They don't necessarily have higher salaries, or the investing IQs of Warren Buffett, advisers say.
Secrets of the 401(k) Millionaires-From Smart Money
Those hoping to occupy Easy Street in retirement may want to follow the lead of the 0.2%: the topmost tiny fraction of savers who've managed to sock away more than $1 million in their 401(k)s.
That figure, based on data from the Employee Benefit Research Institute, may depress those with sums closer to the median 401(k) balance of roughly $60,000 -- and for good reason. Even among employees 55 and up who've been contributing to the same 401(k) plan for more than 20 years, just 2% are estimated to have cracked the $1 million mark, says Jack VanDerhei, EBRI's research director.
To some, the other 98% of savers over 55 who haven't cracked $1 million show that the 401(k), the principal vehicle for American retirement savings, is at best inadequate, and at worst, a colossal failure. Even Ted Benna, the man credited with developing the first 401(k) plans out of an IRS tax loophole in 1981, now concedes that they've grown overly complex, with too many options, too high fees, and too many ways to cash out one's nest egg.
Even some 401(k) providers don't disagree. With traditional pensions, employers hired teams of experts to make the kind of tough investing decisions now entrusted to individual employees, says Catherine Golladay, vice president of participant services for Charles Schwab. "Left to their own devices, most people do not have the knowledge or the discipline to do this themselves," she says.
Schwab, like other 401(k) providers, found efforts to educate employees haven't proven so successful -- and only 10% of workers take advantage of such offerings. So the company just announced a new index-fund-only 401(k), which will keep expenses down, and include mandatory advice on investments. "Many employees don't understand what they are losing to expenses -- sometimes 55 to 110 basis points," says Jim McCool, an executive vice president at Schwab. "They don't realize what a drag it is on their retirement savings."
Target-date funds, which allocate investments based on the saver's age have proven inadequate, McCool says. "It's a cookie-cutter, one-size-fits-all approach. We're hoping that by adding independent, one-on-one advice we can help tailor plans to the needs of individuals and stop them from panicking and making bad decisions when the market gets scary."
So if that's what's wrong with the 401(k), who are these super-rich among retirement savers who've managed to make the system work -- and what are they doing differently? They don't necessarily have higher than average salaries or the investing IQ of Warren Buffett, VanDerhei says. "The one characteristic that differentiates the winners from the non-winners here is contribution rate -- a high percentage of those million-dollar savers had constant participation and high contribution rates," he says.
Though many savers may be scarred by the past decade of lousy returns, getting to $1 million over the course of a 40-year career should be a manageable goal -- even for some lower-income employees, says Greg Burrows, vice president of Principal Financial. Someone who earns $35,000, saves 12 to 13%, including a company match, gets an annual raise of 3.5%, and annual returns of 7% would save a million dollars. And despite the current volatility, many may still do that, he says. "One thing you have to keep in mind, is that the 401(k) hasn't been around long enough for us to see people take full advantage of it over the course of an entire career."
Of course, those who earn big salaries are more likely to have big balances in their 401(k), says Mike Alfred, CEO of Brightscope, which monitors and rates retirement plans. And the recession not only wiped out many 401(k) balances, but its fallout has hampered saving -- particularly among the middle class, he says. "There are a lot of families who have to simply stop saving because of a job loss or major health-care issue," he says.
And top of that, most participants can't -- or don't -- take advantage of their 401(k), says Alfred. Advisers recommend savers max out their 401(k) contributions. But while the IRS raised the cap $500 to $17,000 for 2012, just 9% contribute that much, according to EBRI.
And to put $1 million in perspective: as nest eggs go, it's not exactly Faberge. The rule of thumb, advisers say, is to accumulate enough to be able to replace 75% to 80% of one's income in retirement, without -- ideally -- having to draw down more than 5% of the balance per year. So a $1 million nest egg would give off just $50,000 annually, enough to replace 75% of the income of someone who made $66,666. Even if the retiree collects the current maximum Social Security payment of $30,156 annually for a total income of $80,156, that's still just the recommended replacement for an income of $106,874.
The IRS says it doesn't keep data on the highest 401(k) balances, and providers of the plans refused to disclose the figures. Anecdotally, however, advisers say it's not uncommon for savers to rack up balances in the $3 million to $5 million range.
