What does it take to be wealthy? While each person may have a different financial threshold in mind, most people have a similar mental picture of what wealthy looks like. They see a fancy home, nice cars, and lavish vacations enjoyed by someone who sold their company for a fortune or received a significant inheritance.
While these cases exist, they are the exception rather than the rule. They garner attention because the lifestyles of the “rich and famous” are striking and prominent, and they appeal to the internal desire we have to be successful.
However, the research shows that most individuals who have accumulated wealth did not get lucky, strike it rich, or receive a substantial inheritance. The vast majority accumulated their wealth gradually over a long period of time. Their wealth accumulation strategy was more often boring than exciting. They lived on less than they earned, they saved consistently over time, and they stuck with a sound investment plan regardless of market conditions.
In many cases, wealthy individuals built a significant portion of their wealth in their workplace retirement plans [401(k), 403(b), etc.], and now even after building significant wealth, they continue to live below their means and do not stand out in a crowd.
Millionaire Research:
Understanding how most millionaires attain their wealth is important because it clarifies for the average individual that accumulating wealth is achievable. It also clearly illustrates the lesson that an individual’s behavior has a much more significant impact on the final result than market returns or lucky breaks.
In the National Study of Millionaires, Ramsey Solutions reports the findings from their survey of over 10,000 millionaires. They found that:
- Eight out of ten millionaires invested in their company 401k.
- Three out of four millionaires said consistent investing over long periods of time was the reason for their success.
- Most did not receive any inheritance from parents or family members.
- On average, the participants came from regular professions like engineering, accounting, and teaching.
What is the secret that these millionaires have cracked? It’s the power of long-term, consistent behavior. These millionaires have a lifestyle of living on less than they earn, investing consistently over time, and patiently waiting for their investments to grow.
These millionaires do not try to time the market or jump in and out based on short-term expectations. They realize that investing is a long-term exercise where the cost of long-term results is waiting out the short-term fluctuations along the way.
In fact, the market downturns that inevitably happen during these individuals’ working careers are viewed as opportunities to accumulate more shares at a discount.
Key Takeaway:
Most millionaires did not strike it rich. They accumulated their wealth over many decades of saving and investing.
Is Becoming a Millionaire Achievable?
Is achieving millionaire status through consistent behavior achievable? Each year Fidelity reports the number of 401(k) millionaires in Fidelity workplace retirement plans. At the end of 2022, there were 299,000 individuals with 401(k) account balances in excess of $1 million dollars which represented about 1.4% of Fidelity’s 401(k) accounts.
These statistics don’t include individuals who rolled their original 401(k) balance into an IRA when they changed jobs or retired, and it also doesn’t include the 401(k) millionaires with non-Fidelity accounts. In total, these stats represent only a fraction of the total 401(k) millionaires and demonstrate that many individuals have achieved this milestone.
To clarify how these 401(k) millionaires were able to build wealth through their employer retirement plans, consider the following example. We’ll assume that an individual makes $100,000 each year and is able to save $15,000 annually in their 401k. If there is a 3% employer match, the individual would only need to save $12,000 and their employer would contribute the other $3,000.
If the individual achieves an 8% annualized return, their portfolio would grow as shown in the following chart.
As shown, it would take 24 years for the value of this individual’s 401k account to reach $1 million dollars. Accordingly, an individual who begins saving by age 41, should be able to accumulate a $1 million dollar 401k balance by the time they reach age 65.
However, in 24 years $1 million dollars will not be as valuable as it is today given inflation; so it is best to begin saving at an earlier age. As the graphic shows, someone who begins investing $15,000 per year in their late 20s could expect to achieve a $3 million dollar portfolio balance by the time they reach age 65.
!!!NOTE!!! For 2023, the annual contribution limit to a 401(k) account is $22,500, and individuals who are age 50 and older can contribute up to $30,000. This limit is adjusted for inflation each year. Individuals who currently have a $1 million dollar 401(k) balance likely started investing more than 24 years ago because the 401(k) contribution limit when they started was well under the $15,000 contribution amount assumed above. However, going forward, individuals will be able to accumulate larger balances in their 401(k) accounts given the higher contribution limits.
