Tips from 'Everyday Millionaires'

Three strategies that have made ordinary workers millionaires.

The 401(k) plan has not been around long enough to show the results of a typical employee's experience over a 40-year career. But there are a growing number of plan participants who have managed to save $1 million or more in their accounts, according to the Employee Benefit Research Institute (EBRI). Admittedly, this group of millionaires is in the topmost 0.2% of all retirement savers, [1] but their experience offers valuable lessons - and at least one warning.

Participation is key. So are high contribution percentages.
One characteristic common to these ordinary millionaires is constant participation in their plan and a high contribution rate, says Jack VanDerhei, director of research for EBRI, a nonprofit, nonpartisan organization that provides independent research on retirement issues. Of course, this is easier said than done. The Great Recession of 2008-09 had an impact on many retirement accounts, especially among the middle class. Only those who held on during the downturn are beginning to see their account values recover. Others weren't so fortunate.

Still, with data based on real participant experiences, we present three strategies that show how it is possible to save seven figures - even on a modest salary.

Sally Saver
Sally is a 25-year-old office manager at a growing engineering firm in the Midwest.

She makes $35,000 a year, and socks away 12% of it every year, including her company's matching contribution of 50% up to 6% of pay. Over a 40-year career, Sally earns annual raises of 3.5% and an average annual return of 7 percent in her account.

At retirement of 65, she would have a retirement savings of more than $1.7 million.

Sally's secret is discipline. She sticks with her plan regardless of short-term fluctuations in the market. And because she continues to invest regularly whether the market is up or down, she buys fewer shares when prices are expensive and more when they are cheap, an investment strategy known as dollar-cost averaging. [2]

Maximum Contributor
As marketing chief at a medical devices company, Don earned $450,000 a year before retiring at age 55. Don started his career at his company at age 25, fresh out of business school, when his starting salary was $40,000 a year. Over a 30-year career, with the benefit of steady raises and bonuses, he was able to save $5.5 million for retirement.

What was the "don't" secret? By contributing the maximum amount allowed each year on a pretax basis, and including after-tax contributions, Don put aside 30% of his annual earnings toward his retirement plan each year. Don is the kind of person who never had debt, not even a mortgage, and always paid off his credit cards on time. Whenever he got a bonus, he would invest half of it.

Today, Don's plan has a diversified mix of large cap, small cap, and international stock and bond funds. Notably, he avoids jumping in and out of his investment funds based on the direction of the market. Obviously, Don is not exactly your average employee or plan participant, but his story shows that it is possible to be successful if you have clear objectives, a good asset allocation strategy and the discipline to stick to it.

Betty: Risk Taker
Betty, now age 40, began her career 20 years ago in the HR department of a major Fortune 500 company. She started her career making $45,000 a year. She earns a raise of 4% annually and contributes the maximum allowed each year into her 401k plan.

Her investment? 100% company stock. Her company matched 50% of her contribution up to 6% of her pay. She plans on making these contributions up until she retires, at age 65. Over the past 20 years, her stock has returned an average of 8% per year. At retirement, her account could be worth approximately $2.7 million.

Although owning that much in company stock could prove to be a big win, it also could spell trouble if the company's prospects diminish. This is a strategy that most sensible financial advisors and employers would discourage. Having so much of Betty's wealth tied up in one stock could prove to be a disaster if stock plunges when it's time for her to take her income.

Footnote: Past performance is no guarantee of future performance, and there is no guarantee that any of these strategies will result in a similar investment outcome.

[1] Source: Jeremy Olshan, "Secrets of the 401(k) millionaires," SmartMoney.com, January 17, 2012.

[2] Dollar-cost averaging does not guarantee profit or protect against loss. Investors must carefully consider their ability to continue investing in extended down markets.

Michelle Maccio is the founder of the Maccio Financial Group. For more information, visit the company website at www.macciofg.com, or call (860) 426-1407.