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Here’s How to Become a 401(k) Millionaire

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Here’s How to Become a 401(k) Millionaire

There’s nothing more definitive in the journey to financial freedom than hitting the $1 million mark in retirement savings.

A nest egg like that is a near-guarantee that you could surmount any curveball the world throws at you, whether it is an unexpected family emergency or anything else.

While $1 million certainly sounds like a lofty milestone to many, it’s actually quite a common achievement:

  • Millionaire households in the U.S.: 11.3 million (8.95%)
  • Total households in the U.S.: 126.2 million

And contrary to popular belief, to become a 401(k) millionaire, you don’t need to strike it rich with a lucky stock pick, or use a crystal ball to forecast the future of the market.

Your best bet is to simply focus only on the factors you can control.

What You Can Control

Today’s infographic is from Tony Robbins, and it covers key points from his #1 Best Selling book Unshakeable: Your Financial Freedom Playbook, which is now available on paperback.

It shows that the biggest winners in the financial game know that they can’t predict the future, and instead titans like Warren Buffett or Jack Bogle focus intently on the factors they can control, knowing that with the right approach they’ll thrive in almost any market.

What are these crucial factors?

FactorDescription
TimeThe force of compound interest is more powerful over longer periods of time.
DisciplineStaying calm and focused on the long term during periods of turmoil is key.
DiversificationProper asset allocation and frequent re-balancing can position you to weather any storm.
ExpensesExpenses and taxes are silent killers, and must be minimized strategically.

By diligently working to take control of these four factors, your odds of attaining financial freedom are extremely high. Here is each factor in more depth.

1. Time

The power of compound interest is extraordinary, making time your best friend when it comes to building a battle chest of retirement savings.

The current maximum contribution limit for 401(k)s is $18,500 per year, not including what is matched by your employer. If you maxed out on contributions and started investing early, you can hit $1 million before retirement even in sub-optimal market conditions:

Starting ageRequired returns for $1 million at age 65
302.20%
353.45%
405.40%
458.55%
5014.50%

Time can make up for a lack of investing acumen. Wait until later, and things get very difficult – by age 50, you need market beating returns!

2. Discipline

If you’re taking advantage of the power of compound interest over a long period of time, whether that is 20, 30, or 40 years, it is inevitable that there will be bumps in the road:

  • Stock market corrections happen once a year, on average
  • Bear markets happen once in every 3-5 years, on average
  • Bear markets vary in length, but on average last one year

Through decades of investing, the fact is you are going to see bear markets – it is how you handle them that counts.

Even when it’s the most tempting to sell, remember these facts:

  • Bear markets become bull markets
  • The first 12 months of a new bull market can see crucial market gains
  • Nobody can successfully time the market – not even the experts

In other words, having the discipline to hold through the turbulence can be the difference maker – and a key factor you can control in your journey to becoming a 401(k) millionaire.

3. Diversification

Another factor you control is portfolio diversification, and here are four ways diversification can minimize risk:

Diversification TechniqueExamples
AssetsStocks, bonds, and alternative assets like real estate or gold.
SectorsConsumer goods, tech, energy, financials, etc.
MarketsDomestic, international, emerging markets
TimeAdd to investments regularly, because there is never a “right” time to buy

A properly designed portfolio can weather any storm, and re-balancing it on a regular basis will force you to sell assets at market highs, while buying at low points.

4. Expenses

The fees on your 401(k) statement might not seem like much, but even 1% or 2% can make a big difference over the long term.

For example: the value of $1 compounding for 50 years at 5% will be worth $11.50, but if it averages 7% it will be worth $29.50. That’s almost three times more!

Expenses, both seen and hidden, can be a silent killer any portfolio, so keeping them to a necessary minimum can help you get to the promised land.

A Final Word

If becoming a 401(k) millionaire was easy, everyone could do it.

But to be successful, you need to take control over factors like time, diversification, discipline, and costs – ideally with a qualified and experienced financial advisor and partner. Then, you need to stick to the plan and let the market do its work.

Investing is a game of inches. If your returns improve by, say, 2 or 3 percentage points a year, the cumulative impact over decades is astounding, thanks to the power of compounding.

– Tony Robbins

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Investor Education

Why Investors Should Rethink Traditional Income Strategies

Traditional longer-terms bonds are no longer as effective—so which additional income strategies should investors be considering?

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income strategies

Why Investors Should Rethink Traditional Income Strategies

Humans are creatures of habit. We all have daily routines, whether it’s walking the same lunchtime route, watching a familiar TV show, or cooking the same meal over and over again. Once we develop a pattern, it can take a drastic change to convince us to rethink our approach.

One such shake-up to ingrained investment habits is the changing landscape of income investing.

In today’s infographic from New York Life Investments, we explain why traditional long-term bonds may not be as effective as they were in the past, and which additional income strategies investors can consider.

The Status Quo

For years, investors have relied on traditional longer-term bonds as the centerpiece in an income portfolio. These debt instruments usually pay out interest to investors on a predetermined schedule, providing a steady income stream investment. Historically, they have also been subject to less volatility than equities.

The typical bond portfolio is diversified, much like the Bloomberg Barclay’s U.S. Aggregate Index. Here’s how the sectors are broken down in the index:

SectorMarket Value
Treasury39.5%
Government-Related5.8%
Corporate25.0%
Securitized29.7%

Unfortunately, this income strategy has been less effective in recent years. Over the last decade, core bond duration has increased by 1.5 years while yields have decreased by almost 2%. Essentially, interest rate volatility has increased—but investors are less compensated for the risk.

In light of low rates and higher expected market volatility, it’s critical that investors explore other income solutions. Luckily, there are many lesser-known asset classes for investors to consider.

Additional Income Strategies: An Investor’s Choice

When investors decide how to re-allocate, they can keep these objectives in mind:

  1. Preservation of principal (risk level)
  2. Pursuit of capital (growth potential)
  3. Perseverance in markets (long-term objectives)

Which additional income strategies can they explore?

Taxable Municipal Bonds

Issued by state and local governments, the yield of taxable munis has historically been higher than that of other sectors. Taxable munis also have a strong credit rating—over 76% of U.S. municipal bonds outstanding are A+ rated or better.

Insured Municipal Bonds

Investors can get additional downside protection with insured municipal bonds, which are guaranteed to pay interest and principal back by private insurers. They have historically performed similar to munis while capturing less of the “downside”, often providing an attractive risk-adjusted return for income investors.

Short-duration, High-yield Bonds

Bonds with a shorter duration and higher yield can be a lower volatility approach to achieving the same income investing goals.

Yield and Risk in Bonds (July 1, 2014 – June 30, 2019):

Bond TypeYieldStandard Deviation (annualized)Yield per Unit of Risk
U.S. Aggregate Bonds2.492.940.85
High Yield Bonds6.055.601.08
Low-duration, High-yield bonds5.003.901.28

Short duration funds have lower interest rate risk, and can offer attractive yield per unit of risk.

Yield-Centric Equities

Equities can also play a role in an income focused portfolio. Investors should look for established companies that are achieving:

  • Growth in free cash flow
  • Stable or growing dividends
  • Share buybacks or debt reduction

Over the last 40+ years, the annual compound return of stocks with growing dividends have outperformed dividend cutters on the S&P 500 by more than 4%.

Preparing for Your Future

Maximizing the benefit from new income opportunities can take time. For this reason, it’s important to consider potential portfolio changes now, so that these strategies can play out in the lead up to retirement years.

It may be tempting to stick with the status quo—both in daily routines and investment strategies—but those who proactively adjust their approach will be able to maximize their potential.

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Investor Education

How Equities Can Reduce Longevity Risk

With life expectancies increasing, will you outlive your savings? Learn how allocating more of your portfolio to equities may reduce longevity risk.

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Will You Outlive Your Savings?

The desire to live longer — and outrun death — is ingrained in the human spirit. The first emperor of China, Qin Shi Huang, may have even drank mercury in his quest for immortality.

Over time, advice for living longer has become more practical: eat well, get regular exercise, seek medical advice. However, as life expectancies increase, many individuals will struggle to save enough for their lengthy retirement years.

Today’s infographic comes from New York Life Investments, and it uncovers how holding a stronger equity weighting in your portfolio may help you save enough funds for your lifespan.

Longer Life Expectancies

Around the world, more people are living longer.

YearLife Expectancy at Birth, World
196052.6 years
198062.9 years
200067.7 years
201672.1 years

Despite this, many people underestimate how long they’ll live. Why?

  • They compare to older relatives.
    Approximately 25% of variation in lifespan is a product of ancestry, but it’s not the only factor that matters. Gender, lifestyle, exercise, diet, and even socioeconomic status also have a large impact. Even more importantly, breakthroughs in healthcare and technology have contributed to longer life expectancies over the last century.
  • They refer to life expectancy at birth.
    This is the most commonly quoted statistic. However, life expectancies rise as individuals age. This is because they have survived many potential causes of untimely death — including higher mortality risks often associated with childhood.

Longevity Risk

Amid the longer lifespans and inaccurate predictions, a problem is brewing.

Currently, 35% of U.S. households do not participate in any retirement savings plan. Among those who do, the median household only has $1,100 in its retirement account.

Enter longevity risk: many investors are facing the possibility that they will outlive their retirement savings.

So, what’s the solution? One strategy lies in the composition of an investor’s portfolio.

The Case for a Stronger Equity Weighting

One of the most important decisions an investor will make is their asset allocation.

As a guide, many individuals have referred to the “100-age” rule. For example, a 40-year-old would hold 60% in stocks while an 80-year-old would hold 20% in stocks.

As life expectancies rise and time horizons lengthen, a more aggressive portfolio has become increasingly important. Today, professionals suggest a rule closer to 110-age or 120-age.

There are many reasons why investors should consider holding a strong equity weighting.

  1. Equities Have Strong Long-Term Performance

    Equities deliver much higher returns than other asset classes over time. Not only do they outpace inflation by a wide margin, many also pay dividends that boost performance when reinvested.

  2. Small Yearly Withdrawals Limit Risk

    Upon retirement, an investor usually withdraws only a small percentage of their portfolio each year. This limits the downside risk of equities, even in bear markets.

  3. Earning Potential Can Balance Portfolio Risk

    Some healthy seniors are choosing to work in retirement to stay active. This means they have more earning potential, and are better equipped to recoup any losses their portfolio may experience.

  4. Time Horizons Extend Beyond Lifespan

    Many individuals, particularly affluent investors, want to pass on their wealth to their loved ones upon their death. Given the longer time horizon, the portfolio is better equipped to ride out risk and maximize returns through equities.

Higher Risk, Higher Potential Reward

Holding equities can be an exercise in psychological discipline. An investor must be able to ride out the ups and downs in the stock market.

If they can, there’s a good chance they will be rewarded. By allocating more of their portfolio to equities, investors greatly increase the odds of retiring whenever they want — with funds that will last their entire lifetime.

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