403bwise is a 501(c)(3) nonprofit organization.

The K-12 403(b) is broken.
Together we can fix it.
Dan's Blog

Barbara O'Neill: The 403(b) LifecycleGuest Blog: Who Wants to Be a 403(b) Millionaire?

June 28, 2022

Guest post by Dr. Barbara O’Neill, CFP®, AFC®

Would you like to have a million dollars when you retire? One way to build wealth is to marry a wealthy person. Another is to inherit money or receive a large settlement. A third is to invent a product or service in high demand and a fourth is to possess special talents or skills. Most millionaires, however, become wealthy slowly over time through a combination of frugal living, regular saving, and compound interest.

There were nearly 22 million millionaires in the U.S according to a 2021 report by Credit Suisse Research Institute. Stated another way, a little more than 1% of adults in the U.S. are worth at least $1 million. 403(b) plan participants are certainly among this group. Despite my late start, I am one of them. The book Teachers Can Be Financially Fit notes “once you get started [saving in a 403(b)], it seems painless. Even 1% [of pay] is better than nothing and there are few people who cannot get by on 1% less income.”

Want to join the ranks of “403(b) millionaires”? Key resources include human capital (e.g., knowledge and skills) to earn income, time, and resolve to achieve this lofty goal. This post describes five 403(b) plan tips and 10 additional wealth-building strategies. It concludes with a research brief, three “need to knows,” and six take-away action steps.

Five 403(b) Plan Tips

Pay Yourself First (PYF) — PYF means automatically setting aside whatever percentage of pay you can afford (e.g., 3% of  $50,000 = $1,500). The best time to PYF is your first day on the job. The next best day is today. By making regular 403(b) deposits every payday, you will follow a disciplined investment practice known as dollar-cost averaging. Deposits are made regardless of market performance, which reduces emotion-driven investing.

Kick It Up a Notch — When income increases (e.g., a raise or administrative position) and/or expenses end (e.g., car loan payments and childcare), increase the percentage of pay deposited into your 403(b). Even an increase of just 1% more of pay can make a difference over time. To see what additional savings can amount to with various percentage of pay deposits, test different scenarios using an online 403(b) savings calculator.

Take Prudent Investment Risks — Prudent risks have the potential to increase returns over the long term (i.e., 20+ years). Examples include a blue-chip stock mutual fund and a stock index fund that tracks market performance. The biggest risk investors can take is avoiding risk entirely by investing only in bonds and cash. The University of Missouri Investment Risk Tolerance Assessment can help 403(b) plan participants with asset allocation decisions.

Use 403(b) Catch-Up Strategies — All workers age 50+ can make an additional $6,500 catch-up contribution to 403(b) plans in addition to the maximum $20,500 for all workers, for a total of $27,000 in 2022. In addition, 403(b) plan participants who work for the same employer for at least 15 years can contribute up to $3,000 more per year, up to a total of $15,000, if their plan permits.

Decrease 403(b) Expenses — As 403bwise notes in its five-part podcast series Learned by Being Burned, many 403(b) participants have been “burned” by high-expense 403(b) vendor products that can shave tens, if not hundreds, of thousands of dollars off the total value of their investment. What to do? Follow 403bwise’s 15 steps for How to Get Out of a Bad 403(b) and transfer existing deposits to (and make new deposits with) a low-cost vendor.

Ten More Steps to Seven Figures

Live Below Your Means — The only way to “find” money to deposit in a 403(b) — or anywhere else — is to spend less than you earn. Start by tracking current cash flow for a month or two. Then use this spending plan worksheet to project future income and expenses. Include 403(b) deposits and any other savings as a fixed expense.

Determine a “Number” — Start with at least three online calculators to determine a ballpark amount to save for retirement in a 403(b) and elsewhere (e.g., Roth IRA and taxable account). Why three? They all have different data inputs and assumptions. Next, compare the results to determine a reasonable number (goal) for retirement savings.

Set Measurable “Mini-Goals” — Goals provide a “why” for investing. Without goals, regular savings deposits are hard to sustain. Once you have a “number,” break it down into a series of “mini” goals based on the Rule of 72 and how quickly money can double (e.g., $1,000,000 saved by age 65, $500,000 at 57, and $250,000 at 50).

Invest Cash WindfallsWindfalls are large- sometimes unexpected- sums of money that can really jumpstart retirement savings. Examples include income tax refunds, retroactive pay, bonuses, prizes and awards, gambling proceeds, inheritances and gifts, and divorce and insurance settlements.

Increase Human Capital — Education and income are strongly related. People who learn more often earn more and higher income provides more money to set aside for financial security in later life. Never consider your education finished. The best returns on human capital investments result from skills that are in demand by employers.

