The supercharged 401(k): Getting employees on the millionaire track to retirement

Today, a million dollars doesn’t mean what it used to mean, but it is still an impressive sum. The iconic TV series Hart to Hart (1979-1984) started every episode with the words “This is Jonathan Hart, a self-made millionaire…”  Today, there are 5.3 million people who are millionaires in the US, about 2% of the population, according to The Motley Fool.

Social Security is not enough

The company 401(k) plan along with the employer match can be a powerful wealth building tool.   According to bankrate, the average Social Security benefit for retired workers is about $1,830. The maximum monthly benefit for 2023, based on the age you start collecting is $2,572 (age 62) to $4,555 (age 70). If your employees want to see their projected numbers, this calculator can help.

Although the Social Security numbers can look attractive, these payments are not sufficient to replace most of an employee’s pre-retirement income. Wouldn’t it be great to have a million dollars of your own money saved up by retirement/?  Is it even possible? Yes!

On the road to millionaire status

The stock market has traditionally provided very good returns over time. It is important to not put all your eggs in one basket, so allocating some funds to fixed income (bonds) makes sense too. A popular asset allocation of stocks to bonds is 60/40. The historical return for this asset allocation over time has been 8.77%, according to Vanguard. Past performance is no guarantee of future results.

Let us try to keep the calculations simple. It is logical employees will get salary increases from time to time. That would drive up 401(k) plan contributions if they were made on a percentage basis. Let us assume no salary increases. Inflation is a factor. This can be tied to increasing 401(k) contribution thresholds from year to year. Let us not account for inflation and assume contribution levels stay at the same dollar amount until retirement.

Most companies match their employee’s 401(k) contributions to some degree. Let us assume a dollar-for-dollar company match up to 4.5% of the employee’s salary. Put another way, if the employee contributes 3%, the company matches it. If the employee contributes 9%, the company only matches half of their dollar contribution.

We will need a good 401(k) calculator for this exercise. There are many available online. This example comes from calculator.net

Now let us look at four scenarios and how an employee in this specific situation could reach a million dollars or more in retirement savings.

Scenario #1 – The well-paid younger employee who maximizes contributions

Profile: This employee might be a professional, like an engineer, manager, corporate lawyer or CPA. They are earning $200,000 a year and making the maximum contribution to their 401(k) starting at age 25. The amount they can contribute is $22,500. This represents an 11.25% contribution level. The firm matches dollar for dollar up to 4.5% of the employee’s salary. Assuming a 60/40 stock and bond asset allocation, what might this 25-year-old have amassed 40 years later at age 65?

Potential result: After 40 years (at age 65) their 401(k) might be worth $10,477,237.  The employee contributed $900,000 and the firm’s match totaled $360,000. The difference would be the anticipated appreciation.

Could they be a millionaire at retirement?  Yes.

Scenario #2 – The younger employee who contributes up to the company match

Profile: The next employee is young and earning a modest salary of $60,000. They are setting aside 6% of their monthly pay for their 401(k) plan. The company matches dollar for dollar up to 4.5% of their salary. (The employee is contributing $3,600/year and the company is adding $2,700/year. It’s the same 60/40 asset allocation using historical rates of return for this example.

Potential result: After 40 years (by age 65) the employee has amassed $2,089,447. They have contributed $252,000 and the firm matched with $144,000. The difference is the appreciation over time using traditional rates of return.

Could they be a millionaire at retirement?  Yes.

Scenario #3 – The older employee who put off retirement saving

Profile: This employee is age 50 and has completely ignored retirement planning until now. They are contributing the maximum allowed, $22,500 annually using 2023 numbers. They are also taking advantage of the catch-up contribution allowance of an additional $7,500. They are setting aside $30,000/year. The asset allocation is the same 60/40. The company is contributing 4.5% of the employee’s salary as a matching contribution.

Potential result:  After 15 years the employee has reached $1,038,451. They contributed $450,000 and the firm added $67,000.

Could they be a millionaire at retirement?  Yes.

Scenario #4 – The younger employee seeking financial independence

Profile: The final example is the 25-year-old employee with a goal of reaching a million dollars in savings. They currently earn $60,000 and are setting aside 6% of their salary. The firm is matching dollar for dollar up to 4.5%. We will use a different calculator for this example because it shows the year by year potential accumulation.

Related: Most workers expect to fall short of $1 million retirement savings goal

Potential result: After 40 years at age 65, the employee might have over $2 million ($2,095,541).  However, that was not their goal. Reaching $1,000,000 was the target. They would cross the threshold at about age 55.

Could they be a millionaire by about age 55?  Yes.

Other considerations

These numbers might be conservative because they assume no salary increases. However, the cost of everything would have gone up alarmingly after four decades. However, if the desired result is achieved, four employees in four different situations might have more than $1,000,000 in retirement.

Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, “Captivating the Wealthy Investor” is available on Amazon.