Why Are There So Many 401(k) Millionaires All of a Sudden?

If you’re thinking of saving for retirement, a 401(k) plan may be one of the first options that come to mind. They are safe, reliable investment vehicles and are frequently offered by employers with a matching incentive.

Employer-sponsored 401(k)s provide millions of Americans with the means to retire and, thanks in part to a surging stock market, retire quite comfortably — the number of people with at least $1 million in their 401(k) jumped by 20% in the last quarter of 2023.

A 401(k) is a tax-advantaged retirement plan offered by employers that allows employees to automatically deposit a portion of their paycheck into an investment account. Employees choose from a number of investment options based on their risk preferences, and employers can match either part or all of the contribution.

There are two different types of 401(k) plans, traditional 401(k)s and Roth 401(k)s — both with unique advantages.

In a traditional 401(k) plan, contributions come from pre-tax income. As a result, contributions decrease taxable income, lowering the employees' tax burden for the year, and only withdrawals are taxed.

In a Roth 401(k) plan, contributions are made after funds have been taxed, so there is no tax deduction the year contributions are made, but retirees can withdraw those funds tax-free.

The eye-popping increase in 401(k) millionaires is due in part to a strong market in the fourth quarter of 2023, but that might not be the only contributing factor — people are saving much more aggressively than in years past.

At the end of last year, 78% of savers met the minimum contribution to qualify for a full employer match, according to Fidelity’s fourth-quarter analysis. Employer match amounts vary from employer to employer, but an average of 14% have met that threshold and benefit from a full employer match.

Many employees also chose to increase their 401(k) contributions without waiting for their plans to increase automatically.

“The key to saving for retirement is playing the long game and maintaining consistent contributions over time,” Michael Shamrell, vice president of thought leadership for Fidelity Workplace Investing, told Yahoo Finance. “The increase in the number of 401(k) millionaires is a perfect example, as the majority of these savers aren’t necessarily doing anything special other than saving at a high rate in the same plan over a long period of time.”

According to Fidelity, the average life of a retirement account is 26 years — meaning it pays to invest consistently. It may be tempting to withdraw money early, but this could decrease your overall earning potential due to lower balances available to invest and earn dividends. There may also be tax penalties for early withdrawal. If you’re under 59 ½, a 10% penalty is assessed at the time of withdrawal, and, depending on the type of plan, Roth or traditional, you could get pinged with additional taxes come April.

Almost half of Fidelity’s saving millionaires are Boomers, demonstrating that disciplined, long-term may help you reach that millionaire status.

While a 401(k) can be an efficient option to save for retirement, taking part in other financial options, such as saving more of your paycheck and shopping around for high-yield savings accounts and other savings vehicles like IRAs, can bolster your retirement savings and have you sipping champagne in retirement instead of eating ramen.