Bedda D'Angelo, president of Fiduciary Solutions in Durham, N.C., says one of her clients amassed $6 million in her 401(k). An executive at a pharmaceutical company, she maxed out her pre-tax contributions each year, and including after-tax contributions saved close to 30% of her earnings annually. She was the kind of person who never had debt -- not even mortgage debt, D'Angelo says. "She was a disciplined saver, whenever she got a bonus -- she would invest half of it." Her plan had a mix of large cap, small cap, international equities -- and a bit of bonds, and at 56, when she retired, she was earning $450,000.
Another client who saved more than $1 million worked his entire career at General Electric, invested only up to the company match, but entirely in company stock, D'Angelo said. Though such a strategy seemed dangerous -- even before the collapse of Enron, when many employees suddenly found themselves holding worthless shares -- the employee refused to be convinced to diversify, she says. "As soon as I met him, I tried to convince him not to, but he wouldn't hear it," she says.
Other advisers also shared tales of employees making millions with only company stock in their plans. "Those who bet the entire house on a particular stock are always going to have a higher probability of a big win, but they also may end up in big trouble," VanDerhei says.
Kathleen Campbell, an adviser with Campbell Financial Partners in Ft. Myers, Fla., says the handful of her clients who've saved in between $1 and $2 million in their plans all maxed out their contributions, and refrained from jumping in and out of investment selections based on the whims of the market. But she also had clients get rich on company stock, which she also discourages. "Best not to be holding the bag with your retirement savings in another Enron or Bear Stearns," she says.
2) In the Markets today:
Stocks finished the day roughly flat, as concerns over a weakening economy in Europe gave investors pause after the market's recent gains.
Stocks mixed on euro worries-From USA Today
Stock indexes ended mixed as Europe edges closer to a recession that would hurt corporate profits in the U.S.
The Dow Jones industrial average dropped 13.02 points, or 0.1%, to close at 12,449.50.
Germany reported that its economy, the largest in Europe, shrank at the end of last year. The European Union cut its estimate of economic growth to its slowest pace in two years.
The Standard & Poor's 500 added less than a point to 1,292.48. The Nasdaq composite index rose 8.26 points, or 0.3%, to 2,710.76.
Roughly four stocks rose for every three that fell on the New York Stock Exchange. Trading volume was weak at 3.9 billion.
The European Commission also said Hungary has taken "no effective action" to contain its deficit. Stock markets in Germany and France fell slightly, and the euro dropped half a penny against the dollar, to $1.27.
"Europe is still the main risk," said Jeffrey Kleintop, chief market strategist at LPL Financial. "Yes, they've been making progress on their budgets, but they clearly have growth problems."
The United States depends on Europe to buy about 20% of its exports, and concerns about Europe have led analysts to lower their profit estimates for U.S. companies.
Corporate profits are expected to rise 7.2% for the last three months of last year, compared with 17.6% the quarter before, according to Standard & Poor's Capital IQ.
Judging by the S&P 500 index, investors seem to think earnings could fall much further, Kleintop said. The index is trading at about 13 times the past year's earnings of its companies — close to what it was at the end of 1990, when the economy was in recession. Earnings fell 20% during that downturn.
The stock of Supervalu, (SVU) a grocery store operator, plunged after reporting a wider-than-expected quarterly loss Wednesday because of high food prices and costs related to a turnaround plan. The stock lost 12%.
Orange juice prices, which set a record Tuesday after the U.S. government said that a potentially harmful fungicide had been found in Brazilian imports, settled back down Wednesday.
The futures contract for orange juice fell to $1.88 from $2.08 the day before. Futures have been rising since December, largely over concerns that cold weather in Florida could damage the crop there.
Even with Wednesday's decline, OJ was up 14% from its recent low of $1.65 on Dec. 21.
The recent jump in orange juice futures hit Coca-Cola, (KO) owner of Minute Maid, and PepsiCo, (PEP) which has Tropicana. Coca-Cola sank 1.8%, the most in the Dow. PepsiCo fell 1%.
