The Mindset of Up-and-Coming Millionaires

Happy holiday weekend Friday!

Did I capture your attention with the title of this post?  It was actually the catchy title of a webinar I listened to earlier this week.  The webinar was put on by Fidelity, who manages the 401(k) for my employer.

Here are a few fun takeaways from the webinar:

24% savings rate

Based on a Fidelity analysis of 133,000 participants with 401(k) balances of $1 million or greater, 24% is the average total savings rate for individuals who have hit the million dollar milestone.  This is comprised of 15% of their own pay and another 9% in matching contributions or profit sharing from the employer.

Does anyone out there get that much match or profit sharing?  Because my employer’s is MUCH less than that.

HSA Shout-Out

The Health Savings Account (HSA) has been a darling of the FIRE community for a while now.  It also got a shout-out in the webinar!  HSA contributions are made pre-tax, grow tax-free, and are not taxed when withdrawn for qualified medical expenses.

Unfortunately, my employer does not offer an HSA.  But if yours does, consider contributing – it is a great way to shield current income from taxes or simply just help pay for out-of-pocket medical expenses before your deductible kicks in.

Unlike FSA contributions, HSA contributions are ALWAYS yours, even if you leave an employer.  Mr. FIREDup still has some money in his HSA from the job he just left, which we can tap into for medical expenses if needed.

Compounding is Key

Millionaire status is within the reach of more than just high earners.  The key is to invest early and often.  Check out this scenario from the recap:

Capture

This hypothetical example uses a conservative rate of return of 4.7% and annual salary growth of 1.5%.

$1M in 40 years won’t have the same purchasing power as it does today, but it’s still impressive!  The key is to start the habit and make it automatic.

Do you have any tips for up-and-coming millionaires?

Friday Gratitude

Today’s theme: Work and Money!

We just got done with the performance review cycle I’m a part of at work.  Reviews are always interesting.  Some people are happy, some people are upset, some people are excited about their raises and others are pissed off.   (One of my coworkers refused to look at the company-wide communication about executive promotions, knowing it would just make her mad.)

This was a pretty middling year for me.  No promotion, no outstanding performance rating, a standard meager raise.  But I’m focusing on gratitude as this week comes to a close, for several reasons:

  • I have some things up in the air in terms of the future of my job, and I think that’s been causing some underlying stress for a while.  I brought up the uncertainty in my review, and received some assurances that my time will be redeployed to other projects if business needs change.  There are, of course, no guarantees in the corporate world, but it did allay some fears.  I am grateful for a good boss who recognizes my skill and understands where I can provide value.
  • Though my raise was one of the smallest ones I’ve received at this company, guess what?  It’s still a raise!  And since I make more than I did early in my career, that smaller percentage is still a larger dollar value than many raises received in years past.  So I am grateful for a slightly larger paycheck.  I don’t want to take for granted the add to our household’s bottom line.
  • Laurie’s post came across my Twitter feed at exactly the right time this week – it reminded me to bank my raise!  I immediately increased the portion of my paycheck directed to savings and also set up a (VERY) small monthly transfer to our brokerage account.  I am grateful to have discretionary income to save and invest.
  • It’s really easy at review time to get caught up in how we compare to others. Did I get a better review? Did I get a better raise?  Does everyone else make more than me?  Comparison is the thief of joy.  If I step back for a minute, I am reminded that I make a pretty good salary, AND I have a very good work-life balance to go along with it.

What are you grateful for this weekend?

The Paradox of Choice: Retirement Investing

In a previous life I worked as a financial education consultant, traveling the US and talking to my company’s retirement plan participants about their retirement plan.  We focused on the basics.  Why they should save in their 401(k).  How the power of compounding interest can work for you.  What is diversification? What is your risk tolerance?  How do you use this information to choose how to invest your money?

I have long been a personal finance geek.  But the reality is that the vast majority of people aren’t.  And it can be downright overwhelming for the average 401(k) plan participant to figure out where to invest his or her money.

I was reminded of this fact recently.  The company I work for does its match in company stock, and the stock has done so well over the long term that a lot of people are over-weighted in it (that’s a story for another day).  A couple of months ago the stock hit a new 52-week high, and I decided it was a good time to move a little more of my match money out of company stock.  I had a coworker who wanted to do the same, but she didn’t know WHERE to put the money once she sold the stock.  The paralysis of having to make that decision almost kept her from taking any action at all.

Barry Schwartz outlined this phenomenon in his book, The Paradox of Choice.  I may get overwhelmed by the wall of 50 different types of laundry detergent at Target, but many other people are paralyzed when their retirement plan offers too many options.

So what’s the average Joe to do?  I couldn’t give advice to plan participants in my financial consultant role; I could only educate.  But at the time I was in this job, target date funds were starting to become popular additions to retirement plan investment lineups.  When our plans offered them, we would explain how they worked and how a participant could determine if it was the right choice.

So what is a target date fund?  This link to Vanguard (one of my favorite investment companies and a FIRE community favorite) gives some of the highlights.

  • You invest in one fund that does the diversification for you.  In Vanguard’s case, the target date fund is a blend of their other underlying index funds.  It is diversified to include a mix of US and international stocks and bonds.
  • The asset allocation is based on the target retirement date.  If you are far from retirement, it is more heavily weighted in stocks and as you move closer to retirement, the mix of investments gradually becomes more conservative.
  • You don’t have to rebalance your investments – the fund company automatically does it for you.

Of course there are caveats to every recommendation, and every fund company that offers target date funds has it’s own style and approach (Vanguard’s 2040 fund will not be the same as Fidelity’s or T. Rowe Price’s).  But don’t let the perfect be the enemy of the good – it’s better to have a solution that is 80% effective than to have no solution at all.  I told my coworker that in her upcoming meeting with a financial advisor that she could get advice on where to invest for the long term, but in the meantime I gently steered her towards one of the target date funds offered by our 401(k).

 

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