Periodically, Fidelity Investments reports on the number of 401(k) millionaires among the accounts of their 401(k) and IRA clients. Earlier in 2020, they reported a record number of retirement account millionaires prior to the onset of the economic and market disruptions brought on by the COVID-19 pandemic.
As a financial adviser, here are some ways to help your clients become 401(k) and IRA millionaires.
The most basic advice to give your clients covered by a 401(k) or other workplace retirement plan is to max out their contributions, or at least to contribute as much as possible.
For 2020, the maximum 401(k) contribution is $19,500, with an additional $6,500 catch-up contribution available to those clients who are 50 or over at any point during the year. These limits remain the same for 2021.
For clients who are self-employed, they can utilize a solo 401(k) or a SEP-IRA. The employee contribution limits for a solo 401(k) are the same as for an employer-sponsored 401(k), with the option to make profit sharing contributions as well. Contributions to a SEP-IRA are made exclusively by the employer, with limits of $57,000 for 2020 and $58,000 for 2021.
While the way these retirement funds are invested is certainly crucial, many studies have shown that the amount saved for retirement is the most critical component in determining the amount that your clients will ultimately have saved for their retirement. For your younger clients, encouraging them to save as much as possible in their 401(k) or other retirement plan is one of the most important pieces of advice that you can provide to them.
While the amount saved is the most important factor in accumulating $1 million for retirement, how those contributions are invested is also critical. Your clients need your help in evaluating the choices offered in their plan, and in selecting the options that fit with their overall investing strategy.
The client’s 401(k) asset allocation should be considered as a part of the overall investment strategy and overall financial plan that you have in place for them. You may have to make adjustments based on the quality of the funds available and/or the variety of investment options available inside the client’s 401(k) plan. These adjustments could then be balanced against their asset allocation in the other accounts that you advise them on.
Manage Old 401(k) Accounts
Whether or not your client has $1 million in a single 401(k) account or that amount or more across all retirement accounts is irrelevant. What’s important is helping them accumulate as much as possible toward their retirement.
With people changing jobs a number of times during their careers, it's likely that your clients will have an old 401(k) to deal with, perhaps several.
Ensuring that they make the best decision for their situation as far as what to do with these accounts is a critical piece in helping your clients accumulate as much as possible for their retirement, and certainly key in their having a shot at a seven figure nest egg. This might be rolling these old 401(k) accounts over to an IRA or to a 401(k) plan with the client’s new employer if applicable.
Focus on the Objective
Accumulating $1 million in their 401(k) account is a great goal for clients, but the bigger objective is to ensure that they accumulate enough assets to fund their desired retirement lifestyle. For many of your clients, their 401(k) or similar workplace retirement plan is their largest retirement savings vehicle.
They look to you as their financial adviser to guide them in terms of the amount they save and how to best invest these funds. For clients who have other assets, and for those who need guidance on their 401(k)s when leaving a job, your advice can help them achieve $1 million in a 401(k) and/or an IRA. Most importantly, your guidance is crucial to your clients as they seek to maximize the amount they have saved for their retirement.