3) Top financial story of the day:
Fed survey shows final 6 weeks of last year were among the best for the US economy in 2011
Fed survey shows economy ended 2011 with strength-From AP
The final weeks of 2011 were among the economy's strongest as Americans shopped and traveled more, ending the year with a shot of optimism for 2012.
That's the bright picture the Federal Reserve sketched in a survey released Wednesday. It said all but one of its 12 banking districts experienced some growth from late November through the end of the year.
Some sectors of the economy, notably housing, remain weak, the Fed said. But consumers spent more freely. Factories made more goods. Americans stepped up travel. And the auto industry enjoyed its best stretch of the year.
Economists noted greater confidence in the tone of the report. For example, the central bank described auto manufacturing as "vibrant" in several districts. Consumer spending was deemed "robust" in the Dallas region.
"It has been quite a while since we have seen the Fed use words like vibrant and robust to describe any part of the economy," said Brian Bethune, an economics professor at Amherst College. "I think one of the things driving the stronger language is that things are better than the Fed had been expecting."
The one district that didn't experience growth was Richmond, Va., although even there, the Fed said economic activity either "flattened or improved slightly."
The report comes just six months after the economy nearly stalled under the weight of high food and gas prices and supply disruptions from Japan that slowed U.S. manufacturing.
The economy and the job market have both improved since then. And December may end up being the strongest month of 2011. Employers added 200,000 jobs. And the unemployment rate fell to 8.5 percent — the lowest rate in nearly three years.
"The Fed's report Wednesday confirms what everyone else has been seeing in the economic data from retail sales to auto sales and manufacturing — activity is improving," said Jennifer Lee, senior economist at BMO Capital Markets.
Most of the Fed's districts reported holiday sales increased over last year. In particular, New York and Dallas' districts reported healthy gains. Boston, New York and Minneapolis reported exceptional growth in online sales.
Consumers are spending more on cars and travel, the survey noted. Auto sales in the Atlanta area were the best sales in more than two years. Boston, New York, Richmond and Atlanta experienced gains in tourism from a year ago. In Boston alone, businesses expect double-digit growth in hotel revenue in 2012.
U.S. manufacturing continued to lift the economy, particularly in industries that make heavy equipment and steel. That has helped boost energy, farming and auto manufacturing sectors, the report said.
The depressed housing market has hurt some manufacturers, and the Fed cited weakness among furniture manufacturers in the Richmond, St. Louis and San Francisco districts.
Inflation remained subdued, largely because high energy prices have eased. That may change in the new year. Oil has climbed above $100 a barrel again, and gas prices are creeping up.
The strength shown in the Fed survey reflected other positive economic reports.
Consumer confidence hit its highest point since the spring. U.S. automakers reported their two best months of sales for 2011 in November and December. And U.S. factories ended the year with their best month of growth since spring.
Most economists predict the economy grew at an annual rate of 3 percent in the final three months of last year. That would be an improvement from the summer, when the economy expanded just 1.8 percent, and much better than the 0.9 percent annual growth rate in the first half of 2011.
Still, the U.S. economic recovery remains vulnerable. Europe's debt crisis could lower demand for U.S. exports. Consumers may pull back on spending, especially if their wages continue to stagnate.
And Congress could decide not to extend a Social Security tax cut or long-term unemployment benefits, leaving many households with less income. Both measures expire at the end of February.
The Fed has been studying the economy's progress but announced no new actions to try to energize it after its Dec. 13 meeting. That was taken as a sign of confidence that the economy was in no immediate danger.
But in the minutes from the meeting released last week, the Fed said it will start this month announcing four times a year how long it plans to keep short-term interest rates at existing levels.
The change is intended to reassure consumers and investors that they will be able to borrow cheaply well into the future. And some economists said it could lead to further Fed action to try to invigorate the economy.
The Fed's next meeting is set for Jan. 24-25.
The Beige Book is released eight times a year. The findings from each of the Fed's regional bank districts are all anecdotal; there are no numbers.
The idea is to detect trends in consumer spending, manufacturing and real estate, among other areas.
Consumer spending is particularly important because it accounts for about 70 percent of gross
domestic product, the value of all goods and services produced in the United States.
4) Quote of the Day from Dave Ramsey.com:
Our greatest glory is not in never failing but in rising up every time we fail. — Ralph Waldo Emerson
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