Work Hard and Smart — Experts recommend organizing your life and work with the future in mind. What do you want to be doing in five, 10, and 20 years? In some professions, including K-12 and college teaching, hard work is expected at the beginning of a career to earn tenure. Search out opportunities for professional growth and higher pay.

Take Care of Yourself — Health care costs are a financial shock to avoid, if possible. To do this, exercise regularly, eat right, get enough rest, and reduce stress. Compared to people with “health issues,” healthy people are generally more productive at work, likely to get raises and/or promotions, and earn more.

Believe in Yourself — Studies have found that many millionaires have personal characteristics such as conscientiousness about saving money, reducing expenses, and controlling debt. Other positive personal qualities include discipline, focus, optimism, and a positive “can do” attitude.

Pass “The Wealth Test” — A good measure of financial progress is this formula from the book The Millionaire Next Door. Multiply age by pre-tax income (excluding inheritances) and divide by ten. This is what net worth (assets minus debts) should be at various points in people’s lives.

Minimize Taxes — Many millionaires practice tax avoidance by taking advantage of legal strategies to reduce their income and estate taxes. Examples include holding investments more than a year to claim favorable long-term capital gains tax rates and tax diversification with taxable, tax-free, and tax-deferred accounts, such as 403(b)s.

Research Results 

Seminal research described in The Millionaire Next Door can be boiled down to one key point: you cannot tell a millionaire necessarily by looking at one. Many people with expensive possessions are not wealthy and many wealthy people do not own expensive items. Living well below their means is a common trait of millionaires. Most are not interested in consumption and high-status items. Instead, they spend carefully and save regularly. They are also goal-oriented, allocate time efficiently, and maximize tax breaks.

Survey results reported in the book Everyday Millionaires concurred that millionaires are “regular, hardworking, everyday people.” Virtually all (97%) believe that they were in control of their own destiny vs. 55% of the general population. Another study found that 86% of wealthy people made a habit of associating with success-minded individuals and avoiding negative, “toxic” people.

Three (More) Things

  • Time is an investor’s biggest ally. For every decade that someone delays saving toward a $1 million target, the required monthly savings deposit approximately doubles.
  • Patience is required. The average age when most people become millionaires is their late 50s or 60s. Compound interest is an awesome wealth generator, but it still takes some time.
  • The first million is the hardest. Like the game show Who Wants to Be a Millionaire?, doubling small sums is not very exciting. Big rewards come when you save large amounts and they grow quickly.

Six Smart Strategies

No. 1: Have Multiple Streams of Income — The more sources of income people have, the more money they have available to save. In addition to a job (e.g., teaching) that provides access to a 403(b), plan participants might consider other income sources such as rental income, tutoring, a second job, or a side hustle (freelancing).

No. 2: Make Up for Lost Time — Compound interest should never be underestimated. While it is not retroactive (i.e., you can’t earn interest on money not saved), it will be very powerful going forward. Take advantage of the catch-up strategies noted above and consider working longer to have more time to save.

No. 3: Protect Your Wealth — Adequate insurance decreases the risk of having to withdraw savings for large health care expenses, property losses, or liability judgements. Schedule a comprehensive insurance review with a licensed insurance agent. Once the $1 million goal is achieved, consider purchasing an umbrella liability policy.

No. 4: Trim the Fat — Reduce the temptation to spend money mindlessly and, instead, spend it by choice. Spending “landmines” to avoid include malls, home-shopping shows, and automated payments for barely used services such as a gym or satellite radio.

No. 5: Be a Planner — Studies of savings behavior have shown that, at every income level, people who set goals and are “planners” save more and are more successful financially, than those who do not plan ahead. Planning is associated with a higher frequency of performance of positive health and financial practices.

No. 6: Get Help When Needed — When people accumulate wealth, their financial lives become more complex. They may be in a higher tax bracket or need help making investment decisions or minimizing taxes. Reach out to a CPA®, CFP®, or other qualified professional advisor when faced with unfamiliar financial territory. Resource for finding the right kind of planner. 

In Summary

Most people don’t earn enough to become wealthy from their incomes alone. They need help from compound interest. Three key strategies to become a millionaire are:

  • Save part of what you earn as early as possible
  • Achieve a reasonable rate of return, say 6% to 8% on a diversified portfolio of investments
  • Be patient and allow money to grow

It is possible for people of ordinary means- including teachers and other 403(b) participants in non-profit sector jobs- to become millionaires. Generally, it takes three or four decades.

Will you be a millionaire someday?

This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

...

Dr. O'Neill is the owner/CEO of Money Talk: Financial Planning Seminars and Publications where she writes, speaks, and reviews content about personal finance. She is a Distinguished Professor Emeritus at Rutgers University and a long-time 403(b) plan participant.

Related Podcast:

Fin Lit Royalty Dr. Barbara O'Neill has made huge contributions to the financial literacy movement. Listen Now »