell is the consumer and retail reporter for DailyFinance. You can reach him at [email protected], and follow him on Twitter at@Brownellorama.
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