Key Takeaway:
It is possible for individuals to achieve wealth simply through investing heavily in their employer retirement plans over their entire career.
Great Investment Returns Don’t Make Up For Poor Behavior:
While it is important to create a sound investment strategy with the goal of achieving the best investment returns possible, it is important to understand that good investment returns do not make up for inconsistent or poor investor behavior.
Given investment returns only impact the funds that are in the portfolio, consistent saving is more important than investment returns especially during the first few decades of saving.
For example, consider a portfolio that has a value of $100,000. Each additional $1,000 invested in the portfolio is equivalent to earning an extra 1% return on the portfolio for that year. Accordingly, the easiest way to impact long-term accumulation in the portfolio is through significant investing during the early years.
To demonstrate this point, consider the following example where an individual only invests $5,000 annually but achieves a 10% investment return (2% higher than what was assumed initially).
As shown, this individual has to wait 32 years to reach the $1 million threshold (8 years longer than the original example). Even after 44 years of investing at a 10% rate of return, the individual investing only $5,000 annually still trails the individual in the original example by over $2 million dollars ($3M vs $5M).
Ultimately the key to reaching your long-term goals lies more directly in behavior that can be controlled, than in investment returns that fluctuate.
Key Takeaway:
Great investment returns will not overcome the effects of minimal savings.
What Does This Mean For The Average Investor?
As the numbers show, it is attainable for the average investor to become a millionaire through consistent long-term investing. The following are the keys that lead to long-term success:
Begin Investing Early: The longer your investments have to grow, the better off you will be. It is similar to a snowball that picks up more snow each time it turns over. In the original example, the single year change in the portfolio in year 10 was $30,000 but the single year change had increased to $205,000 by year 35. Each year you delay starting means your portfolio has one less year to grow, and it’s the last years that make the biggest impact.
Prioritize Saving (Especially Early On): Early in an individual’s investing career, how much is saved and invested matters much more than the investment returns achieved. Individuals who develop a habit of living on less than they earn and begin saving aggressively can get off to an exceptional start that will significantly increase the odds of their long-term success.
For many individuals, the easiest way to prioritize saving is to contribute heavily to their 401k plan. Since amounts are deducted directly from their paycheck, they never see the funds in their bank account and don’t experience the temptation to spend it.
Take Advantage of Employer Matching Contributions: Many employers offer a matching contribution (often 3-10% of the employee’s salary) to employer-based retirement accounts [401(k), 403(b), etc.]. Employees should do their best to ensure they contribute enough to receive the full matching contribution from their employer.
Stick With the Plan: The biggest challenge to building significant long-term wealth typically isn’t the difficulty of the plan. It often is the temptation to bail on the plan when progress seems too slow or when markets fluctuate. Individuals who are successful have a plan and stick to it through the good and bad times.
Successful individuals understand that progress will feel slow because the largest effects of compound investment growth come at the end, not the beginning. They also know that markets will fluctuate, and riding out those fluctuations is a necessary part of achieving long-term investment success. Jumping in and out of the market based on short-term expectations can devastate a portfolio’s long-term performance. In the end, slow and steady wins the race.
Key Takeaway:
Begin saving heavily early in your career, make saving automatic through payroll deductions, maximize any available employer matching contributions, and stick with the plan for decades.
Conclusion:
While achieving wealth and financial freedom may seems like an unattainable goal and something that can only be achieved through luck and circumstance, the vast majority of families who have already achieved that status have shown that it can be done through faithful persistence and long-term commitment.
After decades of building their wealth, these families often find that their wealth adds new complexities that they must face such as tax planning and estate strategy. It also affords them the opportunity to create a legacy that extends beyond themselves, either for the next generation or through charitable causes.
If you are interested in ensuring you are on track to create long-term wealth or are interested in learning more about how to handle the planning complexities that wealth often creates, we would love to connect to see if what we do is right for you.
