How You Could Become the Millionaire Next Door

Imagine retiring with a million dollars in the bank. 

It’s not as far fetched as it sounds. In fact, the odds are increasingly in your favor. A record number of individual retirement accounts (IRAs) and 401(k) accounts now hold $1 million or more, according to a new study by the brokerage firm Fidelity. It found that 441,000 of the IRA and 401(k) accounts that it manages held $1 million or more as of the fourth quarter 2019. The fourth-quarter total marks a 15% jump compared to the from the third quarter of 2019, when 382,400 retirement accounts held $1 million or more—a record at the time. 

Also on the plus side:  The average amount saved in a 401(k) or IRA increased 7% between the third and fourth quarters of 2019. Fidelity customers had an average of $112,300 saved in 401(k)s for the fourth quarter of 2019, up from $105,200 in the third quarter. Customers had an average of $115,400 saved in IRAs, up from $110,200.

(A higher number of 401(k)s had $1 million or more, compared to IRAs. A total of 233,000 401(k) accounts held $1 million or more while 208,000 IRA accounts held $1 million or more.) 

Fidelity is reportedly one of the largest retirement account providers, with a combined 27 million 401(k) and IRA accounts. 

What does it take to be a millionaire?

There are nearly 19 million millionaires in the United States, more than in any other country. Yet, the number of millionaires in the U.S. accounts for less than 1% of the population. 

Financial advisors and retirement organizations including the AARP often suggest that a range of $1 million to $1.5 million is a benchmark for retirement savings. While more 401(k)s and IRAs than ever have $1 million or more at Fidelity, only 1.6% of the accounts there hold $1 million or more.

What you need to have saved for retirement varies from person to person. Either way, it is important to know your goal for retirement savings and to account for those savings in your budget.

401(k)s vs. IRAs

While you plan for retirement, it is important to know the difference between the types of accounts.

A 401(k) is a qualified employer-provided retirement plan, meaning it satisfies federal tax guidelines for such plans. Often, an employer will provide this plan to employees with an additional perk, called a matching contribution. This means that employers match the funds you place into your account, generally up to a certain percentage, potentially allowing you to save more, faster.

As of 2020, you can contribute up to $19,500 annually to your 401(k) if you’re younger than 50 years old. You can contribute an extra $6,500 per year if you’re 50 or older.

When you contribute to your 401(k), you contribute pre-tax income. Once you start withdrawing from your 401(k) in retirement, typically at age 70½, you will pay taxes on that income.  

An IRA, on the other hand, is an individual retirement account that anyone who earns income can open up through a brokerage or financial institution. There are two types of IRAs: Traditional IRAs and Roth IRAs. 

Traditional IRA accounts provide some tax advantages, as your contributions are made from your income on a pre-tax basis.  Account owners pay taxes on the funds when they withdraw them.

You can contribute to a Roth with income after taxes have been deducted. In contrast to a traditional IRA whose withdrawals are taxed, Roth investors generally don’t pay taxes on withdrawals once they’ve reached retirement age.

As of 2020, you can contribute up to $6,000 annually to an IRA if you’re younger than 50 and up to $7,000 annually if you’re 50 or older.

Good to know: It’s probably easier to save $1 million or more in a 401(k) than an IRA. A 401(k) lets you put away more money, and if there’s an employer match on funds, it can all really add up over time.

IRAs are available to most people who earn an income, letting you put money away in an investment account on a tax-favorable basis. Since there’s no one matching your contributions, you may have to save more aggressively over time to get to your magic number.

Start saving early

The sooner you start saving in a retirement account, the more money you’re likely to have over time, thanks to a market principle called compounding. (You can find out more about how time in the market and compounding can help you here.)

If you haven’t started planning for retirement yet, it may be time to start planning. Try Stash’s retirement calculator to figure out how much you might need to retire and visit Stash Retire to assist in planning.