The million dollar retirement account is a mythical beast. According to Fidelity, only 0.56% of its retirement savers had a 401k with $1 million or more.
Since the million dollar retirement account is so rare, how do we know how great it is?
Secrets of the million dollar retirement account
You could go on and on about the benefits of a million dollars.
Some people would say you’re set for life. Others would say you have a great opportunity ahead of you.
For you and your retirement, you should think about how to turn $1 million into $2 million.
While it may have taken you 20 years to build $1 million in wealth, it could only take you 5 more years to accumulate $2 million. If you’re smart about your investing and stay special attention to every dollar, you could easily reach $2 million.
Secret #1: A return of $2.2 million in 10 years
From 2005-2015, a million dollar retirement account would have ballooned to $2,206,449.61.
Simply by investing your entire retirement account in the Dow Jones would’ve netted you over $1.2 million.
Remember, that’s a gain of $1.2 million with a Great Recession stuck in the middle. That seems like a pretty good return to me.
Over that time period, the Dow Jones only achieved annualized returns of 5.2% or 7.9% with dividends reinvested.
You may know someone who got spooked by the events that occurred in 2007-2008. Taking your money out of the market during that time would have disastrous to your financial future.
For people who stuck it out and didn’t get scared, they were rewarded with 60-70% gains since the crash. Examples like the crash of 2007-2008 are classic lessons in playing the long game.
In the ten years spanning 2005-2015, your retirement account would’ve lost a bunch during the Great Recession. However, that’s only a bump in the road considering the rebound to $2.2 million by 2015.
Secret #2: A 0.70% expense ratio would cost you $115k
Expense ratios are something people should think more about, but don’t. Considering expense ratios when choosing investment funds should be one of your main search criteria.
The difference in expense ratios can mean a difference of $10,000 or $100,000 in returns.
If you aren’t careful with your million dollar account, you could lose as much as $115,000 to a high expense ratio. That doesn’t sound like something I want to participate in.
Inside your brokerage account, you can find a section to research funds. In the table of funds, they have to disclose the expense ratio. Check out this screenshot from T. Rowe Price.
Although these funds performed above 13% since inception, their expense ratios would eat a big chunk of a million dollar portfolio.
Make sure you do your research when selecting funds. The information is available to you.
Secret #3: Investing 20% in Netflix would have returned $6.4 million
Lots of people know the stories of Intel, Amazon, and Apple.
In a similar manner to those companies, Netflix increased by 3,223% over 2005-2015.
If you would’ve invested 20% of your million dollar portfolio in Netflix stock, your money would have returned a staggering $6.4 million.
For people who read about investing, picking a stock like Netflix is a gamble. It’s like winning the lottery. However, it’s important to realize these success stories are out there and most anyone can take advantage of them.
With most brokerage accounts, you can invest parts of your IRAs in individual stocks. Investing your retirement savings in stocks isn’t something you should take lightly, but it’s an option nonetheless.
Secret #4: Your retirement savings could be nearing a cap
The federal government has, in the past, proposed caps on retirement savings.
The most recent proposal included a $3.4 million cap. With your retirement savings over $1 million, you should start to be worried about this.
If your savings reach $1 million early enough in your life, it’s reasonable to assume your money may grow past $3 million. At that point, you may not be able to use your 401k or IRAs – which may or may not be a first world problem.
Secret #5: Rare company
If you reach $1 million in retirement savings, you’ll be in rare company. Far less than 1% of the population has a 401k over $1 million.
Unfortunately, at this point, you can no longer claim you’re part of the 99%.
Secret #6: Dividends would pump out $27k every year
With your million dollar portfolio, you could stop reinvesting dividends.
Doing so could net you $27,000 every year for doing absolutely nothing.
This is where hard work pays off.
By focusing on your saving, you get to reap the benefits like dividend checks. This is a dream many people strive for, but few ever realize.
Although you may be tempted by that $27k, consider continuing to reinvest. Your savings could continue to grow well beyond a million dollar retirement account.
As you can see in this screenshot from Don’t Quit Your Day Job, your returns could change by almost 3% if you continue reinvesting your dividends. Make sure you consider this when deciding on taking your dividend income.
If you remember the Rule of 72, your money could continue to double at a greater rate by reinvesting that $27k into the market.
However, if you’ve reached retirement, it might be nice to get a nice fat dividend check every month.
Secret #7: Receive exclusive benefits from brokerages
$1 million seems to be the threshold by which brokerages think more of you.
At $1 million, you’ll start to receive greater brokerage benefits than any other point in your life.
For example, with Vanguard, you’re considered a Flagship client.
When you call, you’ll speak with an experienced Flagship representative who will act as your guide to all the services we offer our high-net-worth clients. Whenever you’re facing a complex situation or change in circumstances, a dedicated representative will coordinate personalized, expert help that’s tailored to your needs.
Don’t worry though. There’s yet another level to strive for. Flagship Select is only available to people who’ve accumulated more than $5 million in Vanguard assets.
Secret #8: Eligibility to invest in hedge funds
Now, let’s get to the best part. (I’m only kidding of course).
Once you’ve accumulated $1 million in retirement savings, you might be eligible to invest in hedge funds.
Most hedge funds require you to be an accredited investor. However, some hedge funds only require a minimum of $100,000 these days.
Hedge funds attempt to offset risk by practicing techniques like short selling.
Although you’re eligible, you should be careful. You should not invest in a hedge fund if the Great Recession spooked you.
If you want to learn more hedge funds, consider watching this video from Khan Academy:
- Reaching $1 million in retirement savings puts you in a special category.
- Expense ratios can be expensive. You could easily lose $100k to a high expense ratio.
- Investing $200,000 in Netflix from 2005-2010 would’ve returned $6.4 million.
- With a million dollar retirement account, your dividends could pay $27,000 every year.
- Brokerages give extra benefits to their customers with $1 million in assets or more.
Have I missed anything? What benefits does a million dollar portfolio provide? Let me know in the comments below.