What does a million-dollar 401(k) retirement portfolio mean, and how do you get there?
The number one regret many retirees have is not saving more earlier in life, and their biggest worry is running out of money in retirement.
These financial anxieties are valid and understandable, but the government is providing additional incentives and mechanisms to help individuals save. However, it’s still not easy to know how much is needed for a financially secure retirement.
What are the three pillars of a retirement income?
One traditional approach to retirement income is to make some rather broad assumptions about where it’s going to come from. Retirement income can be equally supported by three pillars: Social Security, pensions, and savings. However, times have changed, and most people don’t have a pension anymore. That pillar can be substituted with a defined contribution plan such as a 401(k).
Where is your 401(k), and how much should you contribute to make it a retirement pillar?
The common advice is to at least contribute enough to get a full employer match, if it’s offered, and to maximize contributions if possible. When limited by contribution amounts (and earning potential), it can be hard to imagine a 401(k) accumulating enough to be a pillar. Catch up contributions are great help. Plus typically, the earlier you start saving, the more time the funds have to grow and the more potential you have to create a passive income with your 401(k).
Consider the simplified example of compounding interest. You contribute $20,000 to your 401(k) each year. Assuming 8% annual growth, after five years you have contributed $100,000, but the 401(k) has grown to $117,332. In the next year, you still contribute $20,000, but the balance is $146,719, so the total growth is $29,787. This means that after just five years it’s almost as if another half contribution is made for you. After 10 years, your direct contributions may still be $20,000, but your savings account would grow by $43,179, so it would be as though more than a full additional contribution is made by your own 401(k) account!
In this example, each year you’re earning additional interest on your contributions, plus the interest you’ve previously earned. The powerful result of this compounding interest is that after 15 years, you’d have over $60,000 of growth with only the same $20,000 contribution. This is how people can become 401(k) millionaires, even without unbelievable contributions. Even if we reduce the contribution amount to just $10,000 per year for 30 years with an 8% average annual return, the simplified example still results in over a million dollars in the 401(k) for retirement.
Will Social Security really cover 33% of my retirement income?
Depending on your income bracket, how much you’ve contributed, and when you start taking benefits, the amount of income Social Security will replace can vary dramatically. One shouldn’t assume it will replace 33% right off the bat.
To check your benefits, go to www.ssa.gov, click on “My Social Security” and then create an account.
There will be a record of your earnings and estimates of your Social Security benefits for early retirement, full retirement, and retirement at age 70. You’ll also find estimates of the amount of benefits paid to your spouse and other eligible family members as a result of your retirement, disability or death.
Starting benefits after full retirement age – A few years may make a big difference.
Conversely, Social Security benefits increase by a certain percentage if you choose to delay receiving them. These increases will be added automatically from the time you reach your full retirement age until you start taking your benefits or until you reach age 70. The percentage varies depending on your year of birth but is 8% per year for those whose full retirement age is 66.
If your Social Security doesn’t cover 33 percent of your retirement income, you may need to consider delaying retirement and benefits or realize that the shortfall will need to come from the other two pillars.
Savings as a passive income for retirement
When we retire, our commuting expenses and other work-related expenses may decrease, which causes many to consider needing only 80% of their pre-retirement income to maintain their lifestyle in retirement. With the three pillars, that income won’t all have to come out of savings. Let’s say you currently have $150,000 in household income, so you want to create $120,000 in retirement income. That’s $40K from social security, $40K from your 401(k), and $40K from your savings.
The 4% rule. One rule of thumb is that retirees can safely withdraw an amount equal to 4% of their total savings during the year they retire, adjust the withdrawals for inflation each subsequent year for 30 years, and not run out of money. So, to get that $40,000 withdrawal at 4%, you would have $1 million in total savings. If inflation is at 5%, the next year, you’d draw out $42,000. There has been debate on whether or not this is a good rule of thumb or if it could be higher or lower, especially given volatile markets. However, it’s a way to envision paying yourself instead of your employer paying you.
Where Arvest Wealth Management can help –
Retirement is hopefully the lengthy golden years of our lives when we enjoy the fruits of all our labors. It’s not just about saving enough money for retirement, it’s also about continuing to earn off of that money in retirement. The three pillar approach is one model to consider for retirement planning, but it doesn’t fit the make-up of all families. There may be income from other assets, such as rental properties or condos, to consider too. Whether you are just starting out, approaching retirement, making catch-up contributions, wondering whether it’s wise to start Social Security benefits, or are retired already and creating a spending plan, an Arvest Wealth Management client advisor can create a holistic review of your unique situation. They can provide information to help you make informed decisions.
This content has been prepared by The Merrill Anderson Company and is intended as a general guideline.
© 2025 M.A. Co. All rights reserved.
Arvest and its associates do not provide tax or legal advice. The information presented here is not intended as, and should not be considered, tax or legal advice. Consult your tax and legal advisors accordingly.