Whenever you read a mainstream personal financial book, you will invariably encounter how easy it is to become a 401k millionaire. All you have to do is skip lattes or avocado toast and invest the savings into your retirement.
For instance, David Bach has registered a trademark called “The Latte Factor.” He talks about how skipping your morning Latte at Starbucks will save you $4.00 per day.
He even has a cool calculator that does all the math for you.
I’m a mocha guy. Let’s see what happens if I skipped my daily decadence and invested in the S&P 500 index. My mocha is a wee bit more due to our insane sales tax; henceforth the $5.00 daily cost.
Wow, in 40 years I will have $888,504.56 in my 401k. Not quite a million, but you get the point.
If only I could teleport myself back in time 40 years where $4.00 was actually the equivalent of $20.15 and followed his advice.
That’s one spendy mocha!
I’m not here to bash David. He is spot on when it comes to behavioral financial hacks to get you to a million. I just take issue with financial gurus who espouse how easy it is to become rich.
Just like me, he is not a fan of budgeting your way to wealth. He advocates paying yourself first and spending the rest. In other words, pick a number that will get you to a million in your 401k or IRA over a certain time frame and enjoy the rest.
In financial planning circles this is called “Goal Based” planning versus “Cash Flow” based planning.
Just make sure you adjust goal for inflation as seen by my $20 mocha.
Most financial gurus tell you to save 10% of your gross earnings. I advise 20% or more to my clients depending on where they are in their savings and investing cycle.
Bach recommends 10% in your 20’s, 12.5% in your 30’s, all the way up to 20% in your 50’s. This seems too little in my opinion.
If you want to retire early, you should follow Mr. Money Mustache‘s advice. He has the best blog article ever on early retirement. I highly recommend doing a deep dive on his site if you wish to cut the cord and pursue your passions.
Next, David advises putting your savings on the Ronco Rotisserie Chicken strategy so you will never deviate from your plan.
JUST SET IT AND FORGET IT
Another solid strategy.
This is the whole premise behind the book that launched him to Suze Orman style fame.
By the way, I just saved you the price of all those books. Go ahead, buy a latte and celebrate!
Sounds great in theory. Does it work?
In other words, how many “Latte Millionaires” are in America?
After doing some research, I discovered it is a lot harder than people think to hit the double comma net worth club.
Let’s start with the current state of millionaire households courtesy of DQYDJ.com.
This is one of my favorite financial sites for geeking out on net worth, finances, and investment calculators.
Yikes. Out of 126 million latte slurping households, only 14.8 million have hit the double comma club.
Oh….this includes a primary residence.
What if you take away the house? Think about it. Can you spend that equity?
According to Spectrum Research, it shrinks to 10.8 million millionaires. Now we are down to 8.6% of households.
What about those 401k millionaires?
This is a bit tricky to find. About the only data I could find on participants with 1 million or more in their retirement accounts comes from articles in the personal finance sphere along with some Fidelity Investment research.
Here’s a recent article from The Washington Post, that sheds some light on this topic. Looks like there were 16,474 TSP millionaires (the government’s version of a 401k) in August of 2017.
This was up from 2,675 in the same month of 2014. Hey, that increase almost matches the ten fold increase in bitcoin this year!
Were they skipping lattes or simply benefiting from a rising stock market?
16,474 millionaires is not a big deal from a percentage standpoint. At the time of the press release, there were 5.1 million participants in the TSP plan. In other words, 96.8% of participants never hit a million after the Dow gained 40% over three years.
If we used the Spectrum percentage, we should see around 486,000 millionaires assuming 8.6% population rate.
Wondering how I got that Dow Jones total return? Another cool DQYDJ calculator.
Lets look at Fidelity Investments data.
According to Business Insider, there were 133,000 401k millionaires out of 15 million plan participants. Again, a dismal percentage of participants.
While this number is higher than the TSP numbers , it would make sense. Fidelity works with the private sector where the average 401k millionaire earns $354,600 for men and $287,700 for women.
On a side note, females earn less than men but actually achieve millionaire status sooner according to this same article.
Kudos to the Grateful Dead. They called it long before the Berber and Odean study of the 90’s.
Will skipping a latte make you a millionaire? I don’t think so.
Instead of skimping on the little things, focus on the big rocks that will move your net worth.
Here are 4 big boulders to consider if you strive to hit the double comma club.
- Assets-things that put money in your pocket.
- Debts-good debt (other people pay off) versus bad debt.
- Inflows-active income versus passive income.
- Outflows-minimizing taxes while knowing wants versus needs.
That’s